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Excerpted From: Stephen Wilks, Private Interests, Public Law, and Reconfigured Inequality in Modern Payment Card Networks, 123 Dickinson Law Review 307 (Winter, 2019) (245 Footnotes) (Full Document)

StephenWilksIn March 2017, the United States Supreme Court held that a New York statute prohibiting merchants from imposing credit card surcharges regulated communication and therefore implicated free speech. The Court stopped short of striking down the legislation and remanded the case back to the Second Circuit. Appellate treatment of similar challenges originating in Texas, Florida, and California, however, suggest that the courts will soon strike down these statutes for violating the First Amendment.

The circuit court rulings and Supreme Court remand are the latest development in an industry where two discrete forces will likely shape cardholder segmentation in the future. The rulings will likely reinforce economic arrangements that favor top-tier "lifestyle" borrowers to the detriment of poorer cardholders who are more likely to be "subsistence" borrowers.

The first development shaping cardholder segmentation originates from surcharges. Surcharges are fees merchants impose when consumers use credit cards as forms of payment. This Article posits that surcharges will dissuade card usage among affluent consumers while exploiting vulnerable subsistence borrowers. Surcharges exploit subsistence borrowers because such cardholders are more likely to generate revenue for lenders through interest on unpaid balances and penalties. Recent appellate jurisprudence suggests statutory surcharge bans are not likely to survive First Amendment challenges. Such challenges are a new phase in the decades-long contest over fees charged to process credit card payments. Much of the dispute about credit card payment fees turns on the ratio of payment fees to infrastructure costs related to capturing cashless payments. The dispute further turns on the degree to which merchants benefit from payment card associations that work through constituent financial associations. The benefit occurs when the constituent financial institution underwrites credit card issuance used to support consumer spending. The dispute about how and which payments go to whom and when is coming to a head in the application of First Amendment jurisprudence to surcharge fees.

Increased credit and debit card use--which now exceeds cash, checks, and other payment methods--sharpens commercial interest in various differential pricing strategies. Differential pricing refers to the practice of selling the same product to different customers at different prices. Differential pricing strategies have been subject to complex legal and economic restraints. Most of us can discern how and why differential pricing psychologically steers a consumer's choice of payment. We give less thought, however, to the ways in which such choices foreclose access to protections afforded by federal law, or to the myriad benefits associated with maintaining active credit relationships. When we infuse the implications of differential pricing schemes with concern for the experience of racial minorities, the discussion becomes more complex. Pre-existing forms of racism already extant within debtor-creditor relationships overlap with payment choice determinants. The intersection of payment choice determinants and racism embedded in the borrowing system adds distinct racialized implications to differential pricing schemes.

How the legal system treats payment choices and systems has dramatic impacts on our society. Payment choice matters because it animates our economic participation in society and supports movement through the financial system. Payment choice serves as the vehicle that private individuals and commercial actors use to pursue their aspirations, meet basic needs, and establish relationships in every interaction requiring tender of payment. Further, payment choice matters because a study of payment choice reveals practices that amplify inequities experienced by racial and other minorities. First Amendment protections for differential pricing regimes merely shift control over the mechanisms that shape consumer behavior. First Amendment litigation posture signals a potential collision of constitutionally protected commercial speech with federal consumer protections for credit card users. Additionally, First Amendment protection poses an ethical dilemma for many socially conscious consumers. Socially conscious consumers often understand that card-user segmentation inevitably involves conferral of benefits to some at the expense of others. Finally, First Amendment protection for differential pricing regimes may enable merchants to reinforce the marginalization of unbanked and underbanked populations--a constituency whose ranks are predominantly poor and people of color.

The second major industry development revolves around issuer dependency on algorithms in marketing and enrollment practices. This Article explores how algorithmic lending practices operate to include class and race in determinations of creditworthiness. Fair lending laws cannot easily reach racially problematic lending arrangements when obscured by algorithms. A critique of fair lending laws must also consider whether it is possible to disentangle high-risk borrower identification, which is a legitimate business practice, from implicit bias and other moral hazards.

Payment environments are networked ecologies in which participant behavior shapes the relationships that actors have with each other, while influencing the payment system architecture as a whole. The granular details of participant behavior belie important revelations about the modern marketplace for financial services, which can be a cruel place for those who are unwittingly complicit in undermining their own interests. Scholars have historically used structural racism and its effects to explain how credit card industry practices produce racially problematic outcomes. This Article seeks to carve out room to adopt new and complementary analytical approaches better suited to capturing the modern marketplace's racially problematic effects.

Often institutional in form and function, structural racism is a system of policies, practices, cultural representations, and other norms that work to initiate, perpetuate, or reinforce racial group inequities. Structural racism's intentional and implicit biases animate and preserve features of socioeconomic stratification and disproportionately impact people of color. These biases reinforce the notion that people of color's standing in society can be diminished and misattributed to their race in isolation of more relevant discriminatory antecedents. The historical arc of racism's legacy connects widely known historical wrongs to the demographic markers shaping contemporary access to credit--namely, education, employment, and earning power.

Although helpful, the structural approach's underlying rubric is not sufficiently equipped to discuss the card industry's racially harmful practices. These practices marry two discrete informational realities. The first reality pertains to traditional demographic indices like zip codes. Traditional demographic indices commonly serve as resultant proxies for race because they flow from access to education, income, employment, and the long-term legacy of redlining and restrictive covenants. The second, and equally insidious, set of norms takes root in actuarial science, algorithms, and "Big Data." These mathematical informational norms complement traditional markers by pairing traditional markers with powerful tools designed to target consumers and prey on their economic anxieties. The tools employ behavioral psychology as part of an effort to promote card usage. The coupling of the traditional and the technological offers the potential to germinate a new, participatory, and atomized species of racism. Facially neutral technologies (1) obscure modern iterations of racial bias, and (2) encourage us to unwittingly enable problematic business processes whenever we opt to pay with cards that feed data-driven expressions of racial harm.

Two features of the credit card industry lend themselves to a conceptualization of race that is more atomized than structural. The first feature is statutory in nature. In 1974, Congress enacted the Equal Credit Opportunity Act (ECOA), which was the first major statutory attempt to regulate determinations of creditworthiness. ECOA sought to regulate determinations of creditworthiness through forbidding discrimination on the basis of sex and marital status. Congress amended the statute in 1976, adding age, religion, race, color, and national origin as protected classes. Although ECOA is the primary federal statute barring racial discrimination in the credit card industry, card issuers are not mandated to capture and report data on the role race plays in marketing, enrollment, and underwriting. The gap in card-issuer-discrimination regulation differs from other similar anti-discrimination financial statutes, such as the statutes that govern anti-discrimination in the mortgage industry. The anti-discrimination obligation of residential mortgage lenders, for example, has been to report on the race of applicants and borrowers since 1989. The lack of reporting obligations is ironic partially because the credit card industry is so deeply embedded in the exploitation of old and new forms of racially problematic data gathering. Yet, there may be a functional explanation. Consumers buy homes less frequently than they use credit cards. The frequency of small credit card purchases makes card use a more transaction-intensive form of borrowing compared to home loans, which support homeownership and community development. Regulating the latter form of loan is tightly intertwined with policy goals that combat the lasting effects of redlining and other intentionally racist processes. The relatively small number of mortgage transactions combined with their qualitatively distinct features therefore lends themselves to existing race-conscious reporting requirements.

If we articulate racism as an atomized, participatory phenomenon rather than a structural one, we can start thinking about how to capture the effect of technology's fusion with actuarial metrics. This fusion informs a second feature of the card industry: the theory of network effects. The network effects theory rationalizes the fee structures that allocate card-system costs among consumers, merchants, and financial institutions. As discussed in Part I, apologists for the current interchange fee system consider this allocation necessary in two-sided markets where mutual benefits somehow arise from unequal cost sharing. The industry uses network effects to articulate cardholders' relationships with merchants, rather than the relationships and effects card-using consumers have with each other. When we understand racism's effects as originating from widely dispersed processes, we also have a better framework for describing how ostensibly neutral lending technologies rely on demographic proxies for race. The same "neutral" lending technologies place prospective cardholders into a stratified transactional arena. This stratification compounds existing inequalities through steering advantages toward premium consumers at the expense of those who are less affluent and more likely to be people of color.

A large body of scholarship discusses the "payment wars" between payment card networks and merchants, the allocation of benefits arising from interchange fees, the advent of algorithmic lending, and the effect of structural inequities within the credit card industry as a whole. This Article takes a consolidated view of this discourse through the lens of public law. Further, this Article observes how commercial actors either embrace public law's features or place themselves beyond its reach. The broad power that commercial credit card lenders possess complicates the protection of the poor and people of color in the modern marketplace.

This Article is organized as follows: Part I provides an overview of modern payment streams and uses a selection of literature to discuss how the concept of "network effects" fits within ongoing arguments for and against interchange fees. It also considers the informational power supporting the payment card networks' rent-seeking behavior.

Part II discusses recent appellate jurisprudence arising from First Amendment challenges to statutory surcharge bans, the public policy arguments offered in their defense, and the historical juxtaposition of legislative prohibitions favoring surcharges rather than discounts.

Part III recognizes the ways in which mainstream credit card use functions as an important gateway to consumer participation in the economy. Part III also considers the behavioral economics underpinning differential pricing strategies. It posits that successful First Amendment challenges to differential pricing schemes will present new questions. While credit card issuers can engineer prices in such a way that discourages credit card use overall, they tend to exploit behavioral theories against certain consumers who choose "back loading" fee structures. Back loading fee structures tend to consist of annual percentage rates and other cardholder terms that replace those often found in alluring introductory offers. Consumers who want to blunt the harmful effect of back loading practices through reduced card usage must also weigh this strategy against its costs. Federal law currently limits payment dispute resolution mechanisms to consumer credit card transactions. Consumers must therefore consider exploiting opportunities to improve their credit scores on the one hand, and ethically problematic pricing practices on the other.

Part IV acknowledges commercial law's historical relationship with racial inequality. It discusses how algorithmic lending models obscure otherwise impermissible forms of racial bias in the credit card industry. Finally, Part IV considers network effects, pricing psychology, surcharges, and algorithms that combine to lure consumers into problematic arrangements that fall outside the normative construction of network effects and harm economically marginalized populations. This Article concludes with a call to find less-harmful ways to support consumer access to credit. It also suggests critical race scholars should examine whether it is possible for ethically minded consumers to use credit cards without participating in practices that harm marginalized users in the same marketplace.

[. . .]

While the ethics of enrollment practices and disputes over surcharges may seem unrelated, both coalesce around a hierarchy of cardholders. A decade ago, one scholar observed that low mortgage rates pressured lending institutions to rely on revenues from interchange fees. As reward programs became more popular, growth in revenues from interchange fees outpaced profits from interest on unpaid credit card balances. Initially conceived as private contractual arrangements and reborn as public law, surcharge bans preserved revenue flows by limiting merchants' capacity to reduce their payment processing costs. Hoping constitutional law would provide relief from these payment processing costs, merchants also forayed into the public law arena. While the Supreme Court has stopped short of settling the substantive First Amendment arguments, a successful challenge could present an opportunity to test the behavioral theories that historically spurred card issuers to oppose surcharges.

This Article predicts that lending practices and surcharges will have the combined effect of supporting cardholder stratification. Further, this Article argues that the stratification will exacerbate racially problematic network effects extant in the relationship between wealthier cardholders and their less affluent counterparts. Aided by algorithms and behavioral theory, the credit card industry will continue to enroll subsistence borrowers into programs where the subsistence borrowers are likely to carry a balance. Subsistence borrowers' balances generate interest and late payment fees. Subsistence borrowers tend to have overconfidence in their capacity to manage credit card debt in the face of pressure to meet urgent financial needs. The industry uses the subsistence borrowers' overconfidence as a source of profit, to service their debt and to generate additional revenues not available from affluent consumers.

Merchant surcharges will further entrench cardholder segmentation in two respects. First, merchants will be free to dissuade the use of high-cost card products. Second, the poor may face predatory fees under the guise of reduced payment processing costs. Although the industry's approach to surcharges has been grounded in behavioral theories of strategic deterrence, surcharge fees simply place desperate borrowers in much the same position as those forced to use so-called "pay day" lenders. Poverty's effects can complicate the autonomous exercise of choices poor people make as consumers because poverty forces those under constant socioeconomic strain to choose from a range of bad options. Being poor preoccupies the mind and consumes "substantial attentional resources." People living in poverty must necessarily cope with competing claims for limited financial resources. Economic stressors cast a pall over the allocation of cognitive resources informing choices made in the marketplace where urgent financial needs outstrip available finances.

What options exist for socially conscious consumers who may see appeal in rewards programs but feel uneasy about hurting their fellow consumers? How do lending institutions design equitable underwriting paradigms that appropriately identify risky borrowers without masking biases harmful to equity? We all make purchases. The manner of payment concurrently expresses who we are as social participants and supplies information to technocapitalists capable of using the information to profit from socioeconomic inequality.

Perhaps it is time for critical race theorists to deepen their foray into the discourse surrounding network effects. Scholars should broaden critical race theory's contours to account for technology's relationship with race. The relationship between race and technology did not inform the original purpose of card networks' formation when such cashless payments were less common. But the theory of network effects might be put to good use if equitably commandeered by a broad, interdisciplinary group of experts in law, economics, banking, computing, and information sciences. This Article aims to promote such an exercise by seeking out assistance from experts interested in blunting the effects of algorithmically framed bias in the marketplace. Poverty complicates subsistence spenders' ability to simply "make better choices." Reliance on debiasing, or cognitively altering a decision-maker's biases, simply diverts attention from the more pervasive and pernicious determinants of racism and "poverty trapping" people in economic distress 

Visiting Associate Professor, Case Western Reserve University School of Law, B.A., J.D., Queen's University at Kingston (Canada);

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