Market-based Credit Card

This is a copy of a message I posted on Internet-Payments mailing list today.

Speaking of Next Generation, here is an idea I had four years ago.

Today, card issuers have limited control over risks stemming from real-time changes to cardholder's financial risk profile and market conditions. While this problem can be minimized by averaging the risk exposure over the cardholders, this is not fair to cardholders in good standing because they are being charged more. How can financial institutions gain better control over risk while providing cardholders with best rate possible?

One way to solve above problem is to use credit card as an electronic loan application along with dynamic risk profile associated with it. Acquirers forward transactions to a transaction market where multi-faceted transaction risk profile is attached. Some of the risk facets are cardholder, card issuer, card acquirer, merchant, transaction type, amount range, duration range, etc. Source of information for these facets are provided by different parties.

At the market, financial institutions bid for the transaction by matching the transaction's risk profile (sum of cardholder, card issuer, and merchant risk profile) with the institution's target risk profile. Some transactions are not live, meaning that they are old transactions returned to the market because transaction risk profile no longer meets original transaction owner's risk profile requirements (i.e. cardholder lost his job one month after he purchased a car).

With today's technology, building multi-faceted risk profile in real time is not likely to be scalable. More realistic implementation will deal with cardholders instead of transactions; that is financial institutions bids and asks for the right to handle a cardholder's transactions.

Where do Visa and MasterCard fit in this picture? They can run the market. There are no apparent changes to card issuer/cardholder relationship other than lower interest rates that changes over time to reflect changes in the cardholder's life and the world around him or her.