Credit Cards and Debit Cards in the United States and Japan

This 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 four institutional factors also have useful explanatory power: the freedom of banks to enter the industry; the size of retailers; the level of telecommunications costs; and the size of the national economy. 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 and also, to some lesser degree, to the relatively small size of Japanese retailers. 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 telecommunications 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 in the United States to its use as a near-cash payment device in Japan leaves a much smaller niche for the debit card in Japan.

Optimizing Consumer Credit Markets and Bankruptcy Policy

This Article explores the relationship between consumer credit markets and bankruptcy policy. In general, I argue that the causative relationships running between borrowing and bankruptcy compel a new strategy for policing the conduct of lenders and borrowers in modern consumer credit markets. The strategy must be sensitive to the role of the credit card in lending markets and must recognize that both issuers and cardholders are well placed to respond to the increased levels of spending and indebtedness. In the latter parts of the Article, I recommend mandatory minimum payment requirements, a tax on distressed credit card debt, and the subordination of payments to credit card lenders in bankruptcy. I also argue that many aspects of the American bankruptcy system, as recently reformed, are overly protective of credit card issuers

Making Sense of Payments Policy in the Information Age

This is a substantially revised and focused version of Payments Policy in the Information Age. This essay in its new form explores how we should design a coherent payments policy, focusing on the incoherence of existing policy related to credit and debit cards. The central point of the essay 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, that suggests that issues of finality should be driven more by transactional considerations, while issues about unauthorized transactions should be driven more by the nature of the technology. To illustrate that framework in application, I turn in the remainder of the essay to the most rapidly growing payment systems in our economy, credit and debit cards. I generally argue that concerns about an imbalance of leverage between merchants and consumers justify broader inroads on finality of payment than existing law contemplates. At the same time, the essay emphasizes the importance of permitting different types of payments so that merchants and consumers can choose from a menu of payment options

Do Patents Facilitate Financing in the Software Industry?

This Article is the first part of a wide study of the role of intellectual property in the software industry. Unlike previous papers that focus primarily on software patents – which generally are held by firms that are not software firms – this Article provides a thorough and contextually grounded description of the role that patents play in the software industry itself. The bulk of the Article considers the pros and cons of patents in the software industry. The Article starts by emphasizing the difficulties that prerevenue startups face in obtaining any value from patents. Litigation to enforce patents is impractical for those firms. Efforts to obtain patents divert the firm\u27s focus from the central task of designing and deploying a product, and the benefits of excluding competitors are limited for firms that cannot themselves exploit the relevant technology. Once the firm is larger, a number of potential benefits appear. First, despite concerns that patents are not effective to appropriate profits from innovation in the software industry, a substantial number of software startups do have patents of sufficient strength to exclude competitors. That important finding, taken with the fact that the principal targets of those patents are much larger firms, suggests patents are more beneficial to small firms than to large firms. The Article then considers indirect effects related to the use of patents in cross-licensing transactions and in providing information about the firm. The first benefit may be substantial to firms that obtain patents, but the Article rejects patent use in cross-licensing as a net benefit to the industry: absent some other benefit, all firms would be better off saving the costs of obtaining patents. The information benefits, in contrast, seem to be net improvements to the innovation system. The central question, which I do not attempt to answer here, is whether those benefits are sufficiently substantial to justify the costs of obtaining the patents. The Article then turns to the prominent claims that the enforcement of software patents has hindered innovation in the software industry through creation of a patent thicket. The Article rejects those claims for two broad reasons. First, notwithstanding the empirical analysis of R&D spending in papers by Bessen, Maskin, and Hunt, direct evidence of high R&D spending in the software industry undermines claims that software patents cause firms to reduce R&D spending. Second, the actual structure and practices of the industry belie any claim of a patent thicket. Relying on interviews that 1 conducted and publicly available information, I show that the development of young firms in the software industry is not significantly constrained by large patent porfolios in the hands of incumbent firms. The Article also contextualizes the role of patents by examining the relatively weak protections that copyright and trade secret afford. At bottom, neither of those systems can provide a useful mechanism that allows small firms to appropriate the values of their inventions. If such protection is a significant positive benefit of the patent system, it is equally true that neither copyrights nor trade secrets contribute (or can contribute) significantly in that respect, however useful they might be in other roles (such as preventing piracy). The Article closes by considering critically the possibility of middle ground responses that would limit patent rights in the industry but not abolish them entirely. First, I criticize a possible registration system that might provide information benefits without the costs of excluding competitors. I argue that such an approach is impractical both because it would be difficult to disentangle the information benefits from the right to control technology and because of my sense that software firms would have an inadequate incentive to participate in such a system. Second, I consider the possibility of special limits on the rights of trolls, small nonoperating firms formed solely to litigate patents. Trolls serve a useful function as specialized intermediaries and thus in fact may have a positive role in promoting innovation in the industry. Third, I consider the possibility that slight alterations in the patent rules for enablement and disclosure might mitigate the risks trolls pose to the licensing equilibrium that currently minimizes the costs of patenting in the software industry

Startegy and Force in the Liquidation of Secured Debt

The question of why parties use secured debt is one of the most fundamental questions in commercial finance. The commonplace answer focuses on force: A grant of collateral to a lender enhances the lender\u27s ability to collect its debt by enhancing the lender\u27s ability to take possession of the collateral by force and sell it to satisfy the debt. That perspective draws considerable support from the design of the major legal institutions that support secured debt: Article 9 of the Uniform Commercial Code and the less uniform state laws regarding real estate mortgages. Both of those institutions are designed solely to support the liquidation process. Each has four major elements: statutory rules describing the actions a borrower and lender must take to create a lien or security interest in a particular asset, statutory and contractual rules describing the occurrences that entitle the lender to take possession of the collateral, statutory and contractual regulations of the mechanics by which the lender can sell the collateral, and statutory rules allocating priority among various claimants to the asset or its proceeds.1 All of those rules reflect an implicit assumption that the central focus of the transaction is the ability of the lender to liquidate the collateral. Legal and contractual institutions foster that ability both by enhancing the practicability of reliable and cost-effective liquidation and by tempering the potential for inequities in the process of liquidation

Information Technology and Non-Legal Sanctions in Financing Transactions

This Essay investigates the effect of advances in information technology on the private institutions that businesses use to resolve information asymmetries in financing transactions. The first part of the Essay discusses how information technology can permit direct verification of the information, obviating the problem entirely; the Essay discusses the example of the substitution of the debit card for the check, which provides an immediate payment that obviates the need for the merchant to consider whether payment will be forthcoming when the check is presented to the bank on which it is drawn. The second part of the Essay discusses how advances in information technology can solve information problems indirectly: leaving the problem in place to some degree but mitigating its severity. The Essay uses three examples. First, it discusses how advances in information technology improve the functioning of reputational verification systems, with a special emphasis on the dis-intermediation of securities issuance. Second, the Essay discusses the rise of intermediation by pooling in the area of securitization. The Essay closes by discussing how information technology has facilitated the rise of the information merchant, which can sell information directly to those who need it for their transactions

A Requiem for Sam\u27s Bank

This paper situates Wal-Mart\u27s failed application to form a banking subsidiary in the context of payments policy. Generally, I argue that permitting Wal-Mart to have a bank would have a salutary effect on the relatively uncompetitive market for payment networks. The dominant position of Visa and MasterCard, in which payments are priced above cost to subsidize credit, inevitably will give way to a world in which payment services are priced at cost, or even below cost as a loss-leader to attract customers to other goods and services. Entry into this market by Wal-Mart would be likely to spur more robust competition and thus lower pricing more rapidly