House of Stolen Cards: Payment Security and Lending Decisions

46 Pages Posted: 15 Apr 2024 Last revised: 26 Apr 2024

See all articles by Justin Mohr

Justin Mohr

UIUC

Divij Kohli

University of Illinois at Urbana-Champaign, Gies College of Business

Date Written: March 22, 2024

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

Suggested Citation

Mohr, Justin and Kohli, Divij, House of Stolen Cards: Payment Security and Lending Decisions (March 22, 2024). Available at SSRN: https://ssrn.com/abstract=4769744 or http://dx.doi.org/10.2139/ssrn.4769744

Justin Mohr (Contact Author)

UIUC ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

HOME PAGE: http://jmohr.me/

Divij Kohli

University of Illinois at Urbana-Champaign, Gies College of Business ( email )

United States

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