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Big banks box customers out of court

By Claes Bell ·
Friday, November 30, 2012
Posted: 6 pm ET

One thing Americans often take for granted is the ability to take a company that wrongs us to court, but when it comes to your bank, that may not be the case. Many banks these days require customers to take disputes to a private arbitrator rather than to a court if they want a bank account, according to a far-reaching study released this week by the Pew Charitable Trusts' Safe Checking in the Electronic Age Project.

Pew surveyed 92 of the 100 largest financial institutions in the U.S. that offered at least one personal checking account option to consumers. Interviews with consumers were conducted from July 9 to 11, with 603 respondents ages 18 and older.

Of the 92 large financial institutions surveyed by Pew, 43 percent require customers to consent to mandatory arbitration. The practice is even more common at large banks, of which 56 percent require arbitration.

Three-quarters of financial institutions that require arbitration also have language to keep customers from joining expensive class-action lawsuits tucked away in account agreements, some of which span more than 50 pages.

Predictably, consumers aren't crazy about being forced into arbitration, which is run by private companies that face few restrictions from regulators on how they operate. Of consumers surveyed, 68 percent said they'd like to have the ability to choose between taking a dispute to arbitration or to court, and 88 percent said they have misgivings about arbitration.

But consumers also were sympathetic to banks' desire to cut costs and reduce litigation. Pew researchers found that more than half of consumers -- 56 percent -- support the idea of arbitration as a way to streamline the justice system, and 51 percent believe arbitration is a simpler, less costly way for banks and individuals to settle a dispute.

Consumers liking arbitration in the abstract but objecting to it in practice may seem contradictory, but it makes a lot of sense to Jean Sternlight, a professor of law at the University of Nevada, Las Vegas.

"I consider myself a great advocate of alternative approaches to conflict resolution. Arbitration can be a wonderful process by which to resolve disputes and yet at the same time, I'm a staunch opponent of mandatory arbitration," Sternlight says. "I think the way that one reconciles those is to say, 'It's a great process, so long as everyone knows what they're getting into and they choose it voluntarily.'"

The problem now is that many banks force arbitration on customers, likely suppressing a lot of legitimate customer claims, Sternlight says. She says that the two major arbitration organizations, JAMS and the American Arbitration Association, handle just a few thousands claims by banking customers each year.

"Considering how many consumers we have in this country, how many arbitration clauses they're covered by and how many disputes we know they have because they complain to the (Federal Trade Commission) and their credit card company and other places, that's just a minuscule number," she says.

Because arbitration clauses keep customers from joining class-action lawsuits, which are a way for the legal system to remedy problems that are so complex they'd be hard for a layman to present before an arbitrator, it is particularly disconcerting, says Thomas Stipanowich, professor of law at Pepperdine University and academic director at the Straus Institute for Dispute Resolution.

"Those types of situations, where arbitration becomes a second-class or third-class system of justice, that should raise everyone's concerns," Stipanowich says.

Still, Stipanowich says that under the right circumstances, arbitration could save both parties time and money compared with going to court and actually help consumers resolve disputes fairly.

"Trial and our public justice system, for all of the benefits of the rule of law, also have significant disadvantages. We often say that justice delayed is justice denied. Justice that costs a lot of money to get may be unattainable," Stipanowich says. "So the idea of creating systems that are superior to litigation in some of these respects is a very good thing."

"Arbitration is not inherently unfair," he says. "The devil is in the details."

How do you feel about arbitration with your bank? Is it worth it for you to solve a dispute?

Follow me on Twitter: @ClaesBell.

Update: Three quarters of banks that require arbitration also prevent customers from joining class action lawsuits, not three quarters of all banks in the survey as we originally reported.

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December 10, 2012 at 12:30 pm

As an attorney, the abritation will always favor corporations over individuals. Who do you think pays for the yearly fees to these assocations for the benefit of being a member?

Bill Coble
December 01, 2012 at 9:06 pm

The creation of the Consumer Financial Protection Bureau could haven't come at a better time as they provide an avenue for the consumer that wasn't there two years ago. Granted not every issue will fall under the bureuas jursidiction but they will route it to another agency if need be. The CFPB is looking at the arbitration concerns many of us have.