The Impact of Fraud on New Methods of Retail Payment

William Roberds
Economic Review, Vol. 83, No. 1, 1998

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Currency fraud (counterfeiting), check fraud, and credit card fraud are serious problems, costing the U.S. economy billions of dollars each year. But with each of these traditional payments methods, the problem of fraud has been kept at a manageable level. To be successful in the marketplace, newer forms of payment such as electronic cash and stored-value cards will need to hold fraud risk to similarly low levels.

Will fraud hinder development of the new payments media? The natural advantages of electronic systems for storing, copying, and manipulating data can be a drawback when it comes to the risk of fraud. This article considers how certain features of new forms of payment differ from more traditional forms and whether these features will detract from marketplace acceptance of the new media. The author concludes that successful payments systems will have to confront various trade-offs posed by the risk of fraud. They will need to balance the costs and benefits of fraud abatement, balance security of payments systems with consumers' desire for privacy, and encourage development of new, more efficient payments systems while ensuring equitable treatment of participants.

March 1998