Security of Retail Payments: The New Strategic Objective

The Federal Reserve Financial Services Strategic Plan for 2012–2016 specifies five main policy goals for the next few years. The second of its goals is to “Maintain public confidence in the end-to-end safety and security of clearing and settlement systems.” Indeed, in each annual Survey of Consumer Payment Choice (SCPC), respondents consistently rank security as the most important characteristic of payment methods. However, in regressions of consumer payment use, security is not as significant as other payment attributes, such as cost, convenience, or record keeping. We analyze that puzzle by looking closely at how consumers’ assessments of payment method security relate to their actual payment behavior, including testing whether consumers are more likely to use payment methods they consider more secure. Econometric results show that concerns about security create an obstacle to the adoption of some of the bank account-based payments—debit cards, online banking bill pay, and bank account number payments—but once adopted, there is no significant effect of security rating on the use of those payment instruments. The reverse is found for more established payment methods—cash, checks, and credit cards: consumers’ perception of security does not influence adoption, but it does affect their actual payment use. Policy simulation results show that security improvements applied to individual payment instruments would increase the adoption of some payments, but once those payment instruments were adopted, security improvements would have only a small effect on the use of those payments. JEL Classifications: D14, D12, G28 Joanna Stavins is a senior economist and policy advisor and a member of the Consumer Payments Research Center in the research department at the Federal Reserve Bank of Boston. Her email address is [email protected]. This paper, which may be revised, is available on the web site of the Federal Reserve Bank of Boston at http://www.bostonfed.org/economic/ppdp/index.htm. Claire Greene and Scott Schuh provided helpful comments. Vikram Jambulapati and Sean Connolly provided excellent research assistance. The views and opinions expressed in this paper are those of the author and do not necessarily reflect the views of the Federal Reserve Bank of Boston or the Federal Reserve System. This version: November 4, 2013 The Federal Reserve Financial Services Strategic Plan for 2012–2016 specifies five main strategic goals for the financial services policy for the next few years.The second of these goals is to “Maintain public confidence in the end-to-end safety and security of clearing and settlement systems.”1 Indeed, in each annual Federal Reserve Bank of Boston’s Survey of Consumer Payment Choice (SCPC),2 consumers selected security as the most important characteristic of payments, dominating all other options, such as cost, speed, and convenience. Therefore, it seems that the strategic plan is consistent with the consumers’ stated preferences. However, there is little information on how these stated preferences correspond to actual consumer payment behavior, which reveals consumers’ actual preferences. Because the strategic plan might lead to spending real resources on enhancing the security of the nation’s payment system, it is worth analyzing in greater detail what aspects of security consumers view as strengths or deficiencies, and to what extent the perceived security of payments affects consumers’ actual behavior. This paper uses recent consumer survey data to address these issues. Most consumers choose from an array of payment methods when conducting their transactions. While consumers likely know from their own experience how the various payment methods compare in terms of speed of transaction or convenience, they are less likely to understand how secure each of these methods is, unless they have been victims of fraud. For example: “most debit card users do not likely understand that when they choose between ‘debit or credit,’ they may be making a choice that can affect whether they can successfully enlist their bank’s help in resolving a dispute with a merchant that arises after the purchase.”3 Because consumers consider security the most important feature of payment methods, we expect consumers’ perceptions of risk and security of payments to affect their payment choice. This paper analyzes the extent to which the judgments consumers make, as indicated in consumer survey responses, are reflected in their actual payment behavior. Limited literature 1 https://4site.clev.frb.org/FSPC/docs/fspc/planning/2012/Strategic_Plan.pdf 2 See http://www.bostonfed.org/economic/cprc/scpc/index.htm for information about the SCPC survey program. The survey has been conducted annually starting in 2008. 3 Furletti and Smith (2005).