Written by Christine Hines, Legislative Director
Fintech Brings New Options and a Lingering Old Problem for Consumers
Financial technology companies are regularly rolling out new products and services made for our cell phones. Some online products or mobile applications offer new and affordable opportunities to millions of unbanked or underserved American households. Other fintech firms offer clever budget and financial planning services; new ways for credit and loans with creative underwriting methods to service customers who lack traditional credit histories; or simply alternatives for obtaining online loans.
Fintech providers assert that their purpose is to upgrade financial products and services for the benefit of consumers. It’s clear the financial marketplace is evolving quickly, and consumers may have the opportunity to benefit if these changes happen properly.
Still, a closer look at fintechs and their services uncovers a recognizable business practice that has long haunted customers (individuals and small businesses) of traditional banks and lenders. In a fintech report that his office released this month, Rep. Emanuel Cleaver (D-MO) acknowledged it too: fintech is embracing the decidedly anti-consumer practice of using the fine print to strip consumers of their rights.
Forced arbitration clauses are a ubiquitous presence in consumer contracts. They deprive customers of the public court system and send them into secretive, private arbitration proceedings to settle their claims against powerful corporations. In the past decade, report after report produced extensive data and real-life cases that show forced arbitration as a shield for wrongdoers to evade accountability and a barrier to deny harmed customers remedies for losses.
The overwhelming majority of arbitration clauses in financial contracts also bar consumers from banding together in class actions. The data show that very few consumers go to arbitration, especially on an individual basis. Consequently, big banks and predatory lenders can and have cheated and ripped off customers systematically without punishment.
Rep. Cleaver’s report, which summarized his investigation of the small business lending practices of fintech companies, found that “almost every company that disclosed a reasonable amount of information [to his office] admitted to using forced arbitration clauses in their contracts.” The congressman is rightly concerned with fintech’s seeming endorsement of the rip-off clause.
While his report did not indicate which fintech companies adopted the practice, the report listed six companies. In a quick online review, the terms and conditions of two, LendUp and Biz2Credit, contain arbitration clauses. Biz2Credit’s terms also bar its customers from participating in class actions.
They are not alone. In an online review of company websites listed in Forbes’ “Fintech 50 2018,” thirty-six of those firms provide consumer products and services. The terms and conditions of twenty-two of those firms contain forced arbitration clauses, class action bans, and/or jury trial waivers. Of those, fourteen firms require arbitration and prohibit customers’ participation in class actions; six—many of them fintech investment firms —require arbitration but do not prohibit class actions; and two fintech firms did not appear to use arbitration clauses, but they required waiver of jury trials. One of those two also banned participation in class actions.
These firms offer an array of consumer products and services including loans, credit cards, financing, investing tools, digital currency purchases, and remittance services. They electronically acquire and collect tons of personal data on customers, and are responsible for carrying out critical functions on their behalf.
Fintech companies with their unique structures and under-the-radar business partners, such as data aggregators, come with perils for consumers, partly due to the proliferation of big data use and potential security problems. Customers can face risk of identity theft, exposure of personally identifiable information, and fraudulent transactions. Not to mention that fintechs engaging in consumer lending remain subject to civil rights and consumer protection laws. Indeed, systemic discriminatory lending resulting from flawed algorithms has emerged as a real concern.
Missteps like these impact not just one customer, but many. Class actions remain the best tool to address widespread or systemic misconduct and harm. They provide remedies to groups of consumers for violations of law, especially where the amount of an individual’s loss is too small to be pursued in separate suits —a likely scenario with fintech as it is for financial institutions, generally.
Meanwhile, individual arbitration, as comprehensive data shows, does virtually nothing to protect consumers that have disputes with powerful entities. The few individual cases that exist do not enforce laws for all other similarly affected customers. Individual arbitration is more myth than reality for most.
The marketplace is all too familiar with the potential for widespread damage caused by unsafe practices of financial institutions. Risky or discriminatory financial products and services, even if wrapped up in new technologies, harm consumers’ welfare. And removal of consumers’ legal protections exacerbates their distress.
There was a fix. In 2017, the Consumer Financial Protection Bureau issued a rule that would have restored consumers’ ability to band together in class actions to pursue claims of harm caused by financial industry practices. But the U.S. Congress voted to overturn it. At its final moments, the rule died at the hands of Vice President Pence’s tie-breaking vote in the Senate. The rule’s reversal was a blow to American consumers, but their rights can be restored in the marketplace by customer-focused businesses.
Overall, fintech strategies appear to rely on providing innovative, accessible, user-friendly products that aim to simplify their customers’ financial lives. The first instinct should not be to shutdown avenues for customers to seek compensation for losses. Fintech’s priority should be to maintain proven safeguards for consumers in a fluctuating marketplace, including the customer’s right to go to court.