Inflation risk or purchasing power risk arises because of the variation in the value of an asset’s cash flows due to inflation, as measured in terms of purchasing power. For example, if an investor purchases an asset that produces an annual return of 5% and the rate of inflation is 3%, the purchasing power of the investor has not increased by 5%. Instead, the investor’s purchasing power has increased by 2%. Inflation risk is the risk that the investor’s return from the investment in an asset will be less than the rate of inflation.
Common stock is viewed as having little inflation risk. For all but inflation protection bonds, an investor is exposed to inflation risk by investing in fixed-rate bonds because the interest rate the issuer promises to make is fixed for the life of the issue.
The most common merchant fraud is probably carried out in shady bars in the small hours of the morning. The first indication that the cardholder has that they have been victim of fraud is when they see a $500 entry on their account statement for a bill that was actually $50.
The advent of the Internet has increased the potential for fraud. Credit card details can be stolen in bulk by stealing details from Internet retail operations with weak security. Banks have had to develop countermeasures to protect against fraud. Many issuers courier the credit card to the holder or send it by some form of registered post. Other issuers require the cardholder to come to a branch in person to collect a new card. These measures are aimed at prevention of fraud based on mail interception.
Some issuers, such as Citibank, have put photos of the holders onto the card itself. This appears to be more of a marketing gimmick than a protection against fraud. There is little evidence that this measure significantly reduces the level of losses and if it did it is reasonable to assume that other issuers would have followed suit. Retailers are supposed to verify that the signature on the card matches that made at payment time. In my experience few bother. The tipping system in the US creates a disincentive for service personnel to challenge a customer’s identity before receiving their tip.
The most surprising thing is that there has been no widespread introduction of personal identification numbers (PIN) as a means to ensure that the person using the card is also the holder. Many banks have introduced this for their own cards used in ATMs. The only reasonable conclusion is that the banks collectively have decided that the costs of system and technology changes would be higher than the savings achieved from reducing fraud. At some stage there is likely to be a great leap forward in technology with the adoption of smart cards. The cost of smart cards has come down below a dollar a card and they could be used to provide many functions, such as a “wallet” of cash, that cannot be provided with the traditional swipe card. A few hundred million of these cards worldwide had been issued at the time of writing.
The very success of credit cards has made any changes in technology a major challenge and such a migration would be on a par with efforts expended by financial institutions to deal with Y2K. Simply replacing all issued cards with smart cards would cost about $2bn worldwide. This takes no account of the costs involved in either replacing or upgrading ATMs and card-reading equipment at the merchants.