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Understanding risk management in emerging retail payments

Author

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  • Michele Braun
  • James J. McAndrews
  • William Roberds
  • Richard J. Sullivan

Abstract

New technologies used in payment methods can reduce risk, but they can also lead to new risks. Emerging retail payments are prone to operational and fraud risks, especially security breaches and potential use in illicit transactions. This article describes an economic framework for understanding risk control in retail payments. Risk control is a special type of good because it can protect one payment participant without diminishing the protection of other participants. As a result, the authors' economic framework emphasizes risk containment, primarily through the establishment and enforcement of risk management policies. Application of the framework to three types of emerging payments suggests that a payments system can successfully manage risk if it quickly recognizes problems, encourages commitment from all participants to control risk, and uses an appropriate mix of market and public policy mechanisms to align risk management incentives. The authors conclude that providers of emerging payment methods must mitigate risk effectively or face rejection in the payment market.

Suggested Citation

  • Michele Braun & James J. McAndrews & William Roberds & Richard J. Sullivan, 2008. "Understanding risk management in emerging retail payments," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 137-159.
    • Handle: RePEc:fip:fednep:y:2008:i:sep:p:137-159:n:v.14no.2
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    References listed on IDEAS

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    1. Kahn, Charles M. & Roberds, William, 2008. "Credit and identity theft," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 251-264, March.
    2. Richard J. Sullivan, 2007. "Risk management and nonbank participation in the U.S. retail payments system," Economic Review, Federal Reserve Bank of Kansas City, vol. 92(Q II), pages 5-40.
    3. Jack Hirshleifer, 1983. "From weakest-link to best-shot: The voluntary provision of public goods," Public Choice, Springer, vol. 41(3), pages 371-386, January.
    4. Stigler, George J., 1980. "An Introduction to Privacy in Economics and Politics," Working Papers 10, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    5. James C. McGrath, 2007. "General-use prepaid cards: the path to gaining mainstream acceptance," Consumer Finance Institute discussion papers 07-03, Federal Reserve Bank of Philadelphia.
    6. Kenneth N. Kuttner & James J. McAndrews, 2001. "Personal on-line payments," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 35-50.
    7. Benjamin Hermalin & Michael Katz, 2006. "Privacy, property rights and efficiency: The economics of privacy as secrecy," Quantitative Marketing and Economics (QME), Springer, vol. 4(3), pages 209-239, September.
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    Cited by:

    1. Mr. Tanai Khiaonarong, 2014. "Oversight Issues in Mobile Payments," IMF Working Papers 2014/123, International Monetary Fund.
    2. Richard J. Sullivan, 2010. "The changing nature of U.S. card payment fraud: industry and public policy options," Economic Review, Federal Reserve Bank of Kansas City, vol. 95(Q II), pages 101-133.
    3. Richard J. Sullivan, 2014. "Controlling security risk and fraud in payment systems," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-36.
    4. William Roberds & Stacey L. Schreft, 2009. "Data security, privacy, and identity theft: The economics behind the policy debates," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 33(Q I), pages 22-30.

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