Legal Seminar, Denver, CO

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IN PRESS

[m7;July 3, 2018;21:58]

JID: CLSR

computer law & security review 000 (2018) 1–8

cards made in-person transactions more secure, thus arguably reducing fraud losses throughout the system. However, the in- centive for this investment came not from altruism, but from contractual pressure from the card brands: Merchants who upgraded their equipment could avoid assessment of fraud costs through charge-backs on their systems; merchants who did not upgrade would bear those costs. 10 These changes oc- curred through private ordering within the industry, albeit with some indirect support from an executive order and gov- ernment purchasing demands based on its own payment sys- tem needs. 11 Payment networks also offer other benefits to consumers, including airline miles, points toward hotel stays, or cash back rewards, to induce consumer participation. 12 Consumer confidence in electronic payments is also boosted by legis- lation and private ordering initiatives coming from within the industry that have limited consumer exposure to losses from fraudulent charges 13 and expanding consumer protec- tion from risks from nonperforming merchants. 14 These coor- dinated efforts appear to have moved consumer preferences toward expanded payment card usage, creating practices and habits that reflect continued loyalty from customers. The net- work is capable of delivering these benefits because, in signif- icant part, the participating firms have obligations that are re- inforced through intermediaries that can be trusted to deliver long-term compliance with their contracts and with related regulatory obligations. The economic livelihood of their pay- ment network depends on the consumers and merchants who are satisfied with this alternative to cash, thereby incentiviz- ing collective behavior to ensure compliance with network rules. Moreover, the transparent, public positions in the mar- ketplace occupied by intermediaries make them amenable to government jurisdiction, allowing regulation and intervention when necessary. In short, there is always the shadow (or light) cast by the law to ensure that these private ordering efforts are functioning in the public interest. Consumers are only one side of this marketplace, as the value they will ascribe to an electronic payment network op- tion also depends on widespread acceptance frommerchants. The converse is also true: merchants would have little incen- tive to adopt a payment method that consumers do not use. 15 Merchant participation has been achieved through promised

benefits from increased trade and the offloading of risks that attend firm-specific extension of credit. 16 As a result, both merchants and consumers benefit from the service delivered by the payment network. 17 In 2017, payment cards generated nearly 300 billion transactions worldwide, up 18% from 2016. 18 While the payment card market is growing, not all are sat- isfied with the attendant costs – and particularly the locus of cost-bearing among participants in the payment network. Consumers may pay annual fees for cards that offer special benefits, such as airline miles or hotel stays, and they may also pay interest and other fees associated with the extension of credit. Given the ubiquity of card options, those who value the perks of miles, hotel stays, or even cash back rewards can choose among various options in a manner that maximizes their utility. For example, no-fee cards are available for those who prefer to forego associated benefits and avoid the pay- ment of annual fees. Indeed, many consumers hold more than one card. 19 Merchants who participate in electronic payment card sys- tems nominally bear significant fees on each payment trans- action, which are generally two to three percent of the pur- chase price on credit transactions. 20 Those fees are shared among intermediaries within the payment network, covering not only the costs of running the network but also the fund- ing source for the other benefits that consumers enjoy. Unlike consumers, who may be able to choose a no-annual-fee pay- ment card, merchants may find it more difficult to avoid the nominal transaction costs associated with participation in the payment network. 21 Of course, they may legally choose to ac- cept only cash (or only a payment card), 22 but by doing so they may shut out a significant component of consumer demand. Merchants seek to recover these payment transaction costs through higher profits from transaction volume benefits on account of the payment card transactions, or through rais- ing prices for all customers to offset the fees associated with payment network usage. Indeed, cards with higher rewards to consumers generally require higher fees and thus cost more for merchants to accept them. 23 Alternatively, some mer- chants have sought to charge differential prices depending on the type of payment in order to recoup the added costs of the payment mechanism. Historically, the differential pricing op- tion has faced restrictions imposed by law or contract. Federal law initially proscribed the practice of imposing surcharges on credit card usage, but it permitted discounts for other forms of payment. 24 These restrictions lapsed in 1984, but some states adopted similar measures that essentially perpetuated the expired federal regime. 25 As a practical matter, these legal

10 See generally Jeannette N. Bennett, "The Smart-Chip Credit Card: A Current Solution," Page One Economics, March 2016, https://research.stlouisfed.org/publications/page1-econ/2016/03/ 01/the-smart-chip-credit-card-a-current-solution/ . 11 See id. 12 See United States v. American Express Co., 838 F.3d 179, 185 (2 nd Cir. 2016), aff’d, 585 U.S. __ , 2018 WL 3096305 (No. 16-1454, June 25, 2018). 13 See Morse & Raval, supra note 8, 10 DePaul Bus. & Comm. L. J. at 223-25. 14 See, e.g., FDIC, Consumer Protection Topics – Billing Er- rors and Resolution, https://www.fdic.gov/consumers/assistance/ protection/errorresolution.html (discussing Regulations Z and E and their consumer protection functions); FTC, Billed for Merchan- dise You Never Received, https:// consumer.ftc.gov/articles/02221- billed-merchandise-you-never-received (noting both private in- centives and legal options for dispute resolution). 15 See American Express, supra note 12, 838 F.3d at 185. 18 See The Nilson Report, Purchase Transactions on Global Cards in 2017, Issue 1130, April 2018, https://nilsonreport.com/ publication_chart_of_the_month.php . 19 See American Express, supra note 12, 838 F.3d at 185. 20 See Expressions Hair Design v. Schneiderman, 137 S.Ct. 1144, 1148 (2017). 21 See American Express, supra note 12, 838 F.3d at 189-90. 22 See Wolman, supra note 6, at 48-49. 23 See American Express, supra note 12, 838 F.3d at 188. 24 See Expressions Hair Design, supra note 20, 137 S.C.t at 1147-48. 25 See id. Please cite this article as: E.A. Morse, From Rai stones to Blockchains:The transformation of payments, Computer Law & Security Review: The International Journal of Technology Law and Practice (2018), https://doi.org/10.1016/j.clsr.2018.05.035 16 See id. 17 See id. at 185-86.