P1:JZZ 0521866111pre 0521866111 July18,2006 13:6 This page intentionally left blank ii P1:JZZ 0521866111pre 0521866111 July18,2006 13:6 CHARGING AHEAD This book is the first comprehensive treatment of credit cards in the global economy.Thetopicistimelynotonlybecauseoftheattentionfocusedoncards asacontributortothesubstantialriseinconsumerborrowing,butalsobecause oftheroleofcardsintherecentretrenchmentintheU.S.bankruptcysystem. RelyingondatafromtheUnitedStates,theUnitedKingdom,Canada,Australia, andJapan,ChargingAheadincludesacarefulstatisticalanalysisoftherelation betweentheriseofcreditcarduseandbroadermacroeconomicphenomenasuch asconsumerborrowingandbankruptcy.Italsoprovidesabroadnarrativeof howcreditcardshavecometobeusedsodifferentlyaroundtheworld.Finally,it setsoutadetailedandcoherentprogramforregulatoryinterventiongrounded inbothempiricalanalysisandtheexistingtheoreticalliterature. RonaldJ.MannreceivedhisJ.D.fromtheUniversityofTexaswherehegrad- uated first in his class and was the managing editor of the Texas Law Review. Aftergraduation,heclerkedforjudgesontheUnitedStatesCourtofAppeals fortheNinthCircuitandtheUnitedStatesSupremeCourt.Afterthreeyears inprivatepractice,heworkedfortheJusticeDepartmentforfouryearsasan AssistanttotheSolicitorGeneral.BeforejoiningtheUniversityofTexasfaculty in2003,hetaughtforsixyearsattheUniversityofMichiganandforthreeyears atWashingtonUniversityinSt.Louis. i P1:JZZ 0521866111pre 0521866111 July18,2006 13:6 ii P1:JZZ 0521866111pre 0521866111 July18,2006 13:6 Charging Ahead THE GROWTH AND REGULATION OF PAYMENT CARD MARKETS Ronald J. Mann UniversityofTexasSchoolofLaw iii cambridge university press Cambridge,NewYork,Melbourne,Madrid,CapeTown,Singapore,SãoPaulo Cambridge University Press TheEdinburghBuilding,Cambridgecb22ru,UK PublishedintheUnitedStatesofAmericabyCambridgeUniversityPress,NewYork www.cambridge.org Informationo nthi stitle :www.cambri dge.org/9780521866118 © Ronald J. Mann 2006 Thispublicationisincopyright.Subjecttostatutoryexceptionandtotheprovisionof relevantcollectivelicensingagreements,noreproductionofanypartmaytakeplace withoutthewrittenpermissionofCambridgeUniversityPress. Firstpublishedinprintformat 2006 isbn-13 978-0-511-24574-9eBook(EBL) isbn-10 0-511-24574-2eBook(EBL) isbn-13 978-0-521-86611-8hardback isbn-10 0-521-86611-1hardback CambridgeUniversityPresshasnoresponsibilityforthepersistenceoraccuracyofurls forexternalorthird-partyinternetwebsitesreferredtointhispublication,anddoesnot guaranteethatanycontentonsuchwebsitesis,orwillremain,accurateorappropriate. P1:JZZ 0521866111pre 0521866111 July18,2006 13:6 Contents FiguresandTables page vii Acknowledgments ix Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 PARTI. THEBASICSOFPAYMENTCARDS 7 1 PaperorPlastic?TheFunctionalityofPaymentSystems . . . . . . . . .9 2 TheMechanicsofPaymentCardTransactions . . . . . . . . . . . . . . 20 PARTII. EASYMONEY 35 3 InDefenseofCreditCards. . . . . . . . . . . . . . . . . . . . . . . . . . 37 4 ThePsychologyofCardPayments:CardSpendingand ConsumerDebt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 5 OvertheBrink:CreditCardDebtandBankruptcy . . . . . . . . . . . . 60 PARTIII. THEPUZZLEOFPAYMENTCARDS 73 6 ExplainingthePatternofGlobalCardUse. . . . . . . . . . . . . . . . . 75 7 TheIntroductionofthePaymentCard . . . . . . . . . . . . . . . . . . . 81 8 RevolvingCredit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 9 Point-of-SaleDebit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 10 ConvergenceandExceptionalismintheUseofCards . . . . . . . . . 106 PARTIV. REFORMINGPAYMENTSYSTEMS 119 11 IndirectApproaches:RegulatingInterchangeandEncouraging Surcharges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 12 ContractDesign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 13 RegulatingInformation . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 v P1:JZZ 0521866111pre 0521866111 July18,2006 13:6 vi CONTENTS 14 ProductDesign:AffinityandRewardsProgramsandTeaser Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 PARTV. OPTIMIZINGCONSUMERCREDITMARKETS ANDBANKRUPTCYPOLICY 175 15 Causation,ConsumerCreditandBankruptcy . . . . . . . . . . . . . . 179 16 RegulatingConsumerCreditMarkets. . . . . . . . . . . . . . . . . . . 188 17 ConsumerBankruptcyReform . . . . . . . . . . . . . . . . . . . . . . 198 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207 Appendix:Country-LevelData 209 Notes 241 Bibliography 271 Index 289 P1:JZZ 0521866111pre 0521866111 July18,2006 13:6 Figures and Tables FIGURES 1.1 Valueofcashandnoncashretailtransactions. 10 1.2 Shareofvalueofchecksinnoncashtransactions. 13 1.3 Consumerpaymentsystemsovertime. 17 2.1 Paymentbycreditcard. 21 2.2 U.S.cardissuerrevenuesources(2004). 23 2.3 Creditcardnumbers. 24 2.4 Dividingthecreditcarddollar. 27 4.1 Creditcarddebt(CCD),creditcardspending(CCS),and consumerdebt(COND). 52 4.2 2001savingsrates. 55 5.1 2002Consumerbankruptcyrates(permillion). 65 5.2 Paymentchoicesandconsumerfinance. 70 6.1 Cardtransactionspercapita(2001). 76 6.2 Creditcardtransactions/totalcardtransactions(2001). 76 6.3 Creditcardtransactionspercapita(2001). 77 6.4 Creditcardspending/GDP(2001). 77 6.5 Creditcarddebt/creditcardvalue(2001). 78 6.6 Creditcarddebt/totalcardvalue(2001). 79 8.1 Chargaplate. 87 8.2 U.S.nonmortgageconsumercredit(TimeSeries). 88 8.3 Cardtransactionspercapita(1992). 90 9.1 Debitcardtransactions/cardtransactions(U.S.Time Series). 94 9.2 Transactionsharesofnoncashconsumerpaymentsystems (U.S.TimeSeries). 100 10.1 Debitcardtransactions/cardtransactions(TimeSeries). 111 vii P1:JZZ 0521866111pre 0521866111 July18,2006 13:6 viii FIGURESANDTABLES 10.2 Creditcardspending/GDP(SouthKoreaTimeSeries). 116 10.3 Creditcarddebt/GDP(SouthKoreaTimeSeries). 117 P4.1 Pricinginterfaces. 120 17.1 Thedynamicsofprofitability. 201 17.2 Lossesandlending. 202 17.3 Averagecreditcardmarkup. 203 TABLES 4.1 Creditcarddebtandconsumerdebt. 56 4.2 Creditcardspendingandconsumerdebt. 57 4.3 Creditcardspending,creditcarddebt,andconsumer debt. 57 4.4 Creditcardspending,creditcarddebt,macroeconomic variables,andconsumerdebt. 58 4.5 Creditcardspending,creditcarddebt,andsavings. 59 5.1 Creditcarddebtandbankruptcy. 70 5.2 Consumerdebtandbankruptcy. 71 5.3 Creditcarduse,consumerdebt,andbankruptcy. 71 5.4 Creditcarduse,consumerdebt,macroeconomicvariables, andbankruptcy. 72 5.5 Finalmodel(withdummies). 72 9.1 Creditcardsandcrime. 105 10.1 Consumerdebt/GDP. 109 10.2 Globalizationandconsumerdebt. 112
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