House of Stolen Cards: Payment Security and Lending Decisions

Abstract

Credit card frauds are one of the most prevalent forms of identity theft. These frauds pose
a unique problem to the banks. Under the Fair Credit Billing Act (1974), banks are generally
liable for fraudulent transactions, not the consumer. Banks want consumers to spend to
generate transaction fees, but also want to minimize their liability to fraud. Research on these
frauds has been limited due to data constraints. Exploiting a quirk of credit card reporting,
we are able to observe these fraudulent cards in credit bureau data. We then document that
banks did restrict credit to individuals exposed to fraud; stopping the increasing trend in
their credit. We then examine the impact of a government initiative to widely roll out chip
cards in the US market. Following increased payment security in the form of the chip-enabled
cards, banks no longer restrict fraud exposed individuals’ credit. Prior fraud exposed cohorts
also experience a jump in their credit limits when chip cards are rolled out. These results are
consistent with payment security lessening fraud risk to banks and document the importance
of payment security in consumer credit markets.

Keywords: Credit Cards, Payments, Security, Household Finance, Credit Information

JEL Classification: G21, G28, G50, G51