Understanding Risk Management in Emerging Retail Payments

23 Pages Posted: 16 Dec 2007

See all articles by Michele Braun

Michele Braun

Federal Reserve Bank of New York - Payments Studies Function

James McAndrews

Wharton Financial Institutions Center

William Roberds

Federal Reserve Bank of Atlanta

Richard J. Sullivan

Federal Reserve Bank of Kansas City

Date Written: September 2008

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.

Keywords: risk, payment, instruments, nonrival goods, fraud

JEL Classification: G20, E42, D86

Suggested Citation

Braun, Michele and McAndrews, James and Roberds, William and Sullivan, Richard J., Understanding Risk Management in Emerging Retail Payments (September 2008). Economic Policy Review, Vol. 14, No. 2, September 2008, Available at SSRN: https://ssrn.com/abstract=1072914 or http://dx.doi.org/10.2139/ssrn.1072914

Michele Braun

Federal Reserve Bank of New York - Payments Studies Function ( email )

33 Liberty Street
New York, NY 10045
United States

James McAndrews (Contact Author)

Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States
9176090086 (Phone)
19104 (Fax)

William Roberds

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8970 (Phone)
404-498-8956 (Fax)

Richard J. Sullivan

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States
(816) 881-2372 (Phone)

HOME PAGE: http://kansascityfed.org/home/subwebnav.cfm?level=3&theID=10970&SubWeb=10782

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