Affinity Organizations Contractual Comparisons

1.  Introduction

            Affinity organizations present a unique issue in the field of contracts.  Affinity organizations are defined as typically non-profit organizations which offer their subscribing members benefits such as discounts to partnering businesses such as insurance companies and retail stores.1  These organizations may cater to a specific demographic (e.g. AARP), people who perform a specific activity (e.g. AAA), or to people banding together within and across specific professions (e.g. AFL-CIO).  The type of organization will often determine the types of benefits bestowed upon the member; however the benefits are almost always linked to some type of discount through partnering with another type of provider or business. 

            These organizations present a unique issue because they often act as an intermediary between the member and the outside business with which the real contract is being made.  The organizations often have simple contracts with a monthly or annual subscription charge to qualify for the offered discounts.²  However, sometimes to take advantage of these benefits the member must further contract with another party, such as an insurance carrier, which is also contracted to the affinity organization to offer discounts to its members.  This three-party situation has the potential to put affinity organizations in an awkward position as they should attempt to receive the most valuable benefits for their members from the third party business while in some cases they may also be receiving benefits from the partner business.³  Affinity organizations with large membership bases often have leverage over other businesses as they may create revenue for those businesses through guaranteed exposure to the organization’s membership base.  This leverage may result in insurance carriers and other types of businesses vying for contractual connections with the affinity organizations.  This may present a conflict of interest as a business that is willing to offer benefits to the affinity organization may be selected over another business which is offering greater benefits to the affinity organization’s members. 

To get a preliminary understanding at whether affinity organizations are negotiating better contractual terms for their members, Citizen Works looked at sample contractual terms in credit card offers across three different types of affinity organizations.   This memo seeks to outline the benefits and pitfalls we found in three large affinity organizations for those considering membership.

2.  Our Methodology

            We began first by examining the presentation of the terms of the card member agreement.  A good starting point is to look at how the agreement is accepted and whether the consumer is ever properly presented the option of looking at it before an “acceptance” of its terms is declared by the crediting institution.  In one affinity organization (AAA), submitting the credit card application online is declared as an acceptance of the agreements terms, as stated in the terms and conditions of the contract.  However, only a link to the terms and conditions is presented in the application process, in small font, and towards the bottom of the web page.⁵  The applicant may never see the terms binding him or her in this process.  A better method, for example, would have the terms pop up on the screen and to have an acceptance box below that would only work if the applicant had scrolled through all the listed terms.

            Second, we looked at whether the terms in the card agreement are actually fixed or if the credit company has the right to alter the terms after the agreement has been executed.  In the case of AAA, as stated in the terms and conditions, the credit card company reserves the right to automatically “upgrade” the consumer at any point after the agreement has been executed.  However, the term “upgrade” is not defined within the terms and conditions and could possibly contain any alteration to the terms contained within.  Also, it is common practice within the credit card industry to alter different terms when a consumer is “upgraded.”  For instance, a company may under the guise of increasing a consumer’s credit limit also simultaneously increase that person’s APR as well.  One other privacy-invading term is a feature which permits the crediting institution to share the applicant’s transmitted data within the business for any purpose.

            Third, we examined how an aggrieved consumer may attempt to extract his or her rights.  It is now common in credit card contracts to include mandatory arbitration clauses within them, forbidding the user from going to a court of law in the matter of a contract dispute, instead forcing them to arbitrate the matter privately, often using an arbitrator selected by the crediting institution.  This can and has been a problem for several reasons: first, the creditor selects the arbiter and often these arbiters work closely with these companies, building a type of business relationship which could be detrimental to the other party, the consumer; second, there is very little transparency, as the results of arbitration are usually not made public and therefore it is difficult to tell how unbiased the process is as no one knows who typically wins these disputes; third, the process is not as thorough as the one found in court, where the Constitution through the Due Process Clause demands that certain procedures are taken to protect the rights of the plaintiff.  Certain protections are provided in arbitration procedures, however, they often do not stack up to those provided by a court of law.  For these reasons (and others) it becomes important to discover whether the consumer will have the opportunity to take his or her dispute to court, instead of entering binding mandatory arbitration.⁶  Finally, we looked at the actual financial terms and penalties to see if they follow the traditional credit card agreement structure, or if the affinity organization used its leverage to extract more favorable terms for its members. 

Auto Clubs

            Auto clubs began as organizations catering to the specialized needs of motorists.  These organizations would offer services such as emergency roadside care such as tire changes, towing, and battery jumping.  Today the vast majority of auto clubs fall under the umbrella of AAA, formerly known as the American Automobile Association.  AAA is composed of 69 regional AAA organizations (such as AAA Midwest) which all have agreements in place where members may use their benefits from any of the individual organizations.  Member services and the costs of running the national organization are all generated through member’s dues which are paid on periodically (monthly, annually, etc.).  The services offered by AAA have also branched out beyond typical roadside services, including the promotion of insurance and financial instruments such as credit cards.⁴ 

AAA Financial Services

            AAA has recently expanded its business into the financial services industry.  The organization has agreements in place where a credit institution pays a fee to AAA for access to AAA’s extremely large membership base.  Through this arrangement, AAA has leverage over the credit institutions and could potentially provide for better contractual terms for its members. In this particular case, AAA does include a mandatory binding arbitration clause within the terms and conditions, making it not unique compared to the rest of the credit card industry.

            Moving to the financial terms, the first thing to look at is the APR rates and how they vary.  Typically, a card includes a low initial APR rate that after an introductory period transfers into a higher variable APR.  Usually the only advertised terms in the agreement are the introductory APR and the fact that there is no annual fee.  However, credit cards companies usually fail to mention what happens after the introductory period has ended.   For instance, for purchases the APR could be as high as 18.24%, depending on the creditworthiness of the consumer.  Also, the APR could be higher if the consumer incurs penalties, such as having a late payment or going over the credit limit.  The agreements typically reserve the right to alter the APR in these types of situations.  Also, if such a penalty is incurred during the introductory period, this will automatically jumpstart the variable APR, acting as a double penalty.   The purchases are on the lower side of the APR scale for this agreement however, as the default APR goes up to 27.99%, an incredible figure that is not favorable to the member.  Also, keep in mind that we are also not including the earlier term in this analysis which allows the crediting term to alter contractual terms at any time during the agreement. 

            When we examined penalties, we discovered that they activate in multiple situations, beyond just late payments and going over the credit limit.  For example, for balance transfers, either a $10 fine or 3% of the transaction will be taken, depending on which amount is higher.  Also, for international transactions, a 2% fine will be taken in USD.  Applying for a cash advance will also cost the user up to 5% of the transaction.  Included within the fees is the standard term used universally in the credit card field which states that whenever a payment is made it will automatically be applied to the lowest APR rate of all outstanding APRs, a sneaky way of extracting more money from the member, but which has been addressed by recent legislation. 

            We also contacted AAA’s financial services department directly in order to see if this card provided any benefits or terms that would not be available on the market at large.⁷  The only answers we received related to a low introductory interest rate of 2.99%, a lack of an application fee or annual fee, and a travel tickets program where money spent on the card could contribute to financing free tickets.  However, terms and benefits such as these are available from other standard credit cards, the only difference being variations in the interest rate and possibly an application or annual fee depending on the particular credit card.  Hence, there is no specific term or benefit offered by this card that cannot be found on the market at large. 

In conclusion, the AAA credit card offered through AAA and backed by VISA does not include more favorable contractual terms than in the rest of the industry.  This card contains similar APR and fee structures as other cards which typically include a low, sometimes zero fixed APR with no annual fee but then backed up by a large variable APR which can be altered at any point for any reason by the company.  Also, the standard MBA (mandatory binding arbitration) is used within the credit card contract to protect the rights of the company over the member (i.e. by forcing arbitration instead of allowing suits to proceed in court).

3.  Age Defined Organizations

            The second type of organization targets a specific demographic, such as AARP which targets those over 50 years of age.  AARP traditionally offers benefits to its members such as discounts at different business that would be in the interest of its targeted demographic.⁸  They also serve as a type of community organizer, which distributes news relevant to its members.  Similar to AAA, they have begun offering financial services and insurance.  AARP also has leverage over the financial business because they provide access to its expansive membership base and could theoretically use this leverage to extract better contractual terms for its members.  Alternatively, AARP could also use that advantage to collect larger fees from the financial companies instead. 

AARP Financial Services

            The standard procedure for acquiring the credit card involves filling out personal data online, and the acceptance of the financial agreement is inferred through completion of the application (i.e. there is no affirmative action by the applicant to represent acceptance).  The “acceptance” for AARP members is completely divorced from any true recognition and acceptance of the terms of the credit card agreement by the member.  Most members would not even know when that an agreement has been executed, much less what the terms are in this arrangement. 

            The AARP contract is more direct and intelligible than AAA when describing how the terms of the contract may be altered, as the terms and conditions simply state, “benefits may be altered by the company at any time for any reason.”  This type of one-sided term is typically found in credit card agreements and the ones provided by the AARP are no exception.  However, the cardholder agreement does not include a mandatory binding arbitration provision that precludes members from accessing a court of law in the event of a dispute.  In this type of relationship the card company has more power contractually as it reserves the right to alter terms but must submit to U.S. courts in the event of a contractual dispute.  Therefore, unlike most credit cards, consumers have the ability to access the procedural safeguards present in the United States court system.

            The AARP credit agreement’s financial terms follow a similar structure to that of AAA, including a low introductory fixed APR (0%) for the first six months followed by a transition to as much as an 18.24% variable APR, irrespective of whether the card user has incurred any penalties or done anything to trigger a rise in rate.   The actual APR is determined by the “creditworthiness” of the member and will be automatically raised in any instance where the member does not “comply with the terms of the contract,” which may be altered at any time.  One other interesting term included in the contract is that the beginning variable APR rate may be determined by any information regarding how the account is used, which goes beyond the simple creditworthiness of the use made earlier in the agreement.  This agreement also contains the familiar term that any payment will be applied to the lowest outstanding APR, allowing the higher APRs to accrue larger balances at higher rates.  The agreement also includes transaction fees for balance transfers, cash advances, late payments, going over the credit limit, and international transactions.  All of these except for late payments can take the form of percentage fees, up to 5% in the case of cash advances and exceeding the credit limit. 

            We attempted to contact AARP’s financial services regarding specific benefits offered on this card that are not available on the market at large.⁹  However, they were unable to point to any specific benefit offered by this card that would be unavailable on a standard credit card.  Looking at the terms in the financial agreement, one can see that it is structured in the same way as any other credit card. 

            In conclusion, the AAA and AARP cardholder agreements contain strikingly similar financial terms but differ with regards to whether a BMA clause is included.  AAA includes a BMA clause while AARP has chosen not do so, however, each have methods of executing the agreement that do not inform the member of the terms which they are being bound by executing the agreement.¹⁰  In a more perfect world, the acceptance of the agreement should be an actual acceptance of the terms.  However, in these two cases the acceptance is an action completely unrelated to the actual terms of the contract.  Also, the financial terms of the AARP card feature the same industry standard structure, including a low introductory rate, followed by a mystical variable rate which may alter and increase at any time for any reason.  These facts lead to the conclusion that the leverage controlled by the AARP has been used to extract slightly more favorable terms than an average credit card company would apply, mainly with respect to the lack of a BMA clause in the case of AARP’s credit cards. 

4. Unions

            The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) is the largest federation of unions in the United States and Canada with more than eleven million members.¹¹  The AFL-CIO offers similar products as the other affinity organizations in discounts, insurance and financial products.  They offer credit cards through the moniker “Union Plus,” which was established by the AFL-CIO to provide financial instruments to its participating labor unions. 

Union Plus Credit Card

            The Union Plus credit card shares the same basic financial structure as the other two previously detailed credit offerings.¹²  There is an initial 0% APR introductory rate which applies for the first six months of membership if no penalties are accrued by the member.  Once the introductory period has expired, the member will pay a variable APR which is dependent upon the creditworthiness of the particular member.  One distinction between the Union Plus card and other offerings is that this card has a hard upper limit on APR at 24.99%.  Also, the terms of the card do not state that they may alter the APR for any reason; instead they list several specific penalties which may raise the variable APR (i.e. late payment, exceeding credit limit, etc.).  While the maximum APR is high, these rules provide some guidance as to how a member may control their APR under this card. 

            There are also several other distinctions which make the terms of the Union Plus credit card superior to its competitors.  For instance, a positive acceptance of the terms of use is required in order to continue the application process.  The applicant must check a box located below a listing of the relevant terms, which is a superior method compared to other mechanisms where the applicant may never see the terms.  However, this mechanism could be improved by forcing the applicant to scroll all the way through the terms of use before they are allowed to check the checkbox saying that they have read and will comply with all of the listed terms.  Next, there is no binding mandatory arbitration clause within the terms for this credit card.¹³  Therefore, if a dispute did arise regarding the terms of the contract, a member at least theoretically would have access to the courts to have the dispute settled. 

            We also conducted first hand research by contacting Union Plus and their financial backer, HSBC.  We spoke with a representative with HSBC regarding benefits available on the Union Plus card that would be unavailable on a normal credit card.¹⁴  We were informed that the unique benefits with this card centered on more favorable financial terms with regard to one’s credit worthiness.  For instance, this card comes with a 0% retail or balance transfer, which would be difficult to acquire on a standard credit card.  This card also offers a host of fringe benefits such as discounts for life insurance, automobile insurance, health insurance, legal services, etc.  This further proves that there is no specific characteristic of the Union Plus card that makes it superior to a standard credit card, but overall the value of the card is higher here by providing a better deal financially. 

In conclusion, while the Union Plus credit card does have the same basic structure as other offerings, it has at least three distinctions which place it ahead of the rest of the pack, including  more concrete terms regarding APR, a better mechanism for contractual acceptance, and a lack of an arbitration clause.

5.  Conclusion

            To conclude, it does not appear that these affinity organizations differ greatly in the credit cards they provide and what is available on the market generally.  Some offer slightly better financial terms and fringe benefits, such as the Union Plus credit card and to some extent the AARP cards, while others offer the same terms available anywhere else.  The financial contracts here are also structured in the same manner as a standard credit card, where a low interest rate is offered up front on a temporary basis, which can spike over time or by drawing a fee or penalty.  All of the agreements also provide the credit card companies the authority to alter the agreement at will, which is seen in how interest rates can vary depending on credit worthiness and other factors.  These agreements also feature mandatory arbitration agreements which further restrict the rights of their customers, with only a few exceptions.  Finally, it does not appear that these affinity organizations have been able to extract significantly better financial terms (except for the noteworthy exclusion of forced arbitration/BMA clauses or slightly better interest rates) through the leverage created by their customer base.

Bibliography

¹See History of Affinity Groups, http://www.rantcollective.net/article.php?id=33 (2009).

²See AAA Membership Services, http://www.autoclubgroup.com/chicago/member_services/index.aspx (2009).

³See Consumer Reports, http://www.consumerreports.org/cro/money/credit-loan/affinity-credit-cards-2-08/overview/affinity-credit-cards-ov.htm (2009) (“The National Audubon Society Rewards American Express card is another affinity card that pays rewards to cardholders. The issuer, Bank of America, has contributed more than $2.8 million to the nonprofit since the card was introduced three years ago.”).

⁴Supra note 2.

⁵Id.

⁶See, National Association of Consumer Advocates, http://www.naca.net/binding-mandatory-arbitration/ (2009) (“It is a secret system of justice with virtually no rules and no evidence or records. Arbitrators are most often hired by providers that serve big businesses (repeat customers), not by any one individual (who may file one claim in a lifetime), and those arbitrators have a documented tendency to rule with the repeat customer and against the individual.”).

⁷Spoke with Anna of AAA’s financial services department on March 4, 2010.

⁸See AARP Products, Services & Discounts, http://products.aarp.org/ (2009).

⁹Spoke with Tasha of AARP’s financial services department on March 8, 2010.

¹⁰Supra note 6.

¹¹See AFL-CIO, http://www.aflcio.org/aboutus/ (2009).

¹²See Union Plus Credit Card, http://www.unionplus.org/money-credit/credit-card (2009).

¹³Id.

¹⁴Spoke with Edna, with HSBC on February 15, 2010.