Summary
Although the article is about an investor's failed bet on arbitration of card disputes, the bigger fail will belong to the card industry -- the 1 billion bank and private label cards held by 200 million consumers. Issuers of those cards have all but lost the right require arbitration and the enormous protection arbitration brings against class actions. With the NAF gone kaput and the AAA refusing to fill the void, issuers now face massive, potentially crippling new risks .
Analysis
Card issuers in recent years have all avoided billions of dollars of liabilities because of arbitration clauses in their agreements that prevent cardholders with a dispute from affirming them in the court system via class actions. With the collapse of NAF and the refusal of the AAA to help, banks, retailers and charge card outfits like American Express will now have to defend themselves in front of hostile courts and juries. If their recent track record in front of other branches of government (e.g., Congress) is any guide, they are in for big trouble. As it is, they are already being battered 1) by rising delinquencies, write-offs and unemployment rates; 2) a harsh new CARD Act that will cost them tens of billions in lost revenues and more trouble with their customers; 3) an interchange fee risk in the tens of billions that either Congress or a federal court is going to ram down their throats; 4) a major dilution of their preemption protection from the enforcement of state laws because of a recent Supreme Court decision ; and 5) the probability that Congress is going to create a Consumer Protection Agency to squeeze the industry even more. Add them up: six disasters. How will/can the industry survive them? What effect will they have on the overall economy? Are there any winners?
Duncan MacDonald consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
