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Keeping the bad guys out, risk management and retail payment innovation

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Author Info

  • Braun, Michele

    ()
    (Federal Reserve Bank of New York)

  • Roberds, William

    ()
    (Federal Reserve Bank of Atlanta)

  • Sullivan, Richard

    ()
    (Federal Reserve Bank of Kansas City)

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, risk containment is critical, primarily through the establishment and enforcement of risk management policies. Informal case studies of several recent 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. Providers of emerging payment methods must mitigate risk effectively or face rejection in the payment market.

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Bibliographic Info

Article provided by Capco Institute in its journal Journal of Financial Transformation.

Volume (Year): 24 (2008)
Issue (Month): ()
Pages: 175-182

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Handle: RePEc:ris:jofitr:0827

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Web page: http://www.capco.com/

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Keywords: retail; payment; innovation; risk; management; economic; framework;

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