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5 Brook. J. Corp. Fin. & Com. L. 1 (2010-2011)
Private Disordering - Payment Card Fraud Liability Rules

handle is hein.journals/broojcfc5 and id is 3 raw text is: ARTICLES
PRIVATE DISORDERING?
PAYMENT CARD FRAUD LIABILITY RULES
Adam J. Levitin*
This Article argues that private ordering of fraud loss liability in
payment card systems is likely to be socially inefficient because it does not
reflect Coasean bargaining among payment card network participants.
Instead, loss allocation rules are the result of the most powerful party in the
system exercising its market power. Often loss liability is placed not on the
least cost avoider of fraud, but on the most price inelastic party, even if that
party has little or no ability to prevent or mitigate losses. Moreover, for
virtually identical payment systems, there is international variation in both
loss liability rules and security standards, suggesting that at least some
variations are suboptimal.
True Coasean bargaining is not possible in payment systems; the
transaction costs are too high because of the sheer number of participants.
Targeted coordination and competition, however, can achieve outcomes that
if not Coasean, are at least optimized relative to the current system. Thus,
the Article suggests a pair of complimentary regulatory responses. First,
regulators should develop a system for coordinating payment card security
measures with governance that adequately represents all parties involved in
payment card networks. And second, regulators should pursue more
vigorous antitrust enforcement of card networks' restrictions on merchant
pricing to expose the costs of participating in a payment system-which
include fraud costs-to market discipline. The Article also presents an
extended defense of the major existing regulatory intervention in payment
card fraud loss allocation, the federal caps on consumer liability for
unauthorized payment card transactions.
TABLE OF CONTENTS
INTRODUCTION  ....................................................................................................  2
I. PAYMENT CARD NETWORKS AND LIABILITY RULES........................................ 10
A. Structure ofPayment Card Networks ............................. 10
B. Payment Card Liability Rules in the United States.................................... 14
II. WHAT HIATH PRIVATE ORDERING WROUGHT?................................................... 16
* Associate Professor, Georgetown University Law Center. The author would like to thank
William Bratton, Mark Budnitz, Robert Hunt, Sarah Levitin, and Ronald Mann for their comments
and encouragement, and Steven Schwarzbach for research assistance. Comments?
AJL53@law.georgetown.edu.

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