On The Contract Law: Why is Your Bank so Evil and What Can You Do About It?

800px-United_States_one_dollar_bill,_reverse Most of us will agree that businesses exist to make a profit. Most of us will also agree that businesses exist because they provide something that a consumer wants to pay for. This model works great for a consumer going to a store to buy an item he can pay cash for 1 time – such as a drill. There are many stores that sell drills, many brands of drills, and many consumers. No particular group can take advantage of any other, and market forces work very well to provide value to the consumer and profit to the businesses.

What happens when a service is purchased for some period of time, such as a bank account, or a cellular phone subscription? Here, the market is more limited in 2 ways.

  1. the number of sellers are very limited in number and in difference in product offering.
  2. the businesses have vast and mighty contracts that give them a level of advantage over the little people not seen since the days of Landlords and Serfs in Europe.

These 2 limitations of the market conspire to make the deals provided by what I will call the Consumer-Contract Industries extremely bad for the consumer. Here are a few examples:

  1. Lawyersandsettlements.com writes about ‘ridiculous cellphone early termination fees’
  2. MSN Money writes that ‘banks have declared war on you’, levying higher and more frequent credit card fees.
  3. USA today writes that banks most frequently hit young and low income customers with excessive fees.
  4. The Consumerist reports a bank manipulated one woman’s account, causing over $5000 in  fees.
  5. Bankrate.com finds banking fees continue to climb
  6. Arbitration is often required in settling these cases. Business Week reports that the arbitrators almost always rule in favor of the business.

When this country was founded, businesses were generally small, excepting government monopolies, such as the British East India Company – which were generally despised. If you didn’t like a certain business, excepting monopolies, you could easily fire them and do business with someone else. Presently, many private companies have attained size and power comparable to large 18th century government monopolies. They protect their position by lobbying the government, and by generally adopting extremely similar business practices, so that the consumer has no meaningful choice. In his book ‘The Dilbert Principle’, cartoonist Scott Adams playfully calls this structure of business a ‘Confuseopoly’. According to the Better Business Bureau, Cell Phone providers, and banks were both in the top 3 most complained about industries in 2008. Predatory contracts and fee schedules as well as a Confuseopoly business structure are the norm in both industries. Certain unethical recruiting firms also abuse their customers like this by making them sign a contract requiring them to pay fees for service and leaving the new company before X date (even though they already made money from the hiring company).

In this country today, we have far too many bright people creating clever business models that make a lot of money for themselves without delivering much value to customers. Contracts allow these businesses to do this.  All businesses need to deliver fair value – otherwise Capital C Capitalism loses its main advantage over Capital C Communism. And I don’t think many people really would want to feel the heavy hand of Communism, with its absence of individual freedoms and opportunities for advancement… So let’s reform the contract law instead.

We need to do something now and do it right. Recall the reforms of Imperial Russia. Every time the serfs would ask for freedom and land, the government gave them the shell of each. Finally they had the Communist Revolution. Let’s enact meaningful reform now, before the anger level builds that far. Let’s begin by supporting Obama’s Office of Consumer Protection and then follow up with reform to the contract law with these key reforms:

  1. Contracts should be short and written in plain language.
  2. Contracts should offer a month by month term at substantially the same pricing as the long term contract.
  3. If a business is no longer in position to provide the agreed service, for whatever reason, for a period of more than 10 days, the consumer should have the option to either obtain a refund or to cancel the contract with no penalty fee.
  4. Businesses should not be allowed to force the consumer to purchase proprietary hardware or software that is inoperable with a competitor’s service, or to make a customer’s data un-transferable to any competing service if/when the customer leaves.
  5. Businesses should have to honor anything an employee of theirs tells a customer, even if it is wrong. Employees should have to record and provide a transcript of all customer service transactions in written form.
  6. The consumer should have to agree to every service that is charged a fee for, each time, before that service is performed.
  7. Fees, and pricing etc. should be fair and proportional to the value of the service provided.  i.e. a $39 overdraft fee on a $4 ATM purchase that goes uncovered a few days  should not be allowed, but a fee based on an interest rate of prime + a few percent would be quite fair (in this example, the fee would be about 1 cent).
  8. Businesses should not be allowed to play with the transaction type, timing, order, etc. to increase the amount of fees.   Fees should be based on the actual work done.   The charge should be reasonable and fair to both business and consumer.
  9. Customarily free services, such as a second checked bag on an airplane, or a dish of sour cream with your baked potato, should not be allowed fees.
  10. The consumer should always have the right to challenge the contract in court, without being forced into an arbitration mediated by some unabashedly pro-business arbitrator such as the NAF.   If the court finds the fees or any other part of the contract to be unfair or excessive, the business should have to refund all affected consumers within 30 days – even if this forces the business into insolvency.  All the consumers should also have the option of picking a different business at that time to meet their needs, without any cancellation penalty.

In the meanwhile, PC World has posted a guide on how to defend yourself against many kinds of unfair fees

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