Credit Cards and Debit Cards in the United States and Japan

Ronald J. Mann, Columbia Law School


This article is an exploration in the tradition of new institutional economics of the possibility that institutional conditions have a significant role in determining the success of credit cards and debit cards. The article examines differences in credit-card and debit-card usage between the United States and Japan. Although I do not doubt that social and psychological factors have some significance, I contend that three institutional factors also have useful explanatory power: the freedom of banks to enter the industry; low telecommunication costs, and the size of the market.

The article provides a detailed description of card usage in the two countries, relying on government statistics and the results of a series of interviews with industry executives in both countries. Generally, credit cards in Japan are used for a smaller share of transactions, with a higher average amount, and with less borrowing per transaction. The costs to merchants that take the cards and the rates of fraud also are noticeably higher in Japan than in the United States. The article argues that the difference in usage is attributable primarily to regulations that largely excluded banks and their affiliates from credit-card lending until 1992. For whatever reason, it is clear that the credit card as it exists in Japan is not nearly so useful a product as the credit card in the United States. That explains the smaller rate of usage and the lower borrowing rates. Also, it is to be expected that Japanese consumers would use cash for smaller transactions for which American consumers would use credit cards (which explains the higher average-transaction size in Japan). The article concludes that the differences in discount rates and fraud rates are more likely to be transient, but attributable to a combination of factors, including the comparatively small payment-card market and high telecommunication costs, both of which have hampered the sophistication of responses to fraudulent transactions.

Debit cards are used quite rarely in Japan. The first general-use debit card was not introduced until the spring of 2000. Although that card is cheaper for the merchants that take it than credit cards, and also is much more resistant to fraudulent transactions, the article suggests that the debit card will not find as large a market in Japan as it has in the United States. The reason is that the shift of the credit card from its use as a borrowing device here to its use as a near-cash payment device in Japan leaves a much smaller niche for the debit card in Japan.