Credits and loans

Inflation or Purchasing Power Risk

admin — Sun, 27 Nov 2011 14:21:10 +0000

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.

CREDIT CARD FRAUD: Merchant fraud

admin — Wed, 02 Dec 2009 14:22:05 +0000

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.

CREDIT CARD FRAUD: Identity theft

admin — Tue, 24 Nov 2009 14:18:56 +0000

Many purchases may be made over the phone or Internet and do not require the actual presentation of a physical card. Details required are simple, name as written on card, credit card number and expiry date. In its more sophisticated form this is a part of what has become known as “identity theft”.

CREDIT CARD FRAUD: Skimming

admin — Sun, 22 Nov 2009 14:18:05 +0000

Sophisticated criminal organizations operate that specialize in copying the electronic details of the credit card. When someone pays a restaurant bill it rarely occurs to him or her that while the restaurant is getting authorization a restaurant worker is copying the details of the card. Low paid service workers can find this a useful supplement to their wages, provided the risks are low. This can be done using an electronic reading device about the size of a cigarette packet.
A more sophisticated development involves breaking into a point-of-sale device and placing a more advanced reader into the device. The reader is left in place for a period of time and then removed allowing details of all of the cards that have been used for purchases to be extracted. These details can be sent electronically anywhere in the world and then transferred to cloned cards. These cards can then be used until the skimmed cards are identified and blocked. Banks also have to cope with remote scanning devices placed in proximity to ATMs and used to attempt to obtain details of cards and related passwords used in these machines.

CREDIT CARD FRAUD: Theft & Inception

admin — Wed, 18 Nov 2009 13:35:51 +0000

Theft. The simplest form of fraud involves simply stealing someone’s card, impersonating the cardholder and faking his or her signature to make a purchase.

Interception. Some fraud is carried out by interception of credit cards sent through the post to customers. This may involve an inside agent, a postal worker, for example, or may involve theft from a post box. The latter is most common in apartment blocks with communal post boxes.

An in-house credit rating score

admin — Sun, 15 Nov 2009 13:34:51 +0000

Most banks have automated consumer credit scoring systems. These rely on the use of statistical data to determine likely risk of default. Non- quantitative factors that will be taken into amount include location, type of residence (house or apartment), rented or owned, children, and highest education qualification. An unmarried actor living in a rented apartment who dropped out of school may well be deemed a higher credit risk than a married lawyer with two children living in a townhouse she owns. This is likely to be the case even if the actor earns significantly more than the lawyer.
In the US there is a body of legislation intended to protect consumers from discrimination by prohibiting banks from making credit decisions on a number of grounds including race, gender and location. This is the exception rather than the rule. In most countries banks make such decisions with few legislative constraints.

A basic search of a credit bureau’s database

admin — Sat, 14 Nov 2009 13:34:00 +0000

Credit bureaus capture financial data from many sources in order to create credit histories for individuals. They then sell the results from this collated information on the basis of specific requests from banks or other creditors. This will identify people with a poor credit history. Ironically people who have never borrowed or had a credit card may find it harder to get their applications approved than applicants who have borrowed often and frequently been late with their payments. At least the latter have a credit history.
There is always the risk that the data held against individuals is inaccurate, resulting in them being effectively blacklisted for new credit. Consumer advocacy groups have campaigned to give individuals the right to check the accuracy of data held on them. Legislation in most developed countries has been enacted to establish procedures to enable this to be done.

Basic checks that applicant details are correct.

admin — Fri, 13 Nov 2009 13:33:11 +0000

A recent pay slip and tax return are usually required to verify income claimed. A recent utility bill in the name of the applicant is frequently used to check the applicant’s address.

Approval Process

admin — Thu, 12 Nov 2009 13:32:27 +0000

Credit appraisal and approval processes are highly standardized and frequently highly automated. Banks must strike a balance between the losses avoided from rejecting applications of lower quality and the income foregone as a result. If the criteria are too conservative many potentially profitable applicants will be turned away and get a card from a less conservative issuer. In most cases the approval process consists of no more than three controls described in the following articles.

Merchant Payment

admin — Wed, 11 Nov 2009 13:32:02 +0000

At the end of the business day the merchant’s processing bank takes all of the collected sales drafts and inputs them into its system. These are then combined with those advises collected electronically during the day to produce a file, in a format defined by the credit card network operator, and transmitted to the relevant network operator.
The network operator then combines together all of the sales advices from all of the merchant processing banks. These are then sorted by issuer bank. Each transaction in a foreign currency is converted into the issuing banks’ base currency. Individual files are then transmitted to each of the issuer banks.
The issuer bank then carries out basic validation checks on this data, checking that authorization codes are correct, for example, and that transactions received are not simply duplicates of others already received and processed. The issuer posts each transaction to the relevant individual cardholder’s account. It also generates payment instructions for each of the merchant banks that are owed payment. These are then settled though a clearing or payment system. The system used will depend on whether the issuer and merchant banks are in the same country or not.
When the transfer has cleared the merchant’s processing bank credits each of its merchants’ accounts with the requisite amount, less fees due. In this way the merchant is finally paid, usually within two to three working days of the actual purchase. This fast and guaranteed method of payment goes some way towards offsetting the fees charged. Responsibility for losses due to fraud lies with the issuer bank and cardholder, if the issuer bank authorized the payment, and with the merchant if no authorization was given. At the end of the billing period the issuer bank prepares and sends a statement of transaction activity to the cardholder.