On the Risk Management of Bank Credit Card

chinese abstract

With the rapid development and continuous growth of credit card business, the risk frequency in credit card business is also increasing. How to manage and control this risk has become a very realistic problem. Broadly speaking, the risks of credit cards at present mainly include the following: the credit risk of cardholders, the risk of fraudulent use by criminals, the risk of improper operation by merchants and the risk of fraud within banks. Due to various reasons, the above risks will inevitably appear in real life, and how to prevent and avoid them is worth discussing.

At present, credit card risks are caused by both objective factors, such as the low level of scientific and technological equipment and imperfect legal system in China, and subjective factors, such as poor coordination in all aspects of handling, and cardholders' failure to use credit cards in accordance with relevant bank regulations.

How to resist these risks? According to the time period of risk occurrence, there are roughly the following types: risk avoidance, risk prevention and risk compensation. These three methods solve and control risks from different angles, effectively reduce risk coefficient and improve efficiency, so as to achieve the purpose of increasing income.

Risk management is the difficulty of credit card business operation and the key to the survival and development of credit cards. Only when the risks are minimized can the benefits be maximized. Credit cards have a brilliant development prospect in China. Therefore, effective management of credit card risk has become a top priority for China banking industry.

Keywords: credit card risk risk factors risk management

I. Introduction

Since the first credit card (BOC card) was issued by Bank of China Zhujiang Sub-branch/KLOC-0 in June, 1985, it has been favored by mass customers because of its convenience and quickness. China's bank card business has developed by leaps and bounds. The issuing banks, the number of cards issued and the transaction amount have all increased greatly, and the use environment of credit cards has also been greatly improved. Credit card business has become one of the most profitable departments of commercial banks. In western developed countries, credit card business is the main business and main profit source of many large international banks. For example, Citibank's credit card business accounts for one-third of its total profits, and American Express's American Express card business accounts for 70% of its total profits. [1] At the same time, credit card business is a high-yield and high-risk banking business, and business risks have been plaguing card-issuing banks. Credit card risk management has become an eternal research topic for banks.

Second, the status of credit card business risks

Credit card business risk refers to the uncertain value of capital loss in the process of bank operating credit card business. With the further development of credit card business, credit card risks occur more and more frequently. There may be risks in the issuance, use and settlement of credit cards. Moreover, with the increase of card issuers, special merchants and cardholders, credit card risks are characterized by wide coverage, diverse risks and great harm, and the profits of card issuers are gradually decreasing. In most cases, these losses are made up by the profits of banks. Therefore, some legal problems of credit card risk are prominent. [5]

According to the different forms of credit card risk, it can be divided into the following categories: [4]

1. Credit risk of cardholders

(1) Changes in the financial status of cardholders will bring risks to banks. The main basis of the bank's decision to issue credit cards to customers is the customer's financial situation and credit degree at that time. After receiving the card, some customers' economic credit status such as occupation, income, property and social status declined or deteriorated, and they were unable to repay the money paid by the credit card.

(2) If the cardholder loses contact with the bank, it will bring risks to the bank. The basis of contact between the bank and the cardholder is the information provided by the cardholder at the time of application, such as work unit and residence address. Some cardholders changed their address, changed their jobs, moved to other places or went abroad without informing the bank, which led to the interruption of contact between the bank and the cardholders. It is difficult to recover the money owed by the cardholder.

(3) Individual cardholders deliberately lied about their credit status and defrauded credit cards, causing losses to card issuers.

2. The risk of fraudulent use and fraud by criminals

(1) The credit card obtained by criminals by stealing, picking up or other means impersonates the cardholder for fraudulent consumption or cash withdrawal by imitating the cardholder's signature and forging identity certificates.

(2) The criminals in the society collude with the criminals of special merchants or cash withdrawal outlets to defraud goods or cash by changing the card number reported as lost or the validity period of expired cards.

(3) Criminals throw forged credit cards (like counterfeit banknotes) into the circulation field, so that special merchants can accept them as genuine cards and be deceived.

3. Risk of improper operation of merchants

(1) The cashier failed to check the payment stop list, ID card and reserved signature according to the operation regulations, and accepted the credit card that should have stopped payment, resulting in losses.

(2) When the cashier stamped the purchase order, he did not stamp the card number of the credit card on the document, resulting in a "document without card number", which made it impossible for the issuing bank to settle accounts with it.

(3) The cardholder exceeds the consumption limit, and the cashier does not ask for authorization or adopts a separate stamp to evade authorization, resulting in credit out of control.

4. Fraud risk within the bank

(1) Individual bank staff take advantage of their jobs and positions to take advantage of lax management and take the opportunity to cheat, which may lead to the following risks:

Unauthorized use of credit cards or misappropriation of credit cards, impersonating customers to withdraw cash or spend with cards; Forging or altering cash withdrawal and accounting vouchers to defraud cash; Collusion inside and outside, unauthorized authorization beyond the limit, taking large amounts of cash or consumption; Illegal extraction or consumption by changing computer data and other means.

(2) The risk that the payment stop notice or authorization information is not timely and confidential. At present, the notice of stopping payment is sent by the bank to special merchants and cash withdrawal outlets regularly. Because it needs to go through internal sorting, printing, mailing and other procedures, it usually takes about 10 days for each payment stop bill to be sent to special merchants and cash withdrawal outlets. During this period, if it is fraudulently used by criminals, it may cause economic losses. Special merchants and cash withdrawal outlets often handle authorization by telephone. If you don't pay attention to confidentiality, criminals may impersonate bank authorization.

3. Causes of credit card business risks

At present, there are both objective and subjective reasons for the risk of bank credit card business in China. Specifically:

1. objective reasons [3]

(1) The high risk of credit card business is determined by its business characteristics: First, there are many cardholders, and the credit status changes greatly. Every card may cause overdraft anytime and anywhere, which is difficult for banks to control. Moreover, it is very difficult to distinguish between goodwill overdraft and malicious overdraft. Second, credit cards are circulating in the society, which is affected by many unstable factors at any time, and banks cannot strictly supervise them. Third, the use involves individuals, merchants and banks, and there will be abnormal situations.

(2) The level of scientific and technological equipment is not high. The closed management mode and low-level operation means of the original banking area are obviously unsuitable. It is necessary to comprehensively and uniformly manage, configure advanced computers and establish a huge network system to handle business, which is the basis for the existence and development of credit cards and the basic condition for reducing credit card risks. Visa and MasterCard clearing centers in the United States can inquire about business through computers, and can reply to domestic and foreign users in just a few seconds when inquiring about problematic credit cards in stores or banks. At present, the processing of credit card business in China is mostly in manual operation, even if it is processed by microcomputer, a business is charged many times, which is very difficult to control. Communication is backward, and there is a big gap between different places. The current business network can't solve the problem of remote authorization. Without a strict monitoring system, the payment stop information needs to be transmitted every ten days. In case of emergency payment stop, it can't be communicated in time, and the potential danger is great within 1O days, so it can't stop the vicious overdraft in time.

(3) China's legal system is not perfect, there are no special credit card laws and regulations, and people's credit, reputation and moral concepts are not strong. These are potential risks.

2. Subjective reasons

(1) The handling link is not closely coordinated. At present, the settlement of credit card funds between banks in different regions still adopts the traditional way of manual bill preparation and bill transfer. Sometimes, due to human factors, the transfer is not timely, which delays the check of payment and receipt. There are often some mistakes between internal savings, accounting, card department and external merchants, which make the transmission delay form loopholes.

(2) Credit review mistakes and accidents caused by managers.

The main way of credit review is telephone inquiry, which is a mere formality. Some people with bad credit become cardholders, leaving hidden dangers for the future.

Yes, this situation is easy to happen during the period of mass card issuance or promotion. Credit card institutions of banks invariably focus on increasing the number of credit cards and decompose quantitative indicators from top to bottom, which leads to the card issuing institutions neglecting to strictly examine the credit of cardholders, leading to accidents such as authorization mistakes and account control mistakes by managers.

(3) The cardholder does not follow the bank credit card.

Use relevant regulations. If the passwords of credit cards and ATMs are not kept separately according to bank regulations and are lost, they will be fraudulently used. Improper operation of merchants, such as not stamping the card number and other information, will cause economic losses. Of course, the responsibility for these losses is generally borne by cardholders and merchants, but if they make mistakes repeatedly, it is possible to lose a lot.

Refusing to accept credit cards caused the bank to lose these customers and caused losses. In addition, the internal management of banks is lax, which leads to some loopholes in operation.

Fourthly, analyze the credit card risk management tools in detail.

1. Risk avoidance

Risk avoidance means that the card issuer consciously takes evasive measures to abandon or reject a certain business because it finds that engaging in a certain business activity may bring risk losses. [4] It can be said that this is the simplest risk treatment method. For example, in the process of applying for a credit card, it is difficult for the card issuer to conduct a comprehensive investigation on the applicant's credit status, and it is also difficult to be sure of the authenticity of the information provided by the applicant, so it is a risk aversion to voluntarily refuse to issue a credit card to the applicant in order to avoid future risks.

2. Risk prevention

Preventive strategy means that the card issuer takes certain preventive measures in advance to reduce or reduce the possibility of credit card risks before they occur. [3] The biggest difference between prevention strategy and evasion strategy is that it is a proactive strategy, and banks take the initiative to reduce the number of risks and the scale of losses by taking measures. At present, the means of risk prevention generally include cardholder risk prevention, special merchant risk prevention, card issuer internal risk prevention and credit card fraud risk prevention.

Compared with other credit card risk strategic means, prevention has the advantages of safety, reliability, low cost and good social effect. What is particularly worthy of recognition is that it can effectively nip in the bud and truly achieve the purpose of "combining prevention with elimination". If the preventive measures are done well, the probability of illegal credit card activities will be greatly reduced, which can prevent the occurrence of risks from the source and reduce the probability of risks. Of course, we should also pay attention to how to face risks correctly. Because risk is not equal to loss, some risks may not really happen. In practice, banks can take many preventive measures, such as strengthening the training of special merchants, guiding cardholders to use their cards, and strengthening the management of overdraft loss reporting. Here, only the management of overdraft and loss reporting and stop payment is analyzed in detail. [2]

(1) Overdraft risk management. "Credit card overdraft is essentially a loan issued by the issuing bank, but unlike other loans, it is generally formed and discovered in the process of payment settlement and authorization." [3] Credit card overdraft can be divided into goodwill overdraft and malicious overdraft. Goodwill overdraft is a normal overdraft, and generally there is not much risk. Malicious overdraft refers to the overdraft behavior of the cardholder for the purpose of illegal possession, which exceeds the prescribed limit or time limit and is invalid after being collected by the issuing bank. The loss caused by malicious overdraft directly constitutes the cost of credit card business. In particular, the development of electronic means in China is lagging behind, the transmission speed of stop payment bills is slow, the automatic authorization equipment is imperfect, the loopholes in business management departments and the lax review of special merchants are causing more and more malicious overdrafts and increasing losses. But can you be afraid of overdraft business because malicious overdraft will cause great losses? Let's analyze it. Article 23 of the Measures for the Administration of Bank Card Business stipulates that credit card overdrafts will be compounded monthly, and quasi-credit card overdrafts will receive simple interest monthly. The overdraft interest rate is 0.5 ‰ of the daily interest rate, which will be adjusted according to the current interest rate adjustment of the People's Bank of China. [5] It can be seen that the interest rate of credit card overdraft is very high. The income sources of credit card business mainly include cardholder's annual fee, information exchange income, interest income and other expenses and income, among which interest income accounts for the largest proportion (overdraft interest income of many foreign banks accounts for 80% of all credit card business income).

By comparison, we can easily find that the development of overdraft business is beneficial to the issuing bank, even if overdraft risk does exist. Therefore, it is not easy to cancel the overdraft function of customers' credit cards. The key is to correctly distinguish between reasonable overdraft and malicious overdraft. We should try our best to increase the number of reasonable overdrafts and reduce or even eliminate the number of malicious overdrafts. In practice, it is necessary to establish a correct risk concept (in a sense, big risks and big returns), take risk management as a way to maximize profits, strengthen the management of credit card overdraft, and do not engage in agreed overdraft according to the relevant regulations of the central bank on credit card business, so as to minimize the settlement of credit card transaction funds.

Link, improve the settlement speed, so as to timely account for credit card overdraft and ensure the normal income of banks.

(2) Risk management of loss reporting and payment stopping. Credit card stop payment is an act that the issuing bank carries out to protect the interests of the cardholder and the issuing bank due to loss reporting, theft, malicious overdraft, violation of the credit card regulations and other reasons. [4]

Stopping payment can improve the capital security of the issuing bank and the cardholder, and effectively reduce the credit card risk. In practice, it is easy to have disputes about the determination of the time to report the loss and the risk responsibility after stopping payment.

It is of great significance for risk liability to determine the time to stop paying the loss. Article 52 of the Measures for the Administration of Bank Card Business

Article 5, paragraph 5, stipulates that the issuing bank shall provide card loss reporting service for cardholders, and set up a 24-hour loss reporting service telephone, providing telephone and written loss reporting, with written loss reporting as the formal loss reporting method. And in the articles of association or related agreements, the responsibility for reporting the loss between the issuing bank and the cardholder is clearly stipulated. [5]

Because there is no uniform regulation, each card issuer has its own regulations on the time and responsibility of reporting loss and stopping payment. For the loss before the loss is reported and payment is stopped, the articles of association of each issuing bank stipulate that the cardholder shall bear the loss. However, there are different regulations on the risk after loss reporting. According to the credit card regulations issued by domestic banks, the risk liability is mainly determined at the time of loss reporting, 24 hours after loss reporting, 24 hours after loss reporting and 36 hours after loss reporting. [3]

Then, is it necessarily beneficial for the bank to stipulate that the risk liability shall be borne by the cardholder for a period of time after the loss is reported? It is true that such a provision of the issuing bank can reduce the resulting risk losses and reduce operating costs. But from an economic point of view, this is not in line with the purpose of maximizing interests. According to the empirical economic analysis of the law, "the loss must be allocated to the party who can bear the risk of such loss at the lowest cost." [1] That is to say, we must first judge the cost of each party's prediction and prevention of this risk, and then decide the party that spends less to bear this risk and responsibility. From both the cardholder and the issuing bank, there is no doubt that the issuing bank is the easiest to predict and prevent this risk. When issuing this service, the issuing bank should foresee the risk of easy loss and fraudulent use of credit cards, and only the issuing bank can effectively prevent the fraudulent use of credit cards. Furthermore, even if a loss does occur, the issuing bank can transfer the risk by applying for insurance with an insurance company, thus effectively avoiding the resulting loss, which is difficult for cardholders to do. It can be seen that the risk cost of the issuing bank in preventing loss reporting is obviously lower. In addition, in practice, it is doubtful whether the dispute can be supported by the court. In addition, the domestic credit card business is booming. If the issuing bank decisively bears the risk of loss caused by loss reporting, it can effectively attract customers and develop special merchants, which is of great significance to establishing a good bank image. [5]

3. Risk compensation.

The so-called credit card risk compensation means that the issuing bank seeks partial or full compensation for the financial risk losses that have occurred or will occur through certain channels, so as to reduce or avoid the credit card risk losses. [5] The common method is to establish a risk reserve system, that is, in the process of credit card business development, card issuing and card stopping institutions take the initiative to incorporate credit card risks into their daily management work, regularly extract a certain proportion from the profits obtained from credit card business to establish risk reserves, and manage the reserves in special accounts to make up for risk losses or bad debts, and the balance is transferred to profits.

In practice, some losses are inevitable, and the issuing bank should bear this responsibility. The establishment of risk reserve system can effectively deal with this kind of risk loss. Moreover, this method does not cost much, especially it can be used in conjunction with the above measures such as prevention and decentralized transfer. After credit card overdraft is included in loan management, it can be written off when other risk management methods are ineffective.

Verb (abbreviation of verb) abstract

Through the above economic analysis of credit card risk management, we can see that credit card risk management departments should pay special attention to risk prevention and formulate strict risk management rules and regulations; Attention should be paid to the training of business personnel and special merchants, especially to strengthen the internal management of card issuers. In the process of credit card application, customers are required to deposit reserve funds and provide guarantees. It is necessary to strengthen the management of overdraft loss reporting and stop payment, formulate reasonable operating rules for overdraft loss reporting and stop payment, strengthen contact with insurance institutions, and try to insure with insurance institutions. At the same time, we should establish a correct risk awareness and establish a risk reserve account. If you are really not sure, take the risk avoidance strategy decisively. In a word, the purpose of credit card risk management is to effectively reduce costs and increase income.

refer to

1, Sun Mingming. Comprehensive thinking on strengthening credit card risk management [J] China Credit Card, 2005, (12).

2. Zhao Peixian. Legal risks of credit card agency business and supervision suggestions [J] Jinan Finance and Economics, 2005, (1 1).

3, Chen Yong China credit card risk management research [J] Journal of Zhengzhou University, 2006, (7)

4. Qiao Jian. Credit card risk and its prevention [J]. Journal of Jiangsu Police College, 1998, (02)

5. Gong Peihua. Summary of the Seminar on Credit Card Management and Legal Issues [J]. Law, 1996, (1 1)