Steve Bellovin raises some good points about the function of credit cards. A couple responses:

...in these cases, customers have the potential to run up a large bill -- that is, a debt -- between interactions with the provider... A vendor possessing a credit card number *will* be paid, with minimum hassle. If the customer skips town, the card issuer eats the charge.

Vendors should be able to get the equivalent protection by buying insurance against customers skipping town, for a similar price. That, and collection enforcement, via local jurisdictions which have been lobbied to pass credit card fraud laws, are two of the main functions served by credit card companies. A third is collection of dossiers on customers, which we would like to put under customer control. For online services, where the customer can be billed in near real-time, the case where a large bill approaches the credit limit is at least exceptional, and might be eliminated entirely. Where the largest bill is much smaller than the credit limit, the customer is put at much smaller risk by putting up a deposit then by exposing their entire credit rating to both the vendor and snoopers who intercept the number. Furthermore, the deposit can be made with a neutral third party which serves the arbitrator function for disputes. In this particular case, phone billing could be done in very small increments, in near real-time, with digital cash.

But there's one more important point to consider: U.S. law on disputed credit card purchases.

This company was operating internationally; one of their customers who posted lives in Kuwait. Do all Internet jurisdictions have laws protecting credit card customers? How are these laws enforced? On whom lies the burden of evidence, legal costs, etc.? I agree that the issue of customer vs. vendor assumption of risk deserves much more attention than we have given it. A major goal is to minimize dependence on the maze of Internet jurisdictions to resolve conflicts. One interesting idea is an online escrow services that holds a customer deposit equal to the amount of the largest possible bill, and uses the escrow to resolve disputed billings. The challenge is minimizing leakage of private information, via the escrow. Nick Szabo szabo@netcom.com