Smart SpendingSmart Spending

Will that be cash, credit or phone?

Using your phone to buy lattes and airline tickets comes with financial pitfalls.

By Karen Datko Jan 25, 2011 1:23PM

This Deal of the Day comes from Kelli B. Grant at partner site SmartMoney.


Not long ago, paying for something by phone meant calling a retailer or catalog merchant to place an order with a credit card. Today, your smart phone is shopping mall and wallet in one -- no dialing or credit card number recitation required.

But for all that high-tech convenience, consumers may be giving up some basic protections and risking greater financial damage.


If you haven't used your iPhone to buy a latte or a pair of sneakers yet, it may be just a matter of time. Consumers spent $3.4 billion on non-travel purchases via their cell phone in 2010, a 143% increase from 2009, according to ABI Research. Starbucks just began accepting mobile payments;, Nike and have been. Shoppers spent another $1.5 billion on travel via handset purchases.


And because the technology still isn't widely available, says Bob Egan, an independent technology analyst, the trend is only gathering steam. That $3.4 billion in mobile payments in 2010? It's just 0.7% of the $462 billion spent on holiday purchases in November and December.


Shop-by-phone -- called mobile commerce -- works in several ways. Smart-phone apps and mobile websites mimic the online shopping experience, downloadable bar codes can be scanned and used like a gift card, chips and stickers turn your handset itself into a credit card, and some retailers accept orders via text message. The underlying idea is the same, regardless: Your cell phone can be an alternative to the credit cards in your wallet. The stuff you buy via mobile commerce is typically charged to a credit or debit card -- usually kept on file with a merchant so you don't re-enter the account number each time.


Billed to your cell phone

While consumers might eventually be able to leave their wallets at home, they might not want to, says Ross Rubin, executive director of industry analysis for market research firm NPD Group. Some purchases you make will be routed to your cell phone bill rather than a credit card, which nixes federal protections that allow you to dispute inaccurate credit card charges.

Lose your phone and you could have more to worry about. Depending on the precautions set by you and the retailers, someone who happened across it could buy his fill of lattes on your dime, not to mention rack up credit card balances and transfer cash from your accounts.


For shoppers, this adds another layer of decision-making. Does the convenience of each opportunity to buy-by-phone outweigh the potential risk if the phone is lost or stolen? A twice-daily Starbucks drinker, for example, might decide that the convenience of not toting his card is more valuable than the risk to his $25 automatically reloaded balance. (A Starbucks spokeswoman says cardholders can call a toll-free number to freeze the balance on a lost card and transfer their rewards and balance to a new number.) But an occasional eBay shopper might decide to stick to bidding from home rather worry about password-protecting his PayPal app for mobile payments.


Here's a look at the main forms of mobile commerce -- and what to watch out for:



Apps are the most likely way shoppers will pay by phone. Those already available from major retailers, like, are similar to shopping via Web browser, and are likely to become more prevalent as phone screens get bigger and browsers improve, says Larry Joseloff, vice president of content for, the National Retail Federation's e-commerce arm.


Other types of apps, like that from Starbucks, generate scannable bar codes for gift cards in lieu of a physical card. In November, Discover Financial Services and Firethorn launched the free app, Swagg , which does the same for more than 200 stores, including J.C. Penney and American Eagle.


Financial pitfall: If you set your account to log in automatically, anyone with your phone can make purchases. Amazon and PayPal say none of the information about your account is stored on the phone, and accounts are password-protected. But Troy Bernard, director of chip payment technology for Discover, acknowledged that a lost handset could result in unauthorized spending. When a theft is reported, balances are frozen.


Phones as plastic

Around the same time Discover launched Swagg, the company also rolled out stickers that attach to a handset and can be tapped or swiped at participating stores -- what the industry calls "contactless payment."


Discover is also collaborating with the major wireless carriers to eliminate the need for such a sticker by embedding chips directly into handsets. "We believe mobile is the next logical step in payment technology," Bernard says.


Right now, however, contactless payment in stores is in its infancy, says Rubin, and the high-tech chips are in just one handset -- Google's Nexus S. Visa recently launched In2Pay, a card that can be inserted into select handsets' memory slots; banks have yet to begin offering the technology to cardholders.


Financial pitfall: The risks are the same as carrying a credit card. Losing either opens the door to unauthorized charges, of which you're liable for $50, maximum, upon reporting it stolen. You'll get a new account number and a new card and contactless payment sticker.



Non-smart-phone owners can get into mobile commerce via text-to-buy, which links your phone number with an account -- and credit or debit card -- on file. AT&T and Verizon both have partnerships with BilltoMobile, which lets consumers charge electronic game purchases -- up to $25 per month -- to their cell phone bill. Amazon offers TextBuyIt, a text-message-based service that bills items to an Amazon account. And startup Subports links your credit card to your account for texted purchases of goods from its partner small businesses.


But it's unclear whether text-to-buy will survive other more sophisticated mobile commerce options. "Text messaging from a payment standpoint is pretty archaic," says Egan. "It's almost stone age."


Financial pitfall: In addition to all those text message fees, billing accuracy could be a problem, if the charge goes to your cell phone rather than a credit card, Egan says. You're relying on the carrier and store policies, rather than the federal laws and bank regulations covering credit and debit card transactions. There's also fine print: Amazon says its best "Deal of the Day" and "Gold Box Discounts" aren't available to texters.


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