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Article Excerpt
CHARGING AHEAD: THE GROWTH AND REGULATION OF PAYMENT CARD MARKETS. By Ronald J. Mann. New York: Cambridge University Press. 2006. Pp. v, 308. Hardcover, $65; paper, $30.
INTRODUCTION
The ubiquity of credit cards in modern economic life inspires much dismay, (1) but little nuanced discourse. Lamentations, about undisciplined consumers or manipulative card issuers, lead to policy prescriptions aimed at reducing credit card use. (2) Such efforts generally have failed to garner the support of consumers, who demonstrate continued preference for cards over cash or checks. (3) These efforts have also roused the ire of opponents to market regulation (4) and the credit industry lobby. (5) The current dynamic of increasing credit card use juxtaposed with regulatory pressure on card markets reflects our society's deep ambivalence about credit cards. (6)
Charging Ahead: The Growth and Regulation of Payment Card Markets offers a refreshingly balanced perspective on the optimal use of credit cards. Authored by Ronald J. Mann, (7) the book manages to be provocative without resort to polemic. Even rarer, Charging Ahead reveals how payment systems law--perhaps the most esoteric topic in the already esoteric world of commercial law (8)--shapes our society and its pursuit of the good life. Private transactions have public effects, and Charging Ahead elucidates the public effects of our often mindless act of paying with plastic.
The centerpiece of the book is regression analysis of the economic effects of credit cards. Scholars have struggled to understand these relationships, (9) shrouded in the mystery of the Holy Grail, or at least its commercial law equivalent. Relying on aggregate macroeconomic data from several countries, Mann establishes consistent and robust relationships between credit card use and increased consumer spending, borrowing, and debt. He isolates credit card spending--as opposed to credit card debt--as the significant variable in increased levels of consumer debt (p. 53).
Mann then turns to the relationship between credit card debt and bankruptcy, which he uses as a public measure of financial distress. Mann shows that borrowing on cards--distinguished from noncard borrowing--is separately associated with bankruptcy filings. Credit card debt, distinct from consumer debt generally, corresponds with an increased bankruptcy rate. He posits that bankruptcy and financial distress impose externalities on society and proposes legal reforms to deter harmful credit card borrowing and reduce the bankruptcy rate. Charging Ahead concludes with a cogent and carefully circumscribed set of strategies for reshaping American appetites for credit card use. These reforms aim to moderate the externalities caused by credit cards without eliminating their efficiency benefits.
This Review explores Mann's empirical analysis and identifies an important limitation inherent in it. Despite Mann's findings, reducing credit card spending and borrowing would have only a modest effect on reducing the number of bankruptcies. Decades of research from the Consumer Bankruptcy Project (10) show the importance of an adverse event such as job loss or illness in precipitating financial collapse. (11) Mann does not fully integrate the implications of this research into his conclusions. Credit cards may ratchet up consumer spending, borrowing, and debt, leading families to divert a higher percentage of their income to current consumption and debt service (p. 64). Most bankruptcies, however, are still triggered by a financial shock.
An aggregate examination of the effects of credit cards does not reveal how card use affects a family's response, or ability to respond, to an adverse financial event. This shortcoming in Mann's analysis reveals the limitation of credit card reform to spare families and society the harms of financial distress. Credit card reform may effectively alter Americans' calculus about whether to pay with credit cards, but such behavioral change does not itself provide families with the income and savings necessary to protect them from adverse financial events. Drawing on original data showing that many families eschew credit cards after bankruptcy, I highlight the vulnerability of "cardless" families to financial hardship. This critique applies Mann's aggregate, macroeconomic analysis to the microeconomic context of individual families and emphasizes the relevance of non-credit card use factors in exposing families to financial stress.
Part I describes the nature of credit card spending and explores the usefulness of Mann's comparative approach to studying credit cards. Part II evaluates Mann's findings on the overall relationships between individual credit card transactions and aggregate levels of spending, borrowing, and bankruptcy. It also briefly analyzes the relationship between his findings and policy recommendations. Part III explores data on families who refrain from credit card use and struggle with serious financial distress. Part 1V revisits Mann's policy recommendations in light of this new data. I conclude that implementing credit card reform would offer families only partial, albeit valuable, protection from the risks of our modern economy. (12)
I. THE POWER OF PLASTIC
Payment cards of all types are growing in popularity. Credit cards combine borrowing and spending capacities in a single plastic instrument--a key feature that simultaneously enhances the utility and risk of credit cards.
A. Nature of Card Transactions
In America, cash is no longer king. Consumers prefer to pay with plastic cards, and such payments outnumber both cash transactions and check transactions (p. 17 fig.l.3). A variety of payment cards exist, including credit cards, debit cards, and types of stored-value cards, such as payroll cards or gift cards. Charging Ahead provides a concise and readable explication of the variety of payment cards, focusing on the benefits and burdens of debit cards versus credit cards.
Given the ubiquity of cards in our daily lives and their dominance of the U.S. economy, we probably should know the answer--or at least the reasons for the question--to the everyday dilemma: "credit or debit?" (13) The structure of debit and credit card transactions vary significantly along both economic and legal dimensions. Lamentations about the decline of cash and ferocious condemnations of the evils of "paying with plastic" fail to consider fully the differences among card-based transactions or to parse the effects of such differences. Mann situates credit cards within a timeless framework of "payment system" devices, showing how concerns about transaction costs, risk of fraud and error, anonymity, universality, and finality shape preferences for payment devices. (14)
Mann responds to a substantial, and somewhat surprising, weakness in prior literature by penning a "defense of credit cards" (p. 37). Rather than assuming that cards must be superior (or dangerous) simply because they are a modern innovation, Mann identifies the key benefits of card-based transactions, both to consumers and to the overall economy. For example, nearly every consumer has access to a credit card. Card issuers have used price differentiation and technology to offer cards to nearly every segment of the market, a strategy that banks have not deployed for many conventional lending products. (15) Credit cards are also ideal for flexible and open-ended financing because cardholders are excused at the time of the card transaction from committing to specific terms of repayment (pp. 42-43). On a larger scale, card transactions are nearly all electronically processed. Mann reports that the current cost of processing paper checks in the United States equals about one-half of one percent of the gross domestic product (p. 39 n.5). Thus, the transaction costs savings of card-based transactions are quite significant. (16) Mann rightly observes that any proposed regulation of credit cards should be evaluated against its potential to weaken or eliminate the benefits of credit cards (pp. 37, 40, 119, 177).
More than three-quarters of all Americans have one or more credit cards, (17) and the average number of cards per wallet is estimated to be between seven and eight. (18) Debit cards, and other plastic cards, are growing, but have not yet eclipsed the popularity of the credit card in America. Mann usefully contrasts the advantages of debit cards with credit cards, noting that some aspects of the law privilege credit cards (p. 29). Understanding such benefits partially explains Americans' voracious appetite for credit cards and refutes simplistic arguments that the choice to transact with a credit card is necessarily profligate.
B. Global Patterns in Card Use
Concern about credit card use is neither novel nor peculiarly American. Fears about unwise consumer borrowing predate the arrival of the credit card. (19) Like many credit innovations, however, the credit card has spawned a new bout of concern about prodigal spending and overindebtedness. (20) Social and economic features of different countries shape these worries, but credit cards inspire nearly universal apprehension.
Mann devotes an entire section of Charging Ahead to exploring the comparative differences in card use among nations. His explanation is largely historic, relying on America's role as birth mother of the credit card and persistent regulatory obstacles in other nations (pp. 91, 114). He concludes that path-dependence is the best explanation for the credit card phenomenon in America (p. 80). U.S. banks invented the product, and the predominance of credit cards in Americans' financial lives has markedly increased in successive generations (pp. 81, 90). Future research could evaluate the contributing role of alternate explanations. In particular, cross-cultural research on behavioral and cognitive differences in individual spending and borrowing decisions seems likely to yield useful insights. (21)
Regardless of its explanation, America's high rate of card use ratchets up the total harm and total benefit of credit cards. In America, these fears about credit card use are exacerbated by worry about declining savings. Americans' strong preference for credit cards may heighten the harmful social consequences of card use. Alternatively, social or cultural factors may themselves fuel card use, requiring broad reforms that reshape norms about spending and borrowing. Anxiety about credit cards often disintegrates into unsupported assertions about the declining moral fiber of Americans.
A comparative approach tests the validity of these arguments. Mann's analysis employs comparative data on cards and debt from five nations with large, modern economies: Australia, Canada, Japan, the United Kingdom, and the United States (p. 51). He identifies consistent, empirical effects of credit cards in these jurisdictions, breaking new ground by establishing a global pattern of card effects.
Mann is somewhat opaque on the usefulness of his comparative approach. He rightly observes that credit cards are a global phenomenon, but devotes little space to delineating the benefits of an international perspective on cards (pp. 3, 51). Imbedded in the structure of his arguments are several suggestions for how comparative analysis can inform our understanding of credit cards. First, such research is useful for refuting nationalistic perspectives that rely on the prodigality or restraint of their citizenry to explain credit card patterns. To the extent a positive relationship between card use and debt exists in multiple nations, the risk...
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