The Crucial Role of Financial Intermediaries for Facilitating Trade Among Strangers

Posted: 10 Dec 2018

See all articles by J. R. Clark

J. R. Clark

The University of Tennessee at Chattanooga

Edward Peter Stringham

Trinity College; American Institute for Economic Research

Date Written: October 27, 2018

Abstract

How are markets possible under conditions of anonymity and lack of repeat dealing? Many scholars consider the problem of fraud as one that must be dealt with by law, but electronic commerce firms treat the problem of online fraud as a business problem, a problem of risk management. This article documents how merchants and financial intermediaries treat fraud as a cost that can be quantified and then minimized. Just as entrepreneurs earn profits by helping meet a previously unmet market demand, entrepreneurs earn profits by helping reduce what could have been considered an unsolved legal problem. Firms have profited by using predictive analytics and various if-then algorithms to help mitigate what might otherwise be an intractable problem and help vastly expand the scope of commerce.

Keywords: Innovation, Fraud Prevention, Payment Processing, Credit Cards, Predictive Analytics, Blockchain, Smart Contracts

JEL Classification: G28, L26, N20, P17

Suggested Citation

Clark, Jeff R. and Stringham, Edward Peter, The Crucial Role of Financial Intermediaries for Facilitating Trade Among Strangers (October 27, 2018). Available at SSRN: https://ssrn.com/abstract=3285899

Jeff R. Clark (Contact Author)

The University of Tennessee at Chattanooga ( email )

Department of Economics
Suite 313 Fletcher Hall
Chattanooga, TN 37403-2598
United States

Edward Peter Stringham

Trinity College ( email )

Hartford, CT 06106
United States

American Institute for Economic Research ( email )

PO Box 1000
Great Barrington, MA 01230
United States

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