The risks of cards from the point of view of banks

Abstract

The purpose of this dissertation is to highlight the risks of debit cards, credit cards and prepaid cards from the banks' point of view. Furthermore, this study addresses the commonalities and the differences between the three types of cards issued by the banks. Also, this research investigates the types of resources that are being used nowadays by card issuing banks, in order to reduce risks. Last but not least, this study aims to describe the models employed by banks to quantify risks. This study was conducted through the use of semi-structured interviews. Representatives from the risk departments of banks which offer card services in Malta were interviewed.

The main conclusions of this study imply that prepaid cards are not so popular in Malta because these cards carry higher risks when compared to debit cards and credit cards. Additionally, the mentality of Maltese people is not credit oriented, since they prefer to use their own funds rather than borrowing money. Results also show that when the cards’ system was implemented, banks had to invest in a new system and in programs to keep up-to-date with technology. Apart from a substantial increase in costs, it was also necessary to train all the staff. Furthermore, when the cards’ system was actualised, there were changes in the regulations and cards did not remain closed loop but they became an international loop instead.

This study reveals that the risks banks associate with credit cards are fraud (operational risks), credit risk and business risks. Moreover, in order to quantify credit risk, banks normally take into account the client’s credit rating and also the days in arrears. Additionally, this study shows that there are certain resources which could be utilised by the Maltese banking sector in order to mitigate risks, such as the card security features. Also, the banks’ system must be compliant with the card schemes’ regulations. Moreover, banks are upgrading their systems by making changes to their infrastructure and by taking some proactive actions to minimise their risks. Risks cannot be completely avoided, but they can be mitigated.