Lex 8256: The Law in Cyberspace Seminar

Electronic payment systems

For Internet commerce to take place, purchasers need a way of conveying money to buyers. In the overwhelming majority of consumer purchases from a Web site today, the purchaser pays with a credit card. Credit cards work well for both buyer and seller. The seller gets a firm contemporaneous commitment to pay. The buyer gets to make the purchase quickly and easily, and knows that the seller will be able to ship immediately (without waiting, say, for a check to arrive in the mail). The buyer also gets the ability to charge back if the goods do not arrive, or are not satisfactory.

Credit cards, though, have some disadvantages.

It's easy to make a purchase using a stolen credit-card number. A cardholder can disavow a transaction after participating in it, claiming that someone else must have used the number without authorization. Levels of fraud are high; it appears that fraud is involved in 5 to 15 % of all Web-based credit card transactions. Under longstanding industry practice for transactions in which the buyer does not present the actual card, these costs are borne by the sellers, not the credit card issuer.
Some consumers are concerned about the possibility that credit-card use online will lead to the issuer or others maintaining dossiers of their buying habits.
The cost of processing a credit-card transaction is high enough as to make use of a credit card uneconomical for transactions much below $10. This problem hasn't turned out to be crucial, because firms haven't in fact seemed especially interested in selling access to individual newspaper articles, say, and asking consumers for "micropayments." Some companies, such as microCreditCard, seek to enable micropayments by providing software that aggregates consumer purchases, charging the consumer's card only when her total purchases reach a certain point.

    Another important disadvantage of credit cards is that one can accept payments by credit card only if one does enough business to justify the cost and hassle of getting a merchant account. Sellers at Internet auctions, for example, typically can't accept credit cards. This created a need for an alternative, person-to-person payment system; PayPal is the dominant player in that market. The buyer gets the money to the payment provider by transferring money in advance from her bank or credit-card account to an account with the payment provider, or by arranging to have the payment provider charge her purchases directly to a credit-card or bank account as they are made. The payment provider, in turn, may deposit the money into the recipient's bank or credit-card account.

    Visit Paypal and nose around; then read David Sorkin's short article Payment Methods for Consumer-to-Consumer Online Transactions, 35 Akron L. Rev. 1 (2001), and this newspaper article. (Contrary to what some folks said in an earlier class, Paypal does not provide an escrow service. It does state that it will investigate consumer complaints, much as a credit-card company does, and seek to collect the funds from the seller. See Paypal's current Buyer Complaint Policy. Escrow services such as Escrow.com do exist, but are more expensive.)

    Internet visionaries have long dreamed of setting up systems of entirely new electronic money, bypassing existing credit-card systems altogether. Such a system might involve either stored-value "smart cards" (such as your Wayne OneCard, which holds value in digital form that you can use for parking, etc.), or true Internet-capable electronic money, in which the digital electronic-money packet that the consumer transmits over the Internet to the merchant itself represents value that the issuer will honor. But so far at least, no such system has gotten off the ground. Read Declan McCullagh, Digging Those Digicash Blues, and the E-money mini-FAQ.

    Browse the Peppercoin home page, and then read Clay Shirky's article The Case Against Micropayments. Who has the better of that argument?

Bottom line:

Would Internet-based electronic money be a Good Thing?
Is it likely to happen in the short- to medium- term?
How about the long term?
Why or why not?

OPTIONAL AND OFFLINE: For more information about all of this, see Ronald Mann and Jane Kaufman Wynn, Electronic Commerce Law 455-499 (2002) .