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Pro-Consumer Innovations in Payments

posted by Adam Levitin

Todd Zywicki wrote in a Wall Street Journal op-ed yesterday that "The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards." 

Todd is right that consumers are happy to see annual fees go away, but the disappearance of annual fees wasn't a freebie for consumers.  It came about as part of a shift in the credit card business model whereby upfront fees were replaced with backend fees that have lesser salience to consumers when the consumers decide which cards to carry and use.  This was a move that was made to increase revenue for card issuers (or put another way, to siphon off more consumer surplus); it was not a charitable act.  The disappearance of annual fees is an important innovation, but I think it is a stretch to call it a pro-consumer innovation, when it is viewed contextually.  

The disappearance of annual fees was a step in the democratization of credit (or put another way, the decline in underwriting standards).  Whether this was a good thing is unclear.  It certainly increased consumer's borrowing ability and choices, and might have led to a substitution from secured installment credit to unsecured revolving credit.  But greater ability to borrow and more borrowing choices are not necessarily good.  They are only good to the extent that a consumer is capable of repaying the increased credit line and making informed choices among credit options.  Both of those are questionable for many consumers.  

In Todd's defense, though, I am hard pressed to think of another widespread innovation that would qualify unabashedly as pro-consumer, so maybe the disappearance of annual fees wins by default.  I would have placed the card associations' waiver of all consumer liability for unauthorized transactions (going beyond TILA) as the clear winner, but I don't know how far back this policy goes.  (Please pipe in if you do.)  

The difficulty in naming pro-consumer innovations is a sorry indictment of the payments industry, and one that says something about the nature of innovation and competition in payments.  Maybe others have thoughts about pro-consumer innovations.  Comments are open.  


Visa (and MasterCard) adopted their so-called 'zero liability' policies about 10 years ago. It was largely done as a public-relations effort during the Walmart litigation, which ultimately successfully challenged their tying arrangements between their signature-based debit cards and their credit cards. Unhappiness among advocates about the less stringent liability standards under Reg E (and the EFT Act) as compared with those under Fair Credit Billing (applicable to credit cards) had been simmering for several years. Congress had held hearings featuring lots of complaints about the differences which were exacerbated by the (intentionally designed-in) confusion between the two types of cards. The 'zero liability' policies were intended to defuse those complaints. Politically, they fit the bill.

However, if you read their policies more closely, you find that they're really NOT 'zero' liability as advertised. The consumer is limited as to how often they can invoke the policy, and has to have an account that is (or, at least, in the determination of the issuer is) in 'good standing'.
[See, eg, http://www.mastercard.com/us/personal/en/cardholderservices/zeroliability.html]

Moreover, the credit card standard (mandated in law for over 35 years) is effectively a strict liability limitation as compared to the card networks' policy which invokes negligence notions.

As much 'sizzle' as 'steak'.

As to the most 'pro-consumer' innovation, I suppose it's good that no one's claiming (at least yet) being able to put your dog's picture on the card as the winner.

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