As smartphones like the iPhone or Droid become more popular and more sophisticated, developers are finding new ways for consumers to use these mobile devices to replace existing items like airplane boarding passes, coupons and now credit cards. Soon, smartphone owners will be able to pay for purchases with a wave of their phones, but they should first be aware of the possible risks involved.

The biggest issue, according to our benevolent benefactors at Consumers Union, is that users’ risk exposure currently all depends on whether that smartphone purchase is backed by a credit, debit or prepaid card:

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.

In light of this fragmentation, CU has called upon regulators to “use their current statutory authority to ensure that existing consumer protections are applied to all new payment methods.”

“Consumers should not be expected to figure out what protections apply to each competing new payments venture,” said CU staff attorney Michelle 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.”

CU is also asking the companies behind these 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.

Mobile Payment Systems Could Leave Consumers At Risk [DefendYourDollars.org]

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