A study forthcoming in the Federal Reserve Bank of New York’s Economic Policy Review, Understanding Risk Management in Emerging Retail Payments, discusses the risks found in new methods of payment and important efforts to assess and mitigate these risks. New payment methods that do not successfully manage and mitigate such risks face rejection in the market.
Providers of emerging retail payments face operational and fraud risks, especially the risk of security breaches and potential use in illicit transactions, that they must manage effectively. Because these electronic payments often involve the participation of many different entities and because of particular characteristics of electronic goods, providers must use a variety of tools to create effective risk management incentives, according to authors Michele Braun, James McAndrews, William Roberds and Richard Sullivan. Primary tools to manage risks include techniques such as pricing, insurance and containment.
Through risk analysis and mitigation case studies, the authors conclude that containment—activities that tend to deter risk and reduce losses—is the dominant means of controlling risk, though alone it does not eliminate risk. Containment programs can be supported by coordinated industry efforts to maintain standards or formal regulation; however, market incentives have led most private-sector providers to develop safeguards designed to reduce risk.
Michele Braun is an officer and James McAndrews is a senior vice president at the Federal Reserve Bank of New York; William Roberds is an economist and policy advisor at the Federal Reserve Bank of Atlanta; Richard Sullivan is a senior economist at the Federal Reserve Bank of Kansas City.