On Fri, Jul 08, 2005 at 12:19:38PM -0400, Perry E. Metzger wrote:
> Actually, the people who would have to pay the investment -- the banks
> and merchants -- have an excellent incentive. The loss because of
> fraud is stunningly large. The real issue is that *consumers* have
> little incentive to cooperate with such a system, because thanks to
> the regulations, they suffer virtually no losses if their accounts are
> hijacked.

As I understand it, the merchants bear the entire cost of fraud - the
banks bear almost none - and thus the consumers end up paying for it
indirectly through higher prices. The merchants, however, have very
little control over the infrastructure, which is provided by the
banks, who have little incentive to actually control fraud because
they would bear all of the costs of such, and none of the risk is

So the assertion is that consumers and banks have little incentive to
cooperate with such a system, but (some of***) the merchants REALLY
WANT it. However, the system is useless if the consumers don't have
it, and the banks have no incentive to give something to consumers
that's better, because it would cost them money and save them money
that they can currently simply charge the merchants for (fraud).

*** The merchants can be divided into two groups - most of them who
    have not been bitten by fraud and will continue to try to pay as
    little as possible for credit processing services regardless of
    the risk because every little bit eats more into their profit, and
    those who have been bitten by fraud, understand the risks, and
    will go for paying for for a service that frees them from
    additional liability.

Consumers, on the other hand, still have limited incentive to
participate. I'd suspect the NewBanks(TM) would simply have to lure
them with lower interest rates, which they'd find hard to do because
it would cut into their profits, making it difficult to pay for all of
the additional infrastructure they'd need to build.

The system is, of course, pretty much worthless if it's not in the
hands of the vast majority of consumers.

As I said, any sea change like this has to either replace the
traditional credit granting/honoring agencies, or take away enough of
their business that they have no choice but to go along with
it. Assuming that they don't use their considerable existing wealth
and influence to simply make the new products illegal from the get go.

                                - Adam

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