Legal Seminar, Denver, CO

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JID: CLSR

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

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

lower costs to the merchant. 31 After a favorable ruling for American Express in the Second Circuit, the Supreme Court has affirmed that U.S. antitrust laws do not prohibit anti- steering restrictions. 32 Transaction costs may provide an important impetus for innovation: Are there cheaper, more desirable ways to make payments? Can we reduce the time and friction involved in a purchase transaction, thereby increasing transaction vol- umes and saving time and cost for both consumers and mer- chants? Innovation in this area has been proceeding, but many of those innovations have been building on the existing pay- ment networks. For example, contactless payment technolo- gies in mobile phones or other personal devices may allow faster scanning of personal information, avoiding the need to get out a physical card and insert it into a POS card reader in order to make a payment. However, those devices often use a payment card network to complete the payment, so that their innovation is restricted to the means of accessing it. 33 Alter- natively, some mobile devices are using bank networks, albeit accessed through QR Codes scanned into an app instead of using card-based accounts. 34 Embedding payment technologies into merchant websites and social media applications may also present opportuni- ties to decrease friction and increase efficiency. 35 In the West, those technologies often also rely on existing payment net- works, albeit with some new providers. PayPal emerged from the online marketplace eBay, but it has become an indepen- dent payment provider with a global platform. Fee structures using PayPal are comparable to card systems when payment cards are used, but lower fees can also be obtained for trans- fers within the PayPal network after an account has been funded. 36 In China, innovators such as AliPay and WeChat Pay have emerged from their particular social andmarket milieu to pro- vide a seamless method for facilitating payments. WeChat Pay emerged from the WeChat social communication mobile ap- plication, and it includes a means to send gifts of money to friends. 37 AliPay emerged from the Alibaba marketplace, ini- tially offering escrow payment services but extending pay- ments to other participants. 38 These new participants have 31 See American Express, supra note 12, 838 F.3d at 191-92. How- ever, some merchants with significant market power were able to negotiate around these restrictions with regard to their own pri- vate label cards. See id. at n. 39. 32 Ohio v. American Exp. Co., 585 U.S. __ 2018 WL 3096305 (No. 16- 1454, June 25, 2018). 33 See generally Erin Fonte, Mobile Wallets/Mobile Payments and Peer-to-Peer Payments, 82-83, in Electronic Payment Systems: Law and Emerging Technologies (Edward A. Morse, ed. 2018). 34 See, e.g., Infrasofttech, QRys Code Payment Solutions, http:// www.infrasofttech.com/payment-solutions/QRys . 35 See generally Sean Ruff and Crystal Kaldjob, In Pursuit of Con- sumers – Merchant Payments via Contextual Commerce, 151-55 in Electronic Payment Systems: Law and Emerging Technologies (Edward A. Morse, ed. 2018). 36 See https://www.paypal.com/us/webapps/mpp/paypal- fees#transfers .

restrictions had little impact because card networks imposed similar restrictions on merchants through contract. However, in 2013, those contractual restrictions were removed, thereby reanimating the significance of state law restrictions that con- tinued to affect merchant practices. 26 Merchants recently mounted successful challenges to these restrictions on First Amendment grounds, arguing that state laws were an unconstitutional restriction on their rights to engage in commercial speech. This issue reached the United States Supreme Court in 2017, which ruled in favor of the merchants on the issue of whether these laws in- volved commercial speech in a manner that implicated First Amendment concerns, and remanding for further proceed- ings. 27 These cases are now winding their way through lower courts, including most recently a decision in the Ninth Circuit striking down California’s surcharge restriction. 28 Cases like these involving restrictions on merchant prac- tices are helpful to illustrate the significance of transaction costs associated with payment card networks. The ultimate economic locus of costs associated with the system remains a matter for debate. If indeed payment cards generate higher transaction volumes, the efficiency benefits associated with them may indeed offset the card fees, thereby avoiding price increases affecting all consumers. While some have argued that cash customers ultimately end up paying higher prices for goods, thereby paying for the airline miles and hotel ben- efits accorded to card users, 29 this would not be true if effi- ciency gains are present. Moreover, it is important to recognize that the proper cost comparison must also take into account the related costs associated with accepting cash, including the costs to secure and deposit it into an account where it as- sumes electronic form. Those merchants that wish to impose a surcharge on their customers using payment cards may, in fact, be overcharging them. If left to market forces within their control, merchants would presumably adopt an approach tailored to maximize their expected value from their particular mix of consumers. The restrictions imposed by anti-surcharge legislation in some states 30 may have interfered withmarket forces in those jurisdictions, but most other states did not have any form of legislative restriction. Given the infrequent appearance of sur- charges, it is likely the case that merchants are content with approaching payment card fees through either pricing or effi- ciency gains. It is clear that card brands do not like surcharges, which tend to steer consumers away from their profit center. Indeed, this tendency likely influenced the adoption of anti- surcharge legislation. Moreover, card brands have imposed other restrictions with similar effects. For example, American Express constrains merchants who accept their cards from “steering” customers toward another form of payment with

26 See id. at 1148. 27 See id. at 1151. 28 See Italian Colors Restaurant v. Becerra, 878 F.3d 1165 (9 th Cir. 2018). 29 See, e.g., Wolman, supra note 6, at 47 (citing research from the Federal Reserve indicating lower-income cash-paying customers may subsidize perks for higher-income credit card payors). 30 See Becerra, supra note 28, at 1170 (listing ten states with this legislation). 37 See Adinah Brown, AliPay vs. WeChat Pay vs. Union- Pay (November 5, 2017), https://financefeeds.com/alipay-vs- wechat-pay-vs-unionpay-important-research/ . 38 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