Today's consumers have a wide variety of choices to meet their specific financial needs. Thanks to this robust competition, if a consumer is dissatisfied with a product or company, many other providers will be happy to step in and provide superior service. In those rare cases where a dispute arises between providers and customers, arbitration has quickly become the most popular and reliable way to resolve conflicts in a cost-effective and timely manner.
Arbitration is cheaper, faster and more flexible than litigation for both consumers and financial institutions. When given the choice, consumers often choose arbitration. This is why many financial services contracts pre-select arbitration as the means for addressing commercial disputes. If consumers prefer not to have a mandatory arbitration clause, they can choose from one of the many other products that do not require it.
But a recent arbitration study published by the Consumer Financial Protection Bureau lays the groundwork for the federal agency to eliminate arbitration-whether or not it is pre-selected by the contract-as a dispute resolution option. The study recommends restricting the use of arbitration clauses in consumer financial services contracts, including agreements for credit cards, checking accounts or debit cards, auto loans, and prepaid cards. Such drastic action could wind up harming the consumers the CFPB says it wants to protect.
Arbitration is preferable to lawsuits for many reasons. First, class-action lawsuits result in millions of dollars in legal fees but provide little or no benefit to consumers. According to the CFPB's own numbers, an average class action lawsuit member received just $6.29, while the lawyers leading the case received millions. Typically, arbitration results in much higher returns for consumers. The CFPB's data establishes that consumers won 47 cents on the dollar in arbitration cases where they received a recovery, as opposed to the minimal payments received by class action participants. Banning mandatory arbitration clauses will deprive consumers of these benefits.
Moreover, arbitration is a far smoother process than taking lawsuits to court. Unlike trials, which must be scheduled into busy court calendars, arbitration hearings can be scheduled more easily and during non-business hours. Arbitration does not require consumers to hire an attorney and doesn't include many of the burdensome practices of a lawsuit, including an extensive "discovery" period with interrogatories, depositions, and the accompanying witness and document preparation requirements. The result, as illustrated in the CFPB's own study, is that customer arbitration is up to twelve times faster than ligation.
Finally, the CFPB arbitration study does not take into account any of the potential harm that service providers may experience if arbitration is eliminated. For example, the CFPB study fails to address the costs of defending against frivolous class action lawsuits. Companies that save money on defending nuisance lawsuits can pass those savings on to their customers.
Arbitration is an important and economically efficient means of resolving commercial disputes. That is why many financial services contracts choose to use arbitration as an alternative to expensive, ineffective, and time-consuming litigation. Before moving forward, the CFPB should consider the unintended consequences of restricting or eliminating arbitration for U.S. consumers, who could ultimately lose an important avenue for addressing conflicts.
Jason Oxman is chief executive of the Electronic Transactions Association,
the global trade association representing more than 500 payments and technology companies.