Review: Charging Ahead - The Growth and Regulation of Payment Card Markets

The general trend of the book moves from the upfront history and examination of the state of the payment card industry to making some very specific recommendations for reform - particularly with respect to practices on the issuing side of the industry. Mann starts by saying that was the outcome he expected:

I have a great belief in the ability of the market to drive behavior, and an abiding skepticism in the ability of the government to improve on the results produced even by flawed markets. Thus, it has been most unsettling as the evidence that I had collected and the theoretical frameworks built on it have steadily driven me to the interventionist conclusions presented in the closing parts of the book.

The book is organized into five parts beginning with "The Basics of Payment Cards" in which he looks at the shift from paper to electronic payments - and how the US is relatively (compared to other countries) slow in moving away from traditional paper checks.

Part II, titled "Easy Money", examines the cost and benefits of cards. He probes deeply into the linkage between credit cards, in particular, and bankruptcies in several major countries concluding that increased credit card debt leads directly to an increase in consumer bankruptcy. He begins to develop his thesis that credit cards impose substantial external costs that are not internalized within the payment system - forming what he describes as a "classic base for regulatory intervention."

"The Puzzle of Payment Cards", Part III of the book, Mann explores how cards - especially credit cards - developed so differently in the US vs other countries. He says:

In truth, the question is not why the revolving credit card has been slow to catch on outside the United States, but how it ever managed to succeed in the United States.

He also explores the evolution of POS debit cards in this section as well.

Part IV, "Reforming Payment Systems", deals with Mann's proposed regulatory actions to deal with the issues he's laid out in the first three parts. His focus here is to shift payments from credit to debit cards - to bring the US closer to the usage patterns of other countries with lower costs to society. He begins with "indirect approaches" -- the regulation of interchange fees -- and quickly dispenses with that as providing any real value. Rather, he suggests allowing merchants to surcharge for the increased acceptance costs of credit cards would be a more meaningful step. Currently, card association rules prevent merchants from being able to surcharge - although they can offer a discount for other forms of payment (e.g., cash).

He then turns to what he calls the "heart of the problem" - the cardholder/issuer interface where he says the problems are "intricate". One major focus is on the credit card account agreements that issuers impose on cardholders (when was the last time you negotiated a credit card agreement with an issuer?). After identifying all of the issues with current issuer practices with their agreements, Mann says:

After an industry develops to a point where a stable set of products and transactions have developed, the typical response is for the legislature to step in and transfer those areas "from the realm of abstract contract law" to the realm on economic regulation.

He points out examples of where this was done - for example, the FTC setting standards for the direct mail industry. He argues for intervention to prohibit specific agreement terms - "universal default" is one he feels particularly passionate about - along with standardizing the agreement language - as has been done with all manner of real estate agreements, mortgage lending agreements, apartment leases, etc. To deal with other issues, he recommends a ban on credit card marketing to minors and college students along with making additional consumer disclosures at the time of borrowing (monthly statement) and the time of purchasing. Because he believes card reward programs encourage consumers to spend or borrow more than they otherwise would, he believes they should not be permitted. Because he views teaser rates as a "form of reward program that is tied specifically to borrowing", he recommends they be banned as well.

In the final section of the book, "Optimizing Consumer Credit Markets and Bankruptcy Policy", Mann looks deeply at the consumer credit market and recommends that regulators impose mandatory minimum payments on credit cards and a new tax on distressed credit card debt - collected from issuers and designed to increase the costs of default such that issuers are more careful about their lending strategies. Finally, he suggests that bankruptcy reforms that are intended to directly benefit credit card lenders are exactly wrong - saying it would make much more sense to prioritize other lenders ahead of credit card lenders in terms of receiving any proceeds following a bankruptcy filing.

Mann concludes by noting that he is "realistic enough to recognize the political implausability of what I propose." Rather, he hopes that the book helps policymakers and others better understand the industry - and that by being better informed they'll make better decisions down the road.

As we mentioned at the outset, we really like this book. It educates and illuminates about the payment card industry in ways that haven't been so well explained before. And, by chewing on the key issues and proposing tentative conclusions, Mann helps you gain perspective about the strengths and weaknesses of the industry today.

One final thought - Mann's at his most passionate when he's talking about the cardholder agreements that issuers impose. Yesterday on Payments News, we featured a story about a credit union in North Carolina that was giving cardholders the ability to adjust their minimum payment percentage - from the default of 3% all the way up to 6%. The press release issued by the credit union spoke to its pro-consumer emphasis. What if the credit union industry got together and developed a standardized, pro-consumer version of the credit card agreement - leaving out things like universal default and others? In a time where leadership and differentiation are the keys to competitive advantage, the credit unions could really seize the day.