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The Charles Evans Gerber Transactional Studies Center


Although I had been mulling over the ideas in this Essay for quite some time, I finally was driven to put the ideas on paper by a call from a colleague one Friday afternoon. He recently had purchased something on the Internet. Regrettably, the Internet merchant had never shipped the goods; apparently the merchant had failed. My colleague had given the merchant the number from his Visa card to pay for the transaction. Being well educated, my colleague assumed that he could have the charge removed from his credit card statement.

When he called the toll-free service line for the bank that issued his card, however, he was surprised to hear that he could not rescind the charge because it had been processed as a debit card transaction, rather than a credit card transaction. He called me, hoping that I would tell him his bank was incorrect. Unfortunately, because the Visa card was a debit card rather than a credit card, I was forced to tell him no, that his bank was acting within its rights.

That anecdote crystallizes something that is deeply wrong with the current framework of our payments policy. The portion of that policy reflected in the Truth in Lending Act (TILA) grants consumers a variety of generous rights in credit card transactions.' By contrast, the Electronic Fund Transfer Act (EFTA), which governs debit card transactions, is relatively chary in its protections.2 Today, however, with the debit card market increasingly dominated by the PIN-less debit cards marketed by Visa and MasterCard,3 the distinction between the credit card and the debit card is almost invisible to all but the most sophisticated consumers.

This Essay explores that problem. The cause of the problem is easy to see: technology has altered the landscape of private payment institutions, and Congress has not updated the statutes that regulate those transactions. The solution, however, seems sufficiently difficult to warrant detailed consideration. The first part of the Essay starts at a high level of generality, analyzing the general question of what types of considerations should inform a sophisticated payments policy. There has been some substantial prior thinking on the subject, most obviously in the Uniform New Payments Code (UNPC)4 and by writers like Peter Alces who criticized that project. The central point of Part I is that previous analysis has failed to recognize the importance of the underlying transactions in which payments are made to issues ordinarily treated in the legal rules that regulate payment systems. Generally, I argue that issues of payments policy need to be separated into two categories: those for which determination of the appropriate rule is heavily influenced by the technology of the payments system; and those for which determination of the appropriate rule depends for the most part on the nature of the underlying transaction. Among other things, my argument suggests that issues like the one raised above-the ability of a purchaser to reverse a completed payment-should be driven more by transactional considerations. For example, I argue here that the differences in relative leverage between merchants and consumers support a broader role for reversibility of payment in consumer transactions, while issues about unauthorized transactions should be driven more by the nature of the technology.