Abstract

When firms contracting with consumers make mistakes, people get hurt. Inaccurate billing, misapplied payments, and similar problems push lucky consumers into Kafkaesque 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 governmental regulations, and consumers’ unpredictable behavior. Given the complexity of servicing, even when firms invest significantly in technology, it will inevitably produce mistakes. 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. The 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 the resulting 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 payoff 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.

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