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Beat the bank in mandatory arbitration?

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Just say “mandatory arbitration” a couple of times. It may make you feel a little drowsy. But if you ever find yourself in a dispute with your bank or other financial services provider, those two words could determine your chances of successfully resolving it.

Mandatory arbitration clauses are bits of legalese inserted into customer agreements for checking accounts and other financial products, requiring customers to settle disputes with the bank through an arbitrator rather than the courts.

A 2012 study by the Pew Charitable Trusts’ Safe Checking in the Electronic Age Project found 66 percent of checking account agreements at the nation’s largest banks had mandatory arbitration clauses tucked away inside. Even if the customer agreement allows you to use the court system to challenge your bank, you’ll probably still find some restrictions. Of the banks surveyed, a whopping 98 percent had clauses waiving a jury trial; 32 percent had clauses requiring customers to pay some or all legal losses, costs and expenses.

“We found that all the banks restrict consumers from options to resolve their disputes,” says Susan Weinstock, project director for Pew’s Safe Checking in the Electronic Age Project.

If a majority of large banks forcing consumers into mandatory arbitration seems like a minor point, it’s not. There are significant differences between arbitration and trials conducted in the court system, Weinstock says.

Lack of a discovery process means you won’t be able to force banks to turn over records and answer questions to help you prove your case. And the results of arbitration are often confidential, so you can’t draw any information or precedent from past arbitration cases involving the company or industry, she says.

Banks love arbitration

So why do banks love arbitration clauses so much? Mostly because it saves them money, says Paul Bland, a senior attorney with Public Justice, a public interest law firm in Washington, D.C.

Arbitration clauses save banks money primarily by preventing costly class-action lawsuits. Most clauses prohibit consumers from banding together to sue a financial institution. The downside for consumers is that such prohibitions make it easier for financial institutions to improperly extract cash from customers’ pockets a few dollars at a time. Individually, those few dollars wouldn’t merit filing an arbitration case, Bland says.

For example, Bland recently handled a case where American Express allegedly underpaid rebates promised to cardholders. Those rebates together probably add up to millions of dollars, but few of the customers who lost out on $100 or less would be willing to take the dispute to arbitration, he says.

“That is a case that can only really be done as a class action,” Bland says.

Lack of consumer awareness and hard-to-understand arbitration clauses that vary drastically between banks also may keep consumers from filing complaints, Bland says.

“I talk to a lot of consumers who do not really know what arbitration is and do not really feel like they understand it,” he says.

Arbitration is rarely used

Few bank customers ever file cases with arbitrators.

The American Arbitration Association, a leading arbitrator used by many financial institutions, only sees consumers file around 500 cases per year nationwide, says Richard Naimark, an association senior vice president.

Naimark believes that while it’s presently small, the number of arbitration cases filed by consumers will rise in the wake of the landmark Supreme Court case, AT&T Mobility LLC v. Concepcion.

That ruling, which made it almost impossible for consumers to get around arbitration clauses, has pushed more banks to adopt the practice, Naimark says.

Public Justice’s Bland says that ruling also means that if an arbitration proceeding doesn’t go the consumer’s way, he or she is stuck with it.

“Once the arbitrator makes a decision, it is almost impossible to get an arbitrator’s decision overturned in court,” Bland says. “There was one case from the U.S. Court of Appeals from the Third Circuit that said ‘glaring errors of law’ are not grounds for a returning of the decision.”

Data on consumers’ chance of success in mandatory arbitration are hard to come by, in part because the results of arbitration claims are usually confidential, Bland says. A 2009 study sponsored by the Searle Civil Justice Institute found that consumers prevail in 53 percent of arbitration cases brought to the American Arbitration Association.

But a 2007 study by Public Citizen found that California credit card customers lost 94 percent of arbitration cases handled by the National Arbitration Forum, which has since been barred from handling consumer cases by a legal settlement with the state of Minnesota.

What to do if arbitration happens to you

If you have to go through arbitration, the proceeding is fairly straightforward, Bland and Naimark agree. You’ll initiate the case by filling out a “demand form” on the arbitrator’s website and pay a nonrefundable fee. For arbitration association cases involving less than $10,000, the fee is $125; for claims of more than $10,000, it’s $375 or more, Naimark says.

Once an arbitrator is selected by the firm, you’ll typically be asked to send in a letter arguing your side of the case, along with any evidence you may have. After that, you may have a telephone or in-person hearing that lasts at most a day, after which the arbitrator will rule.

Bland has a few tips for consumers who are thinking about filing a case.

  • Read the fine print. Look over your account’s terms and conditions and on the arbitration firm’s website before proceeding with any type of action. It’s easy to make a mistake if you don’t know the rules of engagement, Bland says.
  • Pick your battles. You may end up picking up the tab for the arbitration firm and the bank’s defense if you lose, depending on the rules established by the account agreement. Those costs can far exceed the amount of money in dispute in many cases, Bland says.
  • Play for keeps. Once an arbitrator has decided a case, it’s nearly impossible to overturn, so be sure you’re ready to pursue a case properly before filing with an arbitrator.
  • Consider getting an attorney. Arbitration has sometimes been sold as beneficial to consumers because they don’t require legal representation, but a lawyer can help you navigate the process more effectively and avoid missteps that could be fatal to your chances of winning.

Help on the way?

If you’re considering arbitration, you may want to wait. Under a provision in the Dodd-Frank financial reform law, the Consumer Financial Protection Bureau is studying whether arbitration hurts consumers. If their inquiry turns up evidence that it does, the CFPB will decide whether to impose conditions on how arbitration clauses can be used, says CFPB spokeswoman Moira Vahey.

“After the Bureau completes its study, it will assess whether imposing conditions or prohibitions on arbitration clauses would better protect consumers and serve the public interest,” she says.

Until then, you can try doing business with institutions that don’t have arbitration clauses in their fine print. Not all banks have mandatory arbitration clauses, and some allow new customers to opt out of arbitration when you first sign up for an account by calling a number or speaking with a banker. Either way, if you have an option to avoid arbitration, you probably should, Bland says.

“I think nearly every person who represents consumers or advocates for consumers would recommend that they opt out. The only people who would tell them otherwise would be employees and representatives of banks,” he says.