Legal Seminar, Denver, CO

071018 Discussion Draft

B. Common Concerns for Regulators. Regulators face some common concerns, which include: (1) Identifying parties responsible for carrying out transactions within the payment network who can thus be targeted through regulatory or enforcement efforts; (2) establishing jurisdiction over those parties, not only to regulate their conduct and to enforce those regulations; (3) providing content to those regulations that will be likely to produce useful information that can be used efficiently and effectively to pursue government policies; (4) avoiding requirements that will hinder growth and development of payment technologies that can support legitimate economic growth. It should also be noted that government regulation is not the only model; private ordering can also produce favorable results, particularly when doing good for the public enhances trust in the network. Trust generally produces more profits than mistrust (unless you are in the business of profiting from mistrust). C. Common Concerns for Consumers and Merchants. Consumers and merchants share some comment concerns and needs in a payment system. Some significant concerns and needs include: 1. Costs. Cash may seem costless to spend or accept, but it is not. a. For the merchant, cash presents costs, too: (1) Loss prevention from inside and outside the organization (e.g., theft, embezzlement); (2) accounting costs; (3) physical transportation and custody of deposits. b. For the consumer, cash may present opportunity costs, particularly when other payment methods are presented. Consumers lose the “float” that may come from other methods based on credit, and they may also lose other incentives offered by payment intermediaries to incentivize their usage. (More below). 2. Security. The fact that cash is a bearer instrument presents risks that are not present in electronic payments, although electronic payments provide their own forms of risk. a. For the merchant, many of the costs noted above are rooted in security risks. b. For the consumer, if cash is lost or stolen there may be no redress; once it is spent, the finality of the transaction may limit redress for errors and defects in performance. 3. Trust. Trust is common in local transactions in which people deal face-to-face repeatedly with others known to them; in remote, non-repetitive transactions, not so much. a. For the merchant, cash payments provide control if delivered in advance of performance; risk if delivered after performance. b. For the consumer, cash payment presents risk if delivered in advance of performance; control if delivered after performance. c. Does the absence of symmetry prevent transactions from occurring? We solve these asymmetry problems through intermediaries (e.g., escrow) in other contexts involving high value transactions. But there are costs involved in using the services of an escrow agent; can those costs be effective in routine transactions?

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