The Supreme Court ruled Thursday that a group of small businesses wasn't eligible for class-action status in a suit against American Express. In the process, the court might have struck a death blow against one of the nation's best consumer-protection tools.
Last month, I wrote about the trend toward binding arbitration, in which companies stipulate in their terms of service that, by using a product or service, consumers forfeit their right to file class-action suits against the company. Customers with disputes must instead submit to arbitration, which is costlier and regarded as more friendly to businesses than consumers. A few years ago, the advocacy group Public Citizen conducted a study of thousands of arbitration cases: Among those that ended with a decision by the arbitrator, the company won 95% of the time.
While the practice was prohibited by law in many states, the Supreme Court struck down those laws in its 2011 ruling in AT&T Mobility v. Concepcion, opening the floodgates for arbitration clauses.
But there was another case before the Supreme Court that had the potential to salvage some vestige of consumer protection. American Express Co v. Italian Colors Restaurant hung on the question of whether a court could invalidate an arbitration clause if it felt that the cost of individual arbitration was prohibitive for the plaintiffs.
On Thursday the court made its decision on that case: In a 5-3 ruling, it upheld the right of companies to use arbitration clauses as they please. That's bad news for consumers and small businesses who have relied on class-action suits to press claims against large corporations.
"There's no reason why a big company couldn't create contracts that prevent people from filing sex discrimination, consumer fraud, or other similar claims in any venue," wrote Mother Jones following the ruling. "Laws that Congress passed to protect the public could simply be voided through artfully written arbitration clauses that create expensive hurdles to pressing a claim."
If there's enough consumer outrage against binding arbitration clauses, companies could be shamed out of using them -- or Congress could act to make them illegal. But in the meantime, expect to see more of them popping up in those terms of service agreements that nobody ever reads -- until there's a problem, by which time, it's too late.
Why Your Bank Thinks Someone Stole Your Credit Card
Supreme Court Arbitration Ruling Slices Away More Consumer Protections
One reason why Marquis' gas purchases might have triggered a fraud lockdown? Filling their tank is a common first move for credit card thieves.
"Some of the things they look at are small-dollar transactions at gas stations, followed by an attempt to make a larger purchase," explains Adam Levin of Identity Theft 911.
The idea is that thieves want to confirm that the card actually works before going on a buying spree, so they'll make a small purchase that wouldn't catch the attention of the cardholder. Popular methods include buying gas or making a small donation to charity, so banks have started scrutinizing those transactions.
Of course, it's not a simple matter of buying gas or giving to charity -- if those tasks triggered alerts constantly, no one would do either with a credit card. But Levin points to another possible explanation: Purchases made in a high-crime area are going to be held to a higher standard by the bank.
"It's almost a form of redlining," he says. "If there are certain [neighborhoods] where they've experienced an enormous amount of fraud, then anytime they see a transaction in the neighborhood, it sends an alert."
(Indeed, Erin tells me that one of the gas purchases that triggered an alert took place in a rough part of Detroit, which she visited specifically for the cheap gas.)
People who steal credit cards and credit card numbers usually aren't doing it so they can outfit their home with electronics and appliances. They don't want the actual products they're fraudulently buying; they're just in it to make money. So banks are always on the lookout for purchases of items that can easily be re-sold.
"Anytime a product can be turned around quickly for cash value, those are going to be the items that you would probably assume that, if you were a thief, you would want to get to first," says Karisse Hendrick of the Merchant Risk Council, which helps online merchants cut down on fraud. Levin says electronics are common choices for fraudsters, as are precious metals and jewelry.
Many thieves don't want to go through the rigmarole of buying laptops and jewelry, then selling them online or at pawnshops. They'd much prefer to just turn your stolen card directly into cold, hard cash.
There are a few ways that they can do that, and all of them will raise red flags at your bank or credit union. Using a credit card to buy a pricey gift card or load a bunch of money on a prepaid debit card is a fast way to attract the suspicions of your credit card issuer. Levin adds that some identity thieves also use stolen or cloned credit cards to buy chips at a casino, which they can then cash out (or, if they're feeling lucky, gamble away).
When assessing whether a purchase might be fraudulent, banks aren't just looking at what you bought and where you bought it. They're also asking if it's something you usually buy.
"The issuers know the buying patterns of a cardholder," says Hendrick. "They know the typical dollar amount of transaction and the type of purchase they put on a credit card."
Your bank sees a fairly high percentage of your purchases, so it knows if one is out of character for you. A thrifty individual who suddenly drops $500 on designer clothes should expect to get a call -- or have to make one when the bank flags the transaction. If you rarely travel and your card is suddenly used to purchase a flight to Europe, that's going to raise some red flags.
Speaking of Europe, the other big factor in banks' risk equations is whether you're making a purchase in a new area. I bought a computer just days after moving from Boston to New York, and had to confirm to the bank that I was indeed trying to make the purchase. Levin likewise says that making purchases in two different cities over a short period of time raises suspicions.
"I go from New York to California a lot, and invariably someone will call me [from the bank], " he says. Since one person can't go shopping in New York and California at the same time, any time a bank sees multiple purchases in multiple locations in a short period, it's going to be suspicious.