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.

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

Do Defaults on Payday Loans Matter?

This essay examines the effect on a borrower’s financial health of failure to repay a payday loan. Recent regulatory initiatives suggest an inclination to add an “ability to pay” requirement to payday-loan underwriting that would be fundamentally inconsistent with the nature of the product. Because the premise of that regulation would be that borrowers suffer harm when they fail to repay such a loan, it is timely to examine the after-effects of such a default empirically. This essay examines that question using a dataset that combines payday borrowing histories with credit bureau information. The essay uses a difference-in-difference approach, comparing the credit-score change over time of those who default to the credit score change over the same period of those who do not default. The essay presents three principal findings. First, credit score changes for borrowers who default on payday loans differ immaterially from changes for borrowers who do not default on payday loans. Second, the fall in the year of the default plainly overstates the net effect of the default, because the credit scores of those who default on payday loans experience disproportionately large increases for at least two years after the year of the default. Third, the payday loan default cannot be regarded as the cause of the borrower’s financial distress; borrowers who default on payday loans have experienced disproportionately large drops in their credit scores for at least two years before their default

Bankruptcy Reform and the Sweat Box of Credit Card Debt

Those that backed the 2005 bankruptcy reform law argued that it would protect creditors from consumer abuse and lack of financial responsibility. The substantial increase in the number of bankruptcies over the last decade combined with the perception of system-wide abuse apparently convinced legislators from both political parties that the backers had a point. Thus, Congress enacted amendments to the Bankruptcy Code that – if effective – would fundamentally change the core policies underlying the consumer bankruptcy system in this country. The rhetoric surrounding the reform debates pressed the idea that if borrowers had to repay more of their debts, creditors would achieve savings that - through pressures of competition – would be passed on to consumers in the form of lower interest rates and improved access to credit. This essay addresses some of the problems with this justification and considers what else creditors (and particularly credit card issuers) could have expected to achieve with the new law. I argue that the new law will benefit issuers substantially, though not for reasons commonly discussed in the negotiation and drafting of the statute. Means testing alone will not return enough in increased bankruptcy payouts to justify the lobbying expenditures and campaign contributions that led to the statute\u27s enactment. Rather, the most important effect will be to facilitate the card lending business model, by slowing the time of inevitable filings by the deeply distressed and allowing issuers to earn greater revenues from those individuals. In a nutshell, the new law does little for creditors once they reach the courthouse. Its most important effect will be to enable issuers to profit from debt servicing revenues paid by distressed borrowers who are not yet in bankruptcy. For issuers that depend on debt revenues, the benefits of the law could be dramatic

Driver for Contactless Payments

As a consumer, my primary experience with cash before the virus was standing in checkout lines observing the sluggish pace of cash transactions in front of me. Like so many things in our lives, the advent of the virus has changed the situation markedly. From the earliest days of infection, it has been far more unsettling to observe cash transactions knowing that the virus persists on paper and metal surfaces for days. The dynamic that has driven the choices merchants offer in face-to-face retail transactions will change as well. Driven by the private exigencies of the retail environment, the last few decades have witnessed private mechanisms spreading cash-less retail transactions, predominantly card-based. In some countries, policymakers have supported that spread, reacting to the societal costs of a heavy reliance on cash by adopting rules that limit or even aim to eliminate the use of cash.More recently in this country, however, as a few businesses have refused to accept cash, local policymakers have pushed back, reasoning that a refusal to accept cash excludes less affluent purchasers (frequently unbanked) from fair access to commerce. Among others, Massachusetts,New Jersey,New York, Philadelphia, and San Francisco have banned cashless businesses. Indeed, the present Congress has considered two bills that would extend such a ban to the federal level.The likelihood that Amazon’s cashier-less stores (Amazon Go) would refuse cash payments has been a particular stimulant to those bills. This essay makes two basic points about the effect of the virus on that mix of policy, legal, and institutional arrangements. First, policies fostering the use of cash in retail transactions are much harder to justify in the world of the virus, as it is harder to make those transactions safe for purchasers, cashiers, or the populace in general. Second, the slow pace of the shift from card-based payments from swipe to chip, with the slower drift to phone-based payments, is more worrisome now, where fully contactless payments are safer for all involved than authentication either by swipe or chip

Reliable Perfection of Security Interests in Crypto-Currency

As you all know, the organizers of this event chose a topic of burning interest when they selected crypto-currency as the focus of this year’s panel. Fortunately, unlike most of the similar events at which the author has been asked to speak, we have not been asked to talk about Bitcoin as the currency of the future; my doubts about the ability of Bitcoin to succeed as a currency of routine use – as opposed to a speculative investment vehicle – dampen my interest in talking repeatedly about that subject. The task they have set for the speakers is one that involves a transactional development with much more potential for widespread deployment: transactions in which lenders extend loans in return for an interest in some form of crypto-currency as collateral. That topic sidesteps the indeterminate speculation about the future development of Bitcoin in favor of something of commercial immediacy. Crypto-currencies, in fact, have present value on the balance sheets of commercial borrowers, and all signs suggest that, in the years to come, investments in one or another form of crypto-currency will become more routine and more substantial. To be sure, that value might be volatile, and it might or might not be useful to think of it as currency, but from the perspective of lenders, it represents value that would enhance the borrowing base of their customers if lenders could capture it reliably. This article considers that topic. The author proceeds in three steps. First, the author considers the simple straightforward approach of perfecting a security interest under existing legal rules. Recognizing the obvious weaknesses of that approach in cabining transfers of collateral to pseudonymous purchasers, the author turns in the second part of the article to a more capacious use of institutional arrangements that should give the lender a more effective control of the asset – transactions using what the author calls “quasi-control.” Finally, the third part of the article briefly considers technological advances that would use blockchain-based smart contracting tools to perfect the lender’s interests more elegantly, namely the development of a “smart” lien that integrates the respective rights of the borrower and lender directly into the mechanism of the blockchain

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