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Working Paper

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The rise of card-based payments has transformed the landscape of payments in the last half century, from one dominated by government-supported paper-based payments to one dominated by wholly private systems. The rise of those payments presents a number of policy problems, the most serious of which is the empirically demonstrable likelihood that use of the cards here and elsewhere contributes to an undue level of consumer credit and that borrowing on the cards contributes to a rise in the level of consumer bankruptcy. Because increasing financial distress imposes substantial externalities on the economies in which it occurs, the global rise of the credit card poses serious policy questions.

To understand how policymakers should respond, it is important to start by recognizing the powerful efficiencies that cards bring to payment systems, and how those efficiencies have driven the globalization of the payment card. Although the existing pattern shows great variation from country to country, regulators cannot be sure that the variations will persist. Building on existing historical research and on detailed contemporaneous data about the patterns of usage around the world, I show that the differences reflect the youth of the system, and the fact that few countries were as well suited to the rapid takeup of credit cards as the United States. Thus, the United States has developed an almost uniquely unitary payment system in which the credit card is both the dominant borrowing vehicle and the electronic payment instrument of choice. The pressures of globalization are rapidly driving convergence in card usage, except in those countries that have adopted substantial “speed bumps” to slow the growth of cards. Whether those speed bumps will deflect other countries from the problems faced in the United States remains an open question.

The natural question, then, is what policies will be useful to confine the problems related to credit cards without creating undue inefficiencies in retail payment systems. The ideal response would be one that drove the United States closer to the pattern evident in other countries, encouraging debit cards so as to protect the cost savings of electronic payments without the externalities generated by credit card usage. It is not easy, however, to devise policy responses that fit that goal. The closing part of this paper analyzes several different reforms that might be useful to policymakers of different perspectives: (a) permitting merchant credit card surcharges; (b) barring affinity programs, especially those that are conditioned on borrowing; (c) barring marketing to minors; (d) reorganizing the disclosure system to focus on the behavioral problems that make cards problematic; and (e) banning a few provisions that unacceptably shift costs from the card industry to the rest of society. Among other things, this suggests a shift in emphasis away from disclosures in account agreements to disclosures at the point of sale. Thus, for example, I reject recent proposals to provide enhanced disclosures for universal default provisions. On the contrary, I argue that those provisions should be banned from credit card agreements entirely, with a view to causing card issuers to limit the credit they extend to those that are demonstrably in financial distress.


Law | Law and Economics