Error-Resilient Consumer Contracts

Abstract

When firms contracting with consumers make mistakes, people get hurt. Inaccurate billing, misapplied payments, and similar problems push lucky consumers into kafkaesqe customer-service queues and unlucky ones off the financial cliff. Despite significant regulatory interventions, firms contracting with consumers continue to struggle to accurately bill customers, update accounts, and process payments. Firms largely rely on technology, especially databases and software, to discharge these servicing obligations. This technology must accommodate firms’ innovations in their contracts, shifting regulations, and unpredictable consumer behavior. Given the complexity of servicing, the technology will inevitably produce mistakes even when firms invest in technology. When firms skimp on their servicing technology, errors that harm consumers become even more likely. And even if it were possible to build perfect servicing technology, the costs that firms would pass on to consumers may outweigh the benefits. Then challenge, then, is how to reduce customer harm, accepting that perfect servicing is neither possible nor desirable.

This Article argues that structural improvements to consumer contracts can make them more resilient to errors. Far from being new, these structural improvements have long been recognized in contract theory. But these theoretical insights have not been applied to modern consumer financial contracts. Specifically, modularity and formalities improve resilience by mitigating the complexity of servicing, regulation, and consumer behavior. While mitigating complexity may reduce errors ex ante, the bigger pay-off is in simplifying customer redress if and when errors occur. Intervening in the structure of consumer financial contracts is an underappreciated tool for achieving substantive consumer protection.

Keywords: contracts, consumer law, consumer finance, secured transactions