Mobile Payment
Systems Could Leave Consumers At Risk
Consumers Union Calls on Regulators to Require
Mobile Payment Providers to Abide by Strong Consumer Protections
SAN FRANCISCO, CA ― Recent news stories have
highlighted how consumers in the U.S. soon will be able to pay for products and services with a wave of their
smart phones. But while mobile payment technologies may offer a
convenient new way to pay for goods and services, consumers could be at
risk of losing money when mistakes are made by merchants and processors
or as a result of fraud, according to Consumers Union, the nonprofit
publisher of Consumer Reports.
“As mobile payments
systems come to the U.S., product providers and regulators need to make sure that they are at
least as safe for consumers to use as traditional credit card and debit
card payments,” said Michelle Jun, staff attorney for Consumers Union.
“It is critical that mobile payment systems are covered by strong rules
to protect consumers from losing money because of fraud, processor error
or a dispute with a retailer.”
Federal law
protects consumers in the event that their credit card or debit card is
lost, stolen or misused. But current protections are badly fragmented
and don't apply to all new types of payments.
Credit cards carry
a $50 limit on consumer responsibility for unauthorized use, but fraud
on debit cards can expose cardholders to $500 or more in liability,
depending on how soon consumers report it. Voluntary payment network
"zero liability" policies offered by debit card issuers contain
significant loopholes. Prepaid cards where funds are pooled from many
cardholders may lack even the protections that apply to traditional
debit cards.
Consumer rights
involving disputes with merchants can be even more confusing. Credit
cards provide protections in case of bank errors, unauthorized use, and
disputes with merchants, but debit cards provide only protections for
bank errors and unauthorized use, not for disputes with the merchant.
These varying
protections make it difficult for customers to determine what
protections apply to new payment services. If mobile payment
transactions are backed by a credit card and appear on the credit card
bill, then consumers are entitled to all available protections. If the
transaction amount is deducted from the consumer's deposit account with
a financial institution like with a debit card, it should receive the
same protections as any other electronic fund transfer. This means
consumers receive a legal right to get back money for errors and theft,
but not for a dispute with a merchant about the goods and services.
However, if the
transaction is funded by a prepaid card, even the protections for
unauthorized use may be missing, and there also will be no legal
guarantee of protection in the event of a dispute with a merchant. If
the payment service is provided directly by the mobile carrier and the
charges appear on the customer's cell phone bill, the way it is done in
Japan and South Korea, the product might
escape consumer protections entirely. If the cell phone company asks the
consumer to make a prepaid deposit to the phone company to cover future
charges, protections also will be missing unless the contract provides
them.
“Consumers should
not be expected to figure out what protections apply to each competing
new payments venture,” said Jun. “Regardless of the technology or
business organization involved, the same high level of consumer
protections should be guaranteed by law and contract for any payment
service. Now that mobile payment ventures are emerging in the U.S., it’s time to harmonize and extend consumer protections for all payment
services.”
Consumers Union
called on companies offering mobile payment systems to include in their
contracts the full consumer rights provided under existing federal law
for both debit and credit cards, and to provide true voluntary "zero
liability" assurance for consumers without loopholes. The consumer group
also noted that regulators need to use their current statutory authority
to ensure that existing consumer protections are applied to all new
payment methods. For example, the Federal Reserve Board should apply
full debit card protections to payments backed via a prepaid card
through a simple interpretation of Regulation E.
If the Federal
Reserve Board fails to act, Consumers Union noted that the new Consumer
Financial Protection Bureau created under the recently passed financial
reform legislation has the authority to address unfair payment
practices.
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