Columbia Law School Scholarship Archive Faculty Scholarship Faculty Publications 2004 Global Credit Card Use and Debt: Policy Issues and Regulatory Responses Ronald J. Mann Columbia Law School, [email protected] Follow this and additional works at: https://scholarship.law.columbia.edu/faculty_scholarship Part of the Law and Economics Commons Recommended Citation Ronald J. Mann, Global Credit Card Use and Debt: Policy Issues and Regulatory Responses, UNIVERSITY OF TEXAS SCHOOL OF LAW, LAW & ECONOMICS WORKING PAPER NO. 049 (2004). Available at: https://scholarship.law.columbia.edu/faculty_scholarship/2335 This Working Paper is brought to you for free and open access by the Faculty Publications at Scholarship Archive. It has been accepted for inclusion in Faculty Scholarship by an authorized administrator of Scholarship Archive. For more information, please contact [email protected]. THE UNIVERSITY OF TEXAS SCHOOL OF LAW Law and Economics Working Paper No. 049 April 2005 GLOBAL CREDIT CARD USE AND DEBT: POLICY ISSUES AND REGULATORY RESPONSES Ronald J. Mann The University of Texas School of Law This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection: http://ssrn.com/index.html An index to the working papers in The University of Texas School of Law Working Paper Series is located at http://www.utexas.edu/law/ April 6, 2005 Draft GLOBAL CREDIT CARD USE AND DEBT: POLICY ISSUES AND REGULATORY RESPONSES Ronald J. Mann* Table of Contents I. Introduction....................................................................................................................1 II. Global Patterns of Card Use .........................................................................................6 A. How Are Cards Used? .........................................................................................6 B. Explaining the Usage Patterns ..............................................................................10 1. Payment Cards.................................................................................................11 2. Revolving Credit ..............................................................................................14 3. Point-of-Sale Debit ..........................................................................................26 4. Summary: American Exceptionalism...............................................................37 C. Are Card Use Patterns Converging?.....................................................................38 III. Policy Responses..........................................................................................................46 A. Permitting Merchant Surcharges...........................................................................48 B. Affinity Programs...................................................................................................52 C. Regulating Information..........................................................................................57 1. Special Rules for Minors..................................................................................57 2. Disclosures.......................................................................................................60 (a) Account Opening Disclosures ....................................................................61 (b) Point of Borrowing Disclosures.................................................................63 (c) Point of Spending Disclosures....................................................................64 D. Banning Substantively Inappropriate Provisions ..................................................66 * Bruce H. Nichols Visiting Professor of Law, Harvard Law School; Ben H. & Kitty King Powell Chair in Business & Commercial Law, Co-Director, Center for Business, Law & Economics, University of Texas School of Law. An earlier version of this paper was prepared as part of the 2003 John C. Akard Distinguished Lecture at the University of Texas School of Law. I thank Allison Mann for tireless inspiration, aid, and counsel, Dan Powers and Tracey Kyckelhahn for assistance with statistical analysis, Oren Bar-Gill, Andrew Brasher, Terry Sullivan, Elizabeth Warren, Mark West, and Jay Westbrook for comments on earlier versions, and Travis Siebeneicher for research assistance and data collection. For assistance in collecting data, I am grateful to the National Bank of Belgium, the Department of Finance of Canada, the Institute for Monetary and Economic Studies at the Bank of Japan, and the Bank of England. I also thank Morgan Stanley and Euromonitor for the use of proprietary data they kindly have provided to me. I owe special thanks to the Marlow Preston Fellowship for funding my work on this project. iii Credit Card Policy April 6, 2005 Draft IV. Conclusion ...................................................................................................................68 Data Appendix ..................................................................................................................... I Illustrations Figure One – Card Transactions Per Capita (2001).............................................................6 Figure Two – Credit Card Transactions/Card Transactions (2001).....................................7 Figure Three – Credit Card Transactions Per Capita (2001) ...............................................7 Figure Four – Credit Card Spending/GDP (2001)...............................................................8 Figure Five – Credit Card Debt/Credit Card Value (2001) .................................................9 Figure Six – Credit Card Debt/Card Value (2001) ..............................................................9 Figure Seven – USA Nonmortgage Consumer Credit (Time Series)................................16 Figure Eight – Card Transactions Per Capita (1992).........................................................18 Figure Nine – Credit Card Spending/GDP (South Korea Time Series) ............................25 Figure Ten – Credit Card Debt/GDP (South Korea Time Series) .....................................26 Figure Eleven – Debit Card Transactions/Card Transactions (USA Time Series)............27 Figure Twelve – Transaction Shares of Noncash Consumer Payment Systems (USA Time Series).................................................................................................32 Figure Thirteen – Debit Card Transactions/Total Card Transactions (Time Series).........44 Figure Fourteen – Pricing Interfaces..................................................................................49 Table One: Consumer Credit/GDP (2000) ........................................................................42 Abstract The rise of card-based payments has transformed the landscape of payments in the last half century, from one dominated by government-supported paper-based payments to one dominated by wholly private systems. The rise of those payments presents a number of policy problems, the most serious of which is the empirically demonstrable likelihood that use of the cards here and elsewhere contributes to an undue level of consumer credit and that borrowing on the cards contributes to a rise in the level of consumer bankruptcy. Because increasing financial distress imposes substantial externalities on the economies in which it occurs, the global rise of the credit card poses serious policy questions. To understand how policymakers should respond, it is important to start by recognizing the powerful efficiencies that cards bring to payment systems, and how those efficiencies have driven the globalization of the payment card. Although the existing pattern shows great variation from country to country, regulators cannot be sure that the variations will persist. Building on existing historical research and on detailed contemporaneous data about the patterns of usage around the world, I show that the differences reflect the youth of the system, and the fact that few countries were as well suited to the rapid takeup of credit cards as the United States. Thus, the United States has developed an almost uniquely unitary payment system in which the credit card is both the dominant borrowing vehicle and the electronic payment instrument of choice. The pressures of globalization are rapidly driving convergence in card usage, except in those countries that have adopted substantial “speed bumps” to slow the growth of cards. Whether those speed bumps will deflect other countries from the problems faced in the United States remains an open question. iv Credit Card Policy April 6, 2005 Draft The natural question, then, is what policies will be useful to confine the problems related to credit cards without creating undue inefficiencies in retail payment systems. The ideal response would be one that drove the United States closer to the pattern evident in other countries, encouraging debit cards so as to protect the cost savings of electronic payments without the externalities generated by credit card usage. It is not easy, however, to devise policy responses that fit that goal. The closing part of this paper analyzes several different reforms that might be useful to policymakers of different perspectives: (a) permitting merchant credit card surcharges; (b) barring affinity programs, especially those that are conditioned on borrowing; (c) barring marketing to minors; (d) reorganizing the disclosure system to focus on the behavioral problems that make cards problematic; and (e) banning a