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Mobile payments: Convenience at a cost?

Smartphones are getting smarter and might soon replace your wallet. But be careful: Paying with your phone may come with risks.

By Stacy Johnson Jun 27, 2011 10:37AM

This post comes from Brandon Ballenger at partner site Money Talks News.


Swiping a piece of plastic through a slot to pay for something was once a technological marvel. Now, the same thing is becoming possible with a wave of your phone.


For some, this is exciting. For others, a bit unnerving. With good reason: In some ways, the laws and policies that protect our money and credit aren't keeping up with technology.


In the video below, Stacy Johnson talks about the growing popularity -- and risks -- of mobile payments. Check it out, then read on to learn how the mobile magic works, along with concerns raised by a new Consumers Union report (.pdf file).

How mobile payments work

The phrase "mobile payment" is an umbrella term, and includes more than the newest fad of waving or tapping to pay. Other forms of mobile payment include some you're probably already familiar with, including spending money via text messages, phone Web browsers and downloaded applications.


But the risk of mobile payments has not so much to do with how you pay -- the engineers obviously want to protect the privacy of your data and transactions and fight hacking attempts -- but more to do with the funding source.


Mobile payment accounts can be linked to a variety of payment sources: credit card, debit card, prepaid card, gift card, bank account, or directly to your phone bill. Each offers different policies and protection for fraud and mistaken or disputed charges.


Expected to launch this fall, Google Wallet is expected to popularize the "tap and go" payment for Android phone users. It's going to be linkable to MasterCard credit cards through Citibank, Google prepaid cards, and gift cards.


Here's how each payment type works:


Credit cards. According to the Consumers Union report, mobile payments linked to credit cards offer the best protections:

  • $50 maximum liability for unauthorized charges resulting from a lost or stolen card, "which in mobile payments can include the phone itself, a chip in the phone or a sticker on the phone."
  • $0 liability if the erroneous or fraudulent charge is reported within 60 days.
  • Chargeback (payment cancellation) rights for faulty or undelivered goods and services.

Debit cards/bank accounts. These are the second-best choice but are significantly inferior to credit cards:

  • $50 maximum liability for unauthorized charges only if the card is reported missing within two business days.
  • Liability greater than $500 for reports later than that.
  • $0 liability for unauthorized charges reported within 60 days that are not a result of a lost or missing phone.
  • No ability to dispute charges, but unauthorized transactions can be credited within 10 business days.

Prepaid and gift cards. These have few protections, if any. Because there's no law requiring protections, they're based on what the providers choose to offer:

  • Potential liability limited to the full balance on the card.
  • Protections are based on the card's contract, which can usually be altered at the company's whim and is often poorly understood by customer-service reps, making recovery a hassle.
  • While Visa and MasterCard have "zero liability" policies for prepaid cards, the Consumers Union report points out that there are significant loopholes, including limits on how often you can report unauthorized charges and not protecting ATM or PIN transactions.

Direct phone billing. Protections against unauthorized charges made directly to your phone bill vary widely depending on your service provider and the state you're in:

  • According to the Consumers Union report, only California residents have chargeback rights for unauthorized or disputed charges.
  • The major carriers suggest do-it-yourself protections and vary on time frames for disputing charges.
  • Verizon offers a BillBlock protection service to help prevent unauthorized charges, available for free on request, and allows disputes within 180 days.
  • AT&T blocks third-party charges or "cramming" upon request and allows disputes within 100 days.
  • Sprint adopted stronger unauthorized payment standards after a settlement with the Florida attorney general cost the company $800,000, but doesn't seem to list its policy or offer guidance online. It allows disputes within 60 days.

While Consumers Union is fighting for credit card-like protections for all mobile payments, if you're going to be an earlier adopter of mobile payments, use a credit card when paying by phone. If you don't have one, tie it to a debit card or your bank account.


More on Money Talks News and MSN Money:

Jul 11, 2011 2:46PM
avatar provides consumers with our Free mi-NUI™ smartphone application and VoiceLocked™ technology. Our app gives you additional protection against credit card fraud at all participating on line retailers. 

Jun 28, 2011 11:27AM
You are missing what I think is the real next evolution to mobile payments - on-phone payments. 

While NFC and these other technologies are very cool and definitely help consolidate things like rewards cards and provide increased security, they do not address what I think is one of the biggest hassles of purchasing things in "the real world" - the line at the register or the wait at a restaurant for a check. 

We are developing TotalTab to tackle the restaurant side of this issue - I've written a couple of my own blog posts on the topic comparing NFC and other payment technologies. There are other companies (like Boston based AisleBuyer) tackling the retail side of this. But really, in general NFC shaves seconds from your checkout time - in aggregation, great for establishments, but not as good as just grabbing what you want, paying on your phone, and walking out the door without actually needing to see a cashier. 

That's what the real revolution is. This is why I think NFC is an evolution, not a revolution. 
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