Credit Cards’ Benefits Outweigh Chance of ID Theft
The digital age has seen a proliferation of identity theft—the malicious use of personal identifying data. Although the media have focused on a few incidents in which hackers gained access to large amounts of personal data, the more pervasive problem is smaller in scale: the theft of credit card numbers or Social Security numbers. Policymakers have been reluctant to address this problem because the collection of personal data is central to the effective allocation of credit.
Cards save merchants money
In a recent Atlanta Fed working paper (Working Paper 2005-19), authors Charles M. Kahn and William Roberds explore the advantages and disadvantages of payment instruments such as credit cards. The credit card’s main advantage, the authors note, is its economy for the merchant, who can cheaply verify it without having to verify the identity of the individual using the card. The card’s advantage also opens the door to its disadvantage: the introduction of the possibility of fraud and identity theft.
Better verification could control theft
Kahn and Roberds construct a theoretical model of money and payments that shows the advantage of payment instruments such as credit cards outweighs the disadvantage of the possibility of identity theft. They suggest that identity theft could be better controlled by more intense verification of borrowers’ identities but add that this verification might lead to unacceptable levels of social and private cost. But it is up to society, they argue, to determine the acceptable equilibrium between convenient credit card use and the fraud that can arise from credit transactions.