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Friday, October 9, 2015

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Update Newsletter: Spring 2002

Building Capability Through Partnerships

A goal of the Payment Cards Center is to not only build expertise within the PCC itself but also to leverage and expand on the Philadelphia Reserve Bank's existing competencies in the area of payment cards. Using a business model that emphasizes cross-functional initiatives allows us to expand our capabilities beyond those of the PCC's core staff. We also strive to ensure that the PCC's agenda is informed by market realities and recognizes the interests of external constituencies. In this sense, the PCC may be seen as a forum for bringing together contributions from policy-makers, industry, the academic community, and the general public.


During the PCC's first year, we formed key partnerships with Bank colleagues who bring expertise in a variety of relevant areas, including retail payments, risk management, legal, community and consumer affairs, and economic research. Working together and leveraging existing capabilities, we have collaborated on a range of activities. One visible result of these collaborations is the Payment Cards Center Workshop series. These half-day symposiums bring to the PCC leading experts from industry, academia, and consumer groups for interactive discussions on a variety of critical issues. Following these programs, discussion summaries, along with analyses by PCC staff, are published and made available on our website. A few examples of these internal partnerships at work will serve to illustrate the natural synergies with the PCC's goals.


Like other segments of the financial services industry, payment card businesses are subject to a variety of regulatory and legal controls. Credit card issuers operate in a complex regulatory environment involving not only traditional bank solvency issues but also pricing strategies, consumer disclosure requirements, and with the recent passage of the Gramm-Leach-Bliley Act, a new focus on the use of customers' "personal private information."

The emergence of new, nonbank payment business models that provide card-like functionalities raises a number of issues about the legal and regulatory status of these new industry participants. The recent challenges to nonbank person-to-person payments innovators as to their status as unregulated entities illustrate the often complex legal issues surrounding this industry sector. Working with the Bank's Chief Counsel, Ed Mahon, the Payment Cards Center relies on the Legal Department to follow and advise on payment card legislation and relevant court cases. Members of the legal staff participate in PCC-sponsored activities and assist in program development.

Following passage of the Gramm-Leach-Bliley Act, Ed Mahon helped organize a seminar on financial privacy led by Anita L. Allen, a noted legal scholar from the University of Pennsylvania's Law School. Highlights from this workshop are presented later in this newsletter. An expanded summary of the seminar was featured in the Philadelphia Fed's quarterly Business Review under the title "Privacy Matters: Payment Cards Center Workshop on the Right to Privacy and the Financial Services Industry."

Community & Consumer Affairs

Credit cards have increasingly become the payment vehicle of choice for many U.S. consumers. Employing sophisticated new technologies to refine underwriting techniques and develop segmented product offerings, credit card issuers have substantially broadened the base population of credit card users. This "democratization of credit" has brought benefits to many consumers who, in the past, might have been excluded from formal credit markets. However, the proliferation of credit availability has also resulted in severe financial strains for others, who find themselves overextended with heavy debt burdens. The record level of personal bankruptcy proceedings is one measure of this impact. Less understood are the causes behind these statistics and the potential remedies that might lead to more responsible use of credit at lower social cost. Consumer-related issues such as identity theft, fraudulent credit card use, and the rise in personal bankruptcies are all of concern to the Payment Cards Center.

Dede Myers, head of the Bank's Community and Consumer Affairs Department, has helped the PCC address the broad set of consumer issues related to payment cards. Working with PCC staff, the Community and Consumer Affairs Department developed a workshop that brought together the heads of several regional consumer credit counseling service agencies. The workshop focused on the role these agencies play in intermediating between financially troubled consumers and credit card lenders in an effort to maintain debt service and help these individuals avoid personal bankruptcy. Highlights from this workshop are also noted later in this newsletter.


Relative to the literature on corporate lending and large-dollar payment systems, the body of academic research on consumer credit and retail payment systems is substantially more limited. The Payment Cards Center is committed to supporting the expansion of this base of study in an effort to increase understanding of underlying industry and systemic dynamics. Such research can provide the intellectual foundation for analyses of the many challenges and opportunities faced by the industry and policymakers.

Historically, the Reserve Bank's Research Department has had a strong focus on banking and on the payments system, and it is committed to enhancing its research support on issues relevant to the Payment Cards Center. Senior Vice President and Director of Research Loretta Mester has played a key role in helping to establish the PCC's intellectual agenda and, along with her colleagues, has worked to support the PCC's research mission. During the PCC's first year, a collaborative effort resulted in a successful conference on "Consumer Transactions and Credit." Among the research papers discussed at this event was a timely study of consumer responses to changes in credit limits and interest rates based on a unique data set of several thousand credit card accounts. A summary of the conference proceedings and an article on "Perspectives and Research Issues in Consumer Behavior" by the Bank's president, Anthony Santomero, were featured in the Third Quarter 2001 issue of the Business Review.

A conference on "Innovation in Financial Services and Payments," PDF which will be held in May 2002, will bring together a number of leading academic researchers to review new work on a variety of consumer payment issues. Another conference, "Credit Risk Modeling and Decisioning," will include experts from industry and academia who will discuss the latest advances in applying statistical modeling technologies to consumer credit risk management. This event, which will also be held in May of this year, is jointly sponsored by the Financial Institutions Center of the University of Pennsylvania's Wharton School.

Beyond supporting an active conference schedule, the Research Department and the PCC collaborate on bringing scholars to the Bank for seminars and discussions of relevant payment cards research. The PCC also helps support longer term visits by scholars to the Research Department during academic sabbaticals or other times when longer periods are available for research. In late 2001, the PCC established a Visiting Fellows program and announced its first appointment, David Humphrey from Florida State University. Under this multi-year program, Fellows visit the Bank periodically to participate in PCC activities and research discussions, serving also as advisors to PCC analysts and Research Department economists. Over time, the PCC will expand the Fellows program.

The Future

During its first year, the Payment Cards Center established a strong foundation of activities and began the process of realizing its goal to be "a source of knowledge and expertise on this important segment of the financial services industry." As the PCC moves forward, it will continue to emphasize its partnering strategy and to work with the broad base of market participants in developing a value-added agenda.