Check Processing Statistics

I head off to a faculty meeting today for final approval on my Payment Systems course, formerly Commercial Paper here at St. Thomas University. So, I thought being armed with some Federal Reserve statistics could be handy or at least a conversation topic. With the multitude of payment methods available, it seems obvious that the Federal Reserve is processing less checks than it did in the past. But how much less? In 2009, commercial checks processed through the Federal Reserve dropped 10.1% (See Federal Reserve History) to a volume of 8,585 (million items). The 2010 Federal Reserve volume is also down on the year. While not the largest annual drop in recent times (a drop of 12.1% was measured in 2005), the decline does underscore the importance of alternative payment methods. Yet, the death of checks is not in sight, as the amount of checks processed by the Federal Reserve still amounted to $13,759 (billion) in 2009.

So, check processing is down, but still important.

- JSM

Spring Contracts Conference - Reminder

Mark your calendar: The annual spring conference on contract law will be held on February 18 and 19, 2011, at the lovely Stetson Law School. Save the Date!

- JSM

St. Thomas University Looking for Business Faculty

A plug for my school. With Florida now also testing UCC Articles 3 and 9, I suspect there is more room commercial law as well as traditional corporate subjects.

ST. THOMAS UNIVERSITY SCHOOL OF LAW in Miami, Florida, invites applications from experienced and entry-level candidates for tenure-track positions beginning in the 2011/2012 academic year. The Law School especially seeks candidates in the areas of Business Associations, Wills and Trusts, Constitutional Law, Securities Regulations, Property and Civil Procedure. Applicants must possess a distinguished academic record, a dedication to excellence in teaching, and a demonstrated commitment to scholarship. Consistent with the Law School’s tradition of diversity, members of minority groups and women are especially encouraged to apply. Applicants should send a letter of application and a resume. CONTACT: Professor Tamara Lawson, Chair of the Faculty Recruitment Committee, St. Thomas University School of Law, 16401 NW 37th Avenue, Miami Gardens, Florida 33054. E-MAIL: tlawson@stu.edu. FAX: (305) 623-2390.

- JSM

Wall Street: Money Never Sleeps

Is greed still good?




The new movie, Wall Street: Money Never Sleeps never quite answers that one, though Gordon Gekko now dubs it "legal." Went to see this over the weekend and found it great. Perhaps out of sheer nostalgia I would have liked it, but Gekko's condemnation of "speculation" and references to tulip mania reminded me of John Galbraith. Set in the time of the current financial crisis, the movie emphasises the decisions that individuals (such as Susan Sarandon's nurse turned over-leveraged real estate investor) and banks (such as the investment firms peddling bad paper) made that led us to the crisis. Though Gekko, without cash and out peddling a book, is still Gekko, the new twist of creating even larger "bad guys" makes him a bad guy to cheer for. Definitely worth seeing.

- JSM

Credit Card Skimming and Card Issuers Behaving Badly

This past June I attended the CALI Conference, hosted by Rutgers University - Cambden. I stayed in the Philadelphia area for about ten days, since my sister lives there. I have a credit card that I often use for business and did on this particular trip. Not having used the card, which is currently in a locked box in Florida, since that trip, there should be no new charges. Yet, on August 20, 2010 two new charges appeared on my card from convenience stores located well outside of the Philadelphia area. Moreover, the record indicated that the user presented my card for the transactions, which I later learned were made at gas pumps with no receipt or documentation. As the card is here with me in Florida, I know I did not present it in Pennsylvania and that someone replicated my card.

Counterfeiters can replicate your credit card by "skimming" the data information from the card's magnetic strip during an ordinary transaction. (See Visa, Credit Card Fraud). They then use the information to make replica cards and engage in fraudulent transactions. The skimming behavior is just one way that fraud occurs. Of course, TILA 133(a)(1)(B) (Regulation Z 226.12(b)(1))limits the cardholder's liability for unauthorized charges to a maximum of $50 and network rules typically protect the cardholder (me) from liability. See Visa's Zero Liability Policy.

I notified the card issuer, Household Bank, of the unauthorized transactions right away. Within 24 hours, one of the vendors, Wawa, reversed the charge. The other merchant, Turkey Hill gas did not and within 24 hours I received the following email from the card issuer:

This charge represents an automated gas terminal charge. At the time of the
transaction, your credit card was not reported lost or stolen, and this type of
transaction required that your card be present.

In addition, your Account history indicates that this charge is consistent with your spending pattern. For these reasons, we consider this charge to be valid. Although we are unable to assist you, you may pursue this matter further with the merchant.

Note that because the transaction was electronic, we are unable to
provide a receipt.

Unfortunately, we have no recourse to pursue your dispute. Although we are unable to credit your Account, you may still pursue this matter further with the merchant.

If you require additional information, please reply to this message or call us at 1-503-293-4037 and one of our Customer Service Representatives will be glad to help you. To ensure a quick response, please refer to the following reference number: XXXXXXXXX.

For your records, you will receive a separate confirmation letter via
the U.S. Mail.

Sincerely,


Customer Service Department

Knowing I did not authorize the charge, I called the issuer to dispute this denial and to request a new card number. You see, issuers bear the loss generally under network rules in "face-to-face" transactions for unauthorized charges as long as the merchant follows the requisite procedures (often signature and authorization for the transaction). My suspicion is that the issuer would bear the loss in this case, so they wanted to force it back on the consumer. When I called, they told me initially there was nothing they could do, the "documentation" showed that I was in PA and made the charge. I reminded them their own letter said that there was no receipt and the back peddling began. Now, they admitted they were still waiting on a response from the merchant. They had no documentation. They would "reopen" the investigation right away. In addition to talking to them on the phone, I should also respond to the email confirming the conversation.

This type of issuer behavior really gets me going! They knew they did not investigate the transaction, but sent a denial right away of the claim I did not authorize the transaction. The "game" here is to send the denials on fraud claims knowing that only some consumers will pick up the phone and complain. Moreover, when I responded to their email as invited, it turned out to be a "no reply" email address. Since the issuer provides no fax number, I submitted yet another message through their online system. Surely this will take my time in following up on a $25 transaction, but I cannot give a pass to a card issuer attempting to avoid its responsibility under TILA and the Visa network rules regarding fraud. And some wonder why we need a Consumer Financial Protection Bureau . . .

- JSM

Elizabeth Warren spoke to CBS

Elizabeth Warren spoke to CBS about the Consumer Financial Protection Agency this morning.

- JSM

Warren on the New Consumer Agency

Elizabeth Warren has been speaking about the new role of the Consumer Financial Protection Agency. Who should be scared? Businesses want to know whether they should be worried about her role. For those that are making money from tricking and trapping people, the new agency will be a problem for them. She's been reaching out to business to let them know that she wants to learn about what will work and wants to "get it right." Basically, we cannot re-build an economy where families cannot pay for goods and services. She's ready to get to work getting the agency up and running.

- JSM

Opportunity for Self Regulation?

The Financial Crisis Inquiry Commission is examining the causes underlying our current financial crisis. The National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling is charged with examining the causes and circumstances surrounding the BP oil spill in the Gulf this year. The Consumer Financial Protection Agency's job might be so large that we can only guess what it might tackle first, including credit scoring, student loans, overdrafts and payday loans (See, Six Problems the Consumer Financial Protection Agency Should Tackle First). Business interests oppose government involvement and oversight pretty broadly across the board (see, Fight Over Consumer Agency Looms, Business Groups, Obama Administration Spar Over Corporate Governance, The Case Against Corporate Social Responsibility, Businesses Buy Ads vs. Health Overhaul, US Must Control Deficit).

Yet, isn't there an opportunity here for businesses to engage in increased self oversight and regulation? One of those the best offense is a defense line of thinking. The Financial Services Forum states relative to financial oversight "[t]he Forum will continue to work constructively with the regulators charged with implementation of the legislation to create a financial supervisory framework that ensures institutional safety and soundness and systemic stability, while also meeting the financial needs of American businesses, workers, consumers, and investors." The Business Roundtable's list of Initiatives stresses outright that corporate leadership is the best way to foster trust in corporations. The Business Roundtable's list includes health care and retirement, education, fiscal policy, globalization and environmental concerns.

An aggressive list of priorities without dispute. But has business come through on these fronts? And, I mean not individual companies, but as a group? Despite the commissions investigating, new agencies and increased regulation, there is always an opportunity for business to head off looming problems, whether it is speculation, an innovation like credit derivative swaps poised to cause the next financial crisis or plain overreaching by businesses with consumers.

Self regulation and coordination is not unknown to business generally or to specific industries. Anil Gupta and Lawrence Lad commented "Researchers generally have viewed non-market regulation of firm behavior as synonymous with direct regulation by the government." Industry Self-Regulation: An Economic, Organizational, and Political Analysis. See also, Toffel, Industry Self-Regulation: What's Working (and What's Not)?. The whole idea, of course, is that self-regulation can either supplement or take the place of government regulation. While industries can engage in self-regulation more or less and in different manners, it has its effectiveness.

When I hear of businesses opposed to government regulation of a perceived problem, a common complaint is that government regulation hampers business growth generally, costs a lot and stifles innovation. While I understand that businesses want to make money off of the newest innovation, self regulation would seem to allow the financial community for instance to head off some of the systemic risks of the "innovation," such as the credit derivative swaps. Just because there is money to be made does not mean that it should be made if the "innovation" will lead to over-speculation causing a financial crisis. Yet, government regulation would not seem to always be the most efficient in these cases due to the time involved in establishing oversight of newer financial products.

Michael Toffel argues there are four main facets to self-regulation: "how the rules are designed, who adopts them, whether and how compliance is monitored, and whether these rules actually achieve what they purport to achieve." I agree that these considerations dictate whether the laudatory goals of the Business Roundtable and Financial Services Forum will have any effect on market participant behavior. Self regulation must be meaningful. While the door is open for financial services companies to show leadership on many open regulatory issues, movement is slow. With so much attention being given to opposing Elizabeth Warren as the new head of the Consumer Financial Protection Agency, perhaps business might be better served by turning to the issues (See, Warren's New Job).

- JSM

Teaching Statute of Frauds

Today in Contracts we covered the Statute of Frauds. The casebook, by Burton, includes the case of Cloud Corp. v. Hasbro, Inc., 314 F.3d 289 (7th Cir. 2002), a Posner decision. The case involves a toy, the Wonder World Aquarium, governed by our beloved UCC 2-201's Statute of Frauds. Posner, wanting to find that either the parties satisfied the statute of frauds or some exception applied, lays out a multitude of reasons to find an enforceable contract. Surely a delightful opinion helping the students to see that sometimes the formalism of a rule gives way to the realities of business practices. The dispute involved excess gelled filling produced by Cloud for the Hasbro aquariums, which had no other use. Alas, the Wonder World Aquarium was a passing fad.

- JSM

Commerce Hums Along Even in Hard Economic Times

We hear much news about the trouble with the economy. In today's news alone, there were concerns about cooling in auto manufacturing, losses in technology, slower manufacturing in New York, and double dip risks in Europe. Alongside the financial turmoil and worries, Bloomberg yesterday ran a piece on parents who must not be overly concerned about such things. Apparently, there is quite the market for designer clothing for children, including a $750 Burberry trench coat! Sale of designer coats and jackets for children is expected to be up a whopping 12% this year. Luxury goods generally are expected to be up 10%. Apparently, there are nice Gucci lines for pets as well . . . Not bad in a year with worldwide GDP quite low (see, EU Raises Italian 2010 GDP, Canada's GDP Growth Sets, China's GDP Slows, Oil Spill May End Up Lifting GDP Slightly).

While I am a believer in doing my part for the economy, my group of three kiddos (3, 5 and 13) are not partaking in these really cool clothing options! Not only is this a really lot of money, but my kids grow way too fast for this extravagance! Hope that those who are buying designer children's clothing are not financing the purchases on a credit card. Consumers living beyond their means certainly contributed to the current financial downturn.

- JSM

Two Debit Fee Regulation Issues Emerge as The FED Gathers Information

The financial reform legislation enacted this summer included the Durbin Amendment requiring the FED to regulate fees that banks charge to merchants when consumers use debit cards to make purchases. The legislation gave the FED until April of next year to come up with the specifics of a plan that will ensure that debit card fees reasonably and proportionally reflect the actual costs of running the banks' debit card programs. Bankers have reported that the FED has begun an information gathering process designed to gather information about the banks' debit businesses. Although the situation is sure to evolve in the coming months, there are two questions that are now drawing a lot of attention.

First, the legislation included the cost of fraud protection in the costs that the banks should be permitted to recover. Banks are arguing that fraud costs should include the costs of data protection and claims investigation in addition to actual losses. Merchants are questioning the propriety of including costs beyond losses. Another question involves how the FED will deal with the differences across institutions with respect to fraud losses. Will it use average costs, stimulating competition among the banks to lower fraud costs. Or will it try to implement a system that will tie recovery more closely to specific institutions.

Second, the legislation exempts banking institutions with less than $10 billion in assets from the regulation. But most small banks issue debit cards using the Visa and MasterCard system. Will those systems, dominated by larger banking institutions, permit the smaller institutions to recover higher merchant fees than the big banks recover? Small banks became part of the Visa and MasterCard systems for complex reasons. Initially, they played a crucial role developing a critical mass of credit cardholders and especially merchants willing to accept credit cards. By the time the debit card systems became serious business, the smaller banks were less important to the systems' success. But by that time, Visa and MasterCard had grown sufficiently that trying to exclude smaller banks would have been seen as a group boycott potentially violating the antitrust laws. The large banks were content to charge the small banks somewhat higher network fees. Small bankers expect that the Visa and MasterCard networks will limit their debit card merchant fees to the same extent as the large banks. It will be interesting to see, however, if one of the major networks, or perhaps one of the on-line ATM networks, makes a competitive play for smaller banks by offering higher debit card merchant fees than the big banks are permitted to charge. SS

Why Do We Teach Commercial Law?

Among other courses, my new law school home, St. Thomas University in Miami, will have me begin teaching commercial law courses in the spring. St. Thomas has not had a commercial law "die-hard" as regular faculty, but several faculty have taught Sales, Secured Transactions and Commercial Paper from time to time in addition to other courses (for a recent study of course offerings in commercial law, see Mark Roark's Commercial Law Course Survey). Without the dedication of a commercial law faculty member, the course descriptions were not surprisingly out of date.

So, today, I will be off to a curriculum committee meeting to discuss revised course descriptions for the commercial law offerings. This process brings to mind not only Mark's survey of what is being taught, but also Larry Garvin's The Strange Death of Academic Commercial Law, where Larry advocates the rescuing of academic commercial law lest it fall into a void of nothingness crowded out by other new seminars and other nouveau studies. Florida just added articles 3 and 9 to its bar exam (See Florida Bar News), giving commercial law more footing at my law school and more draw to students generally. I hesitate to advocate that we teach a variety of commercial law courses merely because it is examined at bar time. Yet, surely the bar examiners also must believe there is something important here as well.

It is well recognized that so long as we have commerce, there is a need for commercial law. Bar exam or not. We have an obligation to prepare our students for the commercial transactions and disputes that arise naturally in our world of business. Law schools are in "partnership" with the community of judges, businesses, legislatures and communities that expect attorneys who will continue to improve the law and promote new ideas. While there is a temptation in states such as Florida that now test commercial law on the bar exam to teach only what is required on the bar, or for schools in states like Pennsylvania which dropped much of commercial law from its bar exam to not teach it at all, we should resist this urge. There is a richness to the study that goes beyond bar requirements, and is a service to students and community alike.

For my part, I will make my case that the course descriptions here at St. Thomas should go beyond what is required for the Florida bar exam. One of my proposed changes is to rename "Commercial Paper" "Payment Systems," reflecting a course that would go beyond the bar exam's UCC Article 3 to include the multiple ways in which we pay for things in commerce. An intelligent study should include checks, credit cards, debit cards, letters of credit, wire transfers and electronic payment devices, as well as promissory notes and guaranties. Thankfully, I expect the faculty here believes that while we need to prepare students to take a bar exam, our obligation goes deeper than that.

Once I get the course descriptions in order, my next job will be to convince the students that the study is important. I hope to teach Payment Systems here at St. Thomas this Spring. On that score, the bar exam looming before them will help. Once in class, though, I hope they see the richness of the study that affects their own every day lives each time they write a check, pull a card out of their wallet or obtain a student loan. The client needs become more clear to them once they appreciate the importance to ordinary transactions.

So, why do we teach commercial law? The answer is simple. Our students need it personally and professionally. And, the wider community needs them to know it.

- JSM

Business Credit Cards Under the CARD Act

With the restriction from the CARD Act still coming on-line (see More New Credit Card Rules Take Effect), one can expect the card issuers to look for alternate ways to boost their bottom line. Over the weekend, the Wall Street Journal ran a piece "Beware That New Credit Card Offer" highlighting the differences between personal and business credit cards (see also, CARD Act Doesn't Help Small Businesses). The WSJ reported that mailings of applications for business, rather than personal, credit cards are reportedly on the rise. The reason? The Credit Card Accountability and Responsibility Disclosure Act only applies to consumer cards, not business ones.

About 64% of small businesses use credit cards, giving banks a good opportunity to market cards as business cards to avoid the CARD Act's strictures. With applications and pre-approvals up for business cards, it is easy to see how small business owners will need to be savvy about the differences of the cards in their wallet. The advances made with credit cards are simply not universal. Business cards are still subject to the same practices, like interest rate hikes and excessive fees that used to be the norm for consumer cards. It helps businesses to make sure that expenses are deductible for tax reasons (as well as the interest), so their might be incentive to use a business card after all. Aside from possible tax incentives, small business owners might not want to put business debt on personal credit cards as there is a potential for a negative impact on the personal FICO score by increasing the debt to credit ratio.

So, when is a small business issue also a consumer protection issue? One of the lingering problems all along with cards is consumer confusion over terms. The differences in card types are sure to pose problems over time. Moreover, the WSJ reported that some card issuers may be pushing business card applications toward consumers who otherwise would not be looking at these cards and are not likely to understand the differences under the CARD Act. Senator Charles Schumer has already asked the Federal Reserve to look into the practice of marketing business cards to consumers (see Bloomberg). While the CARD Act made headway in the realm of credit card protections, the failure to include business cards may turn out to pose a problem for consumers and small business alike. Pardon my skepticism about the card issuers and their practices, but my expectation is that we will see a rash of business card complaints over deceptive terms.

- JSM