Risk management and nonbank participation in the U.S. retail payments system

The retail payments system in the United States has changed significantly in recent years. Advances in technology have caused a greater reliance on electronic payment networks. And the industrial structure of the payment services industry has evolved, as more and more nonbanks deliver payment products to end users and supply back-end processing. In general, these changes have made the payments system more efficient and given more choices to consumers and more payment options to merchants and businesses. ; At the same time, however, the rapid pace of change has introduced new risks to the payments system. First, as more and more banks market payment services to nonbanks and outsource payments processing, the differences in information possessed by payments participants can magnify difficulties in managing risk. Second, electronic payments have a significantly different risk profile than paper checks. Third, greater complexity of the payments network potentially reduces incentives to manage risk and may cause difficulties in coordinating risk mitigation. ; Sullivan lays the groundwork for a dialogue on policy to control risk in the U.S. retail payments system. He concludes that a thorough review of supervisory authority relevant to retail payments would be valuable. In particular, the original authority to supervise nonbank payment processors was established over 40 years ago, when the primary reason for establishing that authority was the use of computer technology applied to bank accounting systems. Is that authority adequate given the revolutionary changes in the payments technology seen over the last four decades?Payment systems

The Federal Reserve's role in retail payments: adapting to a new environment

The U.S. retail payments system is in the midst of a transformation. The shift from paper to electronics, the emergence of new instruments and payments channels, the rise in nonbank participation, the change in risk profiles—all are elements of this new landscape. The Federal Reserve takes as one of its mandates fostering a payments system that is safe, efficient, and accessible. How does the Federal Reserve fulfill this mandate in this new environment? ; Since its beginning, the Federal Reserve has played a crucial role in the U.S. retail payments system. From time to time, that role has been reevaluated The current environment suggests the time may be right for another examination. Other central banks are facing similar issues. ; Weiner reexamines the Federal Reserve’s role in retail payments in light of the evolving payments system. The Federal Reserve will likely continue to play an important role in retail payments. However, given the evolution of the payments system, the role the Federal Reserve plays and the rationale for this role may be different than they have been in the past.

The changing nature of U.S. card payment fraud: industry and public policy options

As credit and debit card payments have become the primary payment instrument in retail transactions, awareness of identity theft and concerns over the safety of payments has increased. Traditional forms of card payment fraud are still an important threat, but fraud resulting from unauthorized access to payment data appears to be rising, and we are only beginning to get a sense of the dimensions of the problem. ; Thus far, the role of public policy has been to encourage the card payment industry to limit fraud by developing its own standards and procedures. Whether this policy stance is sufficient depends on the effectiveness of industry efforts to limit fraud in light of the dramatic shift toward card payments. ; Sullivan provides an overview of card payment fraud in the United States. He develops a preliminary estimate of the rate of U.S. card payment fraud and suggests that such fraud is higher than in several other countries for which data are available. The U.S. payment industry is taking steps to combat payment fraud, but progress has been slowed by conflicts of interest, inadequate incentives, and lack of coordination. Thus, policymakers should monitor the card payment industry to see if it better coordinates security efforts, and if not, consider actions to help overcome barriers to effective development of security.

Assessing the landscape of payments fraud

The Federal Reserve Bank of Chicago will host its eighth payments conference on June 5–6, 2008. The conference will highlight threats to the security of the payments system and explore solutions to those challenges. This article previews issues that will be covered at the conference.Payment systems ; Fraud

Fraud containment

Fraud ; Unbanked

Nonbanks and risk in retail payments

This paper documents the importance of nonbanks in retail payments in the United States and in 15 European countries and analyzes the implications of the importance and multiple roles played by nonbanks on retail payment risks. This paper also reviews the main regulatory safeguards in place, and concludes that there may be a need to reconsider some of them in view of the growing role of nonbanks and of the global reach of risks in the electronic era.

Payments fraud: perception versus reality - a conference summary

The authors highlight key issues from the presentations, keynote addresses, and open floor discussions at the Federal Reserve Bank of Chicago's eighth annual Payments Conference. The conference's agenda appears at the end of this article.Fraud ; Payment systems

Market Design for Generation Adequacy: Healing Causes rather than Symptoms

Keywords JEL Classification This paper argues that electricity market reform – particularly the need for complementary mechanisms to remunerate capacity – need to be analysed in the light of the local regulatory and institutional environment. If there is a lack of investment, the priority should be to identify the roots of the problem. The lack of demand side response, short-term reliability management procedures and uncompetitive ancillary services procurement often undermine market reflective scarcity pricing and distort long-term investment incentives. The introduction of a capacity mechanism should come as an optional supplement to wholesale and ancillary markets improvements. Priority reforms should focus on encouraging demand side responsiveness and reducing scarcity price distortions introduced by balancing and congestion management through better dialog between network engineers and market operators. electricity market, generation adequacy, market design, capacity mechanis

Improving security for remote payments

Given the growing popularity of e-commerce and m-commerce over the past few years, remote payments have become commonplace. Unfortunately, remote payments fraud has grown in response. On September 26, 2011, the Federal Reserve Bank of Chicago and the Secure Remote Payment Council (SRPc) co-hosted a symposium to discuss strategies that help reduce such forms of fraud.Fraud ; Payment systems

Can smart cards reduce payments fraud and identity theft?

In the United States, when a consumer presents a payment to a merchant, the merchant typically makes a request for authorization before accepting the payment. Personal information, such as an account number, address, or telephone number, are often enough to initiate a payment. A serious weakness of this system is that criminals who obtain the correct personal information can impersonate an honest consumer and commit payments fraud. ; A key to improving security-and reducing payments fraud-might be payment smart cards. Payment smart cards have an embedded computer chip that encrypts messages to aid authorization. If properly configured, payment smart cards could provide direct benefits to consumers, merchants, banks, and others. These groups would be less vulnerable to the effects of fraud and the cost of fraud prevention would fall. Smart cards could also provide indirect benefits to society by allowing a more efficient payment system. Smart cards have already been adopted in other countries, allowing a more secure payments process and a more efficient payments system. ; Sullivan explores why smart cards have the potential to provide strong payment authorization and thus put a substantial dent into the problems of payments fraud and identity theft. But adopting smart cards in the United States faces some significant challenges. First, the industry must adopt payment smart cards and their new security standards. Second, card issuers and others in the payments industry must agree on the specific forms of security protocols used in smart cards. In both steps the industry must overcome market incentives that can impede the adoption of payment smart cards or limit the strength of their security.