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Working Paper
Who's minding the store? motivating and monitoring hired managers at small, closely held firms: the case of commercial banks
We test whether the gains from hiring an outside manager exceed the principal-agent costs of owner-manager separation at 266 small, closely held U.S. commercial banks. Our results suggest that hiring an outside manager can improve a bank's profit efficiency, but that these gains depend on aligning the hired managers with owners via managerial shareholdings. We find that over-utilizing this control mechanism results in entrenchment, while under-utilization is costly in terms of foregone profits. This study provides a relatively unfettered test of mitigating principal-agent costs, because these ...
Journal Article
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 ...
Journal Article
The U.S. adoption of computer-chip payment cards: implications for payment fraud
The fraudsters, phishers, hackers, and pickpockets who thrive off payment card fraud may soon have their work cut out for them. U.S. financial institutions have announced plans to add computer chips to their debit and credit cards in the next few years, a move likely to make payment card fraud more difficult. ; However, the fraud will not disappear. As other countries around the world have adopted computer-chip cards, they have seen fraud patterns migrating to channels with relatively weak security. ; Sullivan describes how computer-chip cards and magnetic-stripe cards work?and how they ...
Journal Article
Controlling security risk and fraud in payment systems
In late 2013, a security breach at a major retailer exposed information on 40 million payment cards. The number of data breaches has increased in recent years, and the targeted use of exposed data suggests a decentralized "virtual fraud factory" driving payment fraud. The direct costs of third-party fraud are high for consumers, banks, and merchants, but the indirect costs could be even higher if these incidences undermine the public's confidence in non-cash payments. Sullivan examines trends in payment fraud, prevention, and data protection to evaluate recent security performance. He ...
Journal Article
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 ...
Journal Article
Interchange fees in credit and debit card markets : what role for public authorities
Credit and especially debit card transactions are on the rise worldwide. Interchange fees are an integral part of the pricing structure of credit and debit card transactions. Indirectly paid by merchants to card issuers, interchange fees in most countries are set by credit and debit card networks. But in one country, Australia, the central bank is regulating interchange fees, and in several other countries and areas, including the European Union, Mexico, the Netherlands, Spain, and the United Kingdom, public officials are taking, or considering taking, a more hands-on regulatory stance. In ...
Journal Article
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 ...
Journal Article
Data Breach Notification Laws
Richard J. Sullivan and Jesse Leigh Maniff study individual provisions within states' data breach notification laws to evaluate their effects on identity theft.
Journal Article
The impact of debit card regulation on checking account fees
Starting in 2011, when new regulations capped the interchange fees paid to banks for debit card transactions, some news reports predicted banks might increase checking account fees. The cap reduced many banks' revenue and the concern was that they might offset their losses by charging more for checking accounts. Sullivan examines data from broad samples of banks and finds that many large banks raised fees?but among the thousands of smaller banks that had been exempted from the regulations, some raised fees while others lowered them. On net, consumer access to free checking actually increased. ...
Journal Article
Nonbanks in the payments system: innovation, competition, and risk - a conference summary
From the early days of automated card sorting to the more recent times of the Internet and check imaging, payments and payments processing have continually embraced new technology. At the same time, the industry has been shaped by its share of entry and exit, through startups, mergers, and the reorganization of businesses seeking the proper scope of horizontal and vertical integration. ; These changes have enabled nonbank organizations to play a larger role in the payments system. Nonbanks have followed a number of pathways to more prominence: purchasing bank payment processing subsidiaries, ...