Why Credit Card Issuers and Telecom Providers Use Arbitration Clauses

By now, most American consumers have received "arbitration agreements" stuffed in the envelopes containing their credit card, telephone, wireless, and cable bills. Buried in the fine print of all these "bill stuffers" are clauses taking away the consumer's right to participate in or receive benefits from a class action lawsuit.

Although these inserts are referred to by the companies as "bill stuffers," a better term might be "bill puffers," because their purpose is very clear: to allow the company to unfairly inflate future bills, without being forced to refund the money by a class action lawsuit.

Class action lawsuits are the only effective remedy when consumers are cheated in small amounts. Experience has shown that banks and telecom companies continually use the same techniques to chisel customers out of a few extra dollars each month. In the past, a company that "pushed the envelope" in its billing practices would be held accountable for violations of state Unfair and Deceptive Acts and Practices (UDAP) laws. But immunized from court accountability for their practices by an artfully drafted arbitration clause, the credit and telecom industries are now free to scam their customers with impunity.

"Credit card companies are increasingly relying on fee income - selling ancillary products, and penalizing customers for the slightest infraction - to make up for the money they lose by peddling products with low interest rates and no annual fee." American Banker, July 28, 2000. Competition among credit card issuers should be good for consumers. But instead of providing inexpensive products, banks are resorting to trickery to squeeze consumers for extra money:

  • The Early Bird Special. The bank says a payment is due on or before a certain date, but doesn t post payments on that date unless they were received at a designated early hour, before the usual mail delivery time. Citicorp failed to credit payments received on the due date unless they were received before 10 AM, deeming payments received after that time late, assessing finance charges and sometimes raising the cardholder s interest rates. Advanta uses a 6:30 AM cut-off. Citigroup has paid $45 million to settle a consumer class action based on this unfair manipulation.
  • Payment jockeying. The bank advertises low annual interest charges for new customers, but fails to warn that the rate applies only to balances transferred from rival cards, with a much higher rate for new credit. Payments received are first applied to the low interest balance, allowing the higher rate balance to continue to grow. MBNA Corp. has agreed to pay approximately $20 million to settle class-action lawsuits alleging deceptive payment jockeying practices.
  • The late hit. Some banks use less artful dodges than early bird cut-offs to impose "late fees." One bank routinely designates weekends and holidays as due dates. Some banks have forced customers to pay late fees even when monthly payments had arrived on time. Chase Manhattan paid $22.2 million to settle suits that said the company held payments and posted them after the due date in order to slap the consumer with penalties.
  • Sham "add-on" services. "Fee-based services" can be a means of extracting money from unsuspecting consumers. In its marketing materials, Providian Financial claimed that there was "no annual fee" for its card, but failed to disclose the hidden condition that to be eligible the cardholder must purchase a $156 a year credit protection plan. Providian agreed to pay $105 million to settle class-action lawsuits alleging this scam and the sale of other add-on services that customers were unlikely to use or benefit from. A variation of this scheme is when the bank automatically enrolls customers into service programs without their consent, as Metris Bank is alleged to have done.
  • Bait and switch. Some banks promise low rates or no annual fees to entice customers, but renege on the promise. First USA recently paid $84.9 million to settle class action suits over charges that they illegally hiked interest rates. The suits charged that the company promised cardholders that their interest rate would become fixed at a certain rate, but then raised it to a higher variable rate. Fleet Bank is fighting a suit alleging it welshed on a promise of no annual fee.

"The Better Business Bureau of Metro Washington D.C. now receives more complaints about telephone companies than about those in any other industry even more than auto dealers and home remodelers, who in the past have incurred the most consumer wrath. A survey of 28 state utility commissions shows that customer complaints filed against the nation s two largest long-distance firms AT&T Corp. and WorldCom have tripled in two years." Washington Post, July 28, 2000.

  • Phantom calls. The nation s fourth largest long-distance company, LDDS/Worldcom, has agreed to settle a class action lawsuit by providing refunds to as many as 294,000 homes and businesses that were customers of ATC, Telus Communications of Miami and Teltec Savings Communications Corp of Miami. The lawsuit claimed the companies routinely added time to customers bills for calls that did not take place, charged local calls as long-distance calls and billed for time when customers received busy signals.
  • Switching plans. Separately, WorldCom agreed to pay $88 million in refunds to
    customers to settle a class-action lawsuit a year ago, which accused WorldCom of advertising 5 cent-per-minute long distance rates but instead charging customers much higher "casual caller" rates about $3 for the first minute and 40 cents-per-minute thereafter. As part of the settlement, each customer was eligible to receive a refund check for $75.
  • Inflated charges. AT&T has agreed to pay as much as $20 million to settle a class action lawsuit alleging it misrepresented cable television packages to customers in New England during the late 1990s. The lawsuit alleged that customers were sold standard cable service (called "Total Basic" or "Basic 3") without being told that the same channel lineup could be had for roughly half the price by purchasing a package called "Basic 2."

Arbitration clauses are intended to allow all these scams to flourish anew. Emboldened by their new freedom from court accountability, credit card and telecom companies are angering more and more consumers with broken promises and billing irregularities. According to Planetfeedback.com, both these industries draw above-average levels of complaints about unfair practices far more than industries such as automobile manufacturers and insurance companies that are prohibited from using binding arbitration clauses!