The Efficiency and Integrity of Payment Card Systems: Industry Views on the Risks Posed by Data Breaches

35 Pages Posted: 16 Oct 2012

See all articles by Julia S. Cheney

Julia S. Cheney

Federal Reserve Bank of Philadelphia

Robert M. Hunt

Consumer Finance Institute, Federal Reserve Bank of Philadelphia

Katy R. Jacob

Federal Reserve Bank of Chicago

Richard D. Porter

Federal Reserve Bank of Chicago

Bruce J. Summers

Consultant on Money, Banking, and Payments

Multiple version iconThere are 2 versions of this paper

Date Written: October 2012

Abstract

Consumer confidence in payment card systems has been built up over many decades. Cardholders expect to use their cards to execute payment instructions in a reliable and timely manner. Data breaches that degrade the perceived safety and reliability of payment cards may weaken consumer confidence in those systems and potentially cause cardholders to shift to other, and perhaps less efficient, forms of payment. A sizable shift away from payment cards — induced by the consequences of one or more data breaches is unlikely. Even so, the probability of such an outcome is uncertain. In other words, this could be an example of “tail risk” for payment card systems. The authors informally interviewed a number of market participants and several experts to better understand the risks presented by data breaches, the efforts to protect payment card systems against data breaches, and areas where more might be done to secure these systems. In particular, the authors investigated whether existing levels of investment, coordination, information sharing, and management of incentives in securing payment card systems by firms and organizations in the private and public sectors are adequate to confront the threats arising from modern data breaches. The lessons learned from these conversations are described in this paper. These insights may also be helpful in considering the risks that data breaches may broadly pose to retail payments in the United States.

Keywords: payment card fraud, data breaches, credit cards, debit cards

JEL Classification: D14, E42

Suggested Citation

Cheney, Julia S. and Hunt, Robert M. and Jacob, Katy R. and Porter, Richard D. and Summers, Bruce J., The Efficiency and Integrity of Payment Card Systems: Industry Views on the Risks Posed by Data Breaches (October 2012). FRB of Philadelphia - Payment Cards Center Discussion Paper No. 12-04. Available at SSRN: https://ssrn.com/abstract=2162536 or http://dx.doi.org/10.2139/ssrn.2162536

Julia S. Cheney (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Robert M. Hunt

Consumer Finance Institute, Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3806 (Phone)
215-574-7101 (Fax)

Katy R. Jacob

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Richard D. Porter

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Bruce J. Summers

Consultant on Money, Banking, and Payments ( email )

VA
United States
540-464-1790 (Phone)

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