Another Black Eye For Credit Card Companies

As if sweeping new regulation wasn't bad enough news for credit card companies, this week things got even worse. Two major arbitration firms have decided they don't want to handle credit card disputes going forward. It's hard to tell whether this is a clear win for consumers, but they probably don't mind.

The Wall Street Journal explains why this is such a blow to credit card companies:

Their retreat has big implications for credit-card and cellphone companies, which generally require customers to agree to mandatory arbitration. They argue arbitration is less expensive and time-consuming for both parties than going to court.

I vaguely remember reading something about arbitration in the fine print once -- that's what they're referring to. Court battles can be expensive, so that's a legitimate reason for preferring arbitration. But when consumers opt into this clause it also prevents them from suing credit card companies. That's a luxury credit card companies must also enjoy. This week's news makes arbitration harder, as fewer firms will exist to absorb a massive caseload.

How many disputes are there? A lot. According to the WSJ story, one firm spokesperson said that's why they got out of the business. There were just too many consumers unhappy with credit card companies. So many people were bringing disputes that the firm couldn't handle the magnitude of cases.

Why should consumers be happy other than potentially gaining the right to sue credit card companies? Companies tend to win in arbitration. According to the WSJ:

The National Arbitration Forum said companies prevail over consumers in 94% of such cases. Credit-card companies defend those results, arguing that there is typically a long paper trail proving the customers owe the amounts in dispute.

While arbitration might favor companies, I think this statistic is misleading. Consumers probably often demand arbitration to dispute fees and penalties when, according to their contract, they have little legal basis to do so.

Whether consumers will ultimately benefit depends on a few things. First, will this cause companies to give up on arbitration, or just give them an excuse for disputes to be a more frustrating process, since fewer firms mean greater delays in having a dispute heard? Second, if they do give up on arbitration and allow consumers to sue, how much will their legal costs increase? That additional cost, of course, will ultimately fall on all cardholders.

I think it's kind of strange that giving consumers the right to sue credit card companies slipped through the cracks when Congress passed their sweeping legislation a few months ago. Maybe Congress just assumes that fairer practices will prevent many of these disputes. That may be true, but the ability to sue seems a pretty fundamental right they could have mandated. At this rate, however, the market might end up providing that right to consumers anyway.

Note/Update: I just found out that this afternoon, the House Subcommittee on Domestic Policy will hold a hearing on the misuse of arbitration to collect consumer debt. Despite ignoring this in the credit card legislation, Congress is concerned.