Do Pay-By-Smartphone Systems Put Consumers At Risk?

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 []


Edit Your Comment

  1. smo0 says:

    Just change it to include these types of payments….

    systems like this need to be fluid to change… open to upgrades… nothing is set in stone.

    • Loias supports harsher punishments against corporations says:

      What seems to work best is when the law requires re-assessment of the current state of affairs on a regular basis. This way, new aspects of society are always taken into consideration, and it is unnecessary to write all the details into the law itself. Things become much more fluid and flexible – one of the big negatives of democratic government is its slowness to change.

      • ARP says:

        We do have that framework in place via general laws and then the regulations implementing that law. The problem has been the deep ideological divide within the US. When one party wants no regulations and the other wants lots of regulations, the result is our current system. We underegulate until something goes really bad, and then we over-regulate, potentially stifiling growth of that particular industry. Since compromise is now viewed as weakness, we go through this large regulatory arc, when we should be somewhere in the middle.

  2. Bob Lu says:

    Aren’t “existing consumer protections” already applied to all new payment methods? For the prepaid card funded mobile payment, isn’t it protected like…. well, that stupid thing called “cash”?

    • ARP says:

      I’m not sure I understand your comment, but CU is saying that depending on the source of the payment, consumers may or may not have protections. For example, if the system directly pulled from your bank account, you may not be able to recover any money if your phone is stolen or there are fraudulent charges. Therefore it wants all payments systems to have some basic level of consumer protections from fraud, loss, unauthorized transactions, etc. without having to do detailed research on Regulation Z and the like to figure it out.

      • Bob Lu says:

        I mean CU clearly pointed out that not all pay-by-smartphone system are created equal. different systems have different “real world counterpart”, like credit card or debit card. And those systems DO already have the same protection as their real world counterparts (credit card: full protection. debit card: some protection).

        One of the “problem” that CU pointed out is “if the transaction is funded by a prepaid card, [……] there also will be no legal guarantee of protection”.

        However I can argue that the real world counterpart of such payment type is “cash”, and this prepaid-card-funded-mobile-payment system is not missing any protection that “pay by cash” system is offering (basically, non for both system).

  3. Alvis says:

    I think there’s some confusion over things that “put consumers at risk” and those that just “don’t offer extra protection”.

    Would you say using cash puts you at risk just because you can’t do a chargeback?

    • YouDidWhatNow? says:


      Essentially every transaction you make of any value at all should be made with a credit card for that reason.

      Obviously, if at all possible you want to be able to pay off your CC every month, so don’t get in over your head…but that protection is incredibly important.

  4. mac-phisto says:

    that’s a great idea (extending the same protections across payment systems), but good luck. the consumer protections that exist are set forth in regulations by various agencies & apply only to businesses that fall under their regulatory umbrella.

    a perfect example of the “doughnut hole” in payment systems regulatory authority: paypal. is paypal a bank? no. are they regulated by the fed? no. by the fdic? no. by the occ? no. by the ots? no. who does regulate them? individual state agencies.

    until you get all payment systems governed by the same set of rules (which is unlikely to happen any time in the near future), creating universal payment protections for consumers is a pipe dream. the best course of action is becoming an informed consumer so you can choose the payment system that offers a level of protection that makes you comfortable.

  5. post_break says:

    Why do people still think this type of payment system is new and dangerous? It’s been around forever overseas.

  6. Destron says:

    There is this shop in the mall that accepts PayPal payments by “bumping” your android phone to a device attached to the register – coolest thing ever. I pay with PayPal every time I buy something there just to use that :P

    The PayPal app also lets you transfer money to someone else s PayPal account by bumping two phones together.

  7. classic10 says:

    Getting a $500 charge back on a fraudulent charge on visa is a breeze. Getting $2 straightened out on an AT&T bill is a nightmare. I will NEVER use my phone as a credit card.

  8. classic10 says:

    Getting a $500 charge back on a fraudulent charge on visa is a breeze. Getting $2 straightened out on an AT&T bill is a nightmare. I will NEVER use my phone as a credit card.

  9. classic10 says:

    Getting a $500 charge back on a fraudulent charge on visa is a breeze. Getting $2 straightened out on an ATT bill is a nightmare. I will NEVER use my phone as a credit card.

    • dvddesign says:

      Apparently so is only clicking submit once. :P

      I have no issues with this. Bring it on. It’s high time we started getting more options for contactless payment. I cannot tell you how many times I have wanted a soda and been without any cash.

      Or wanted to buy something and couldn’t find a clerk around to ring me up.

      A contactless payment system means I authorize charges with a bump, and I don’t have to worry about credit card skimming.

  10. Destron says:

    If this is like the technology I have seen on other sites, it won’t even touch your bill. You will link a CC account or bank account to your phone and the money will be deducted straight from there.

  11. golddog says:

    Moses on a moped. People have been paying for things with cellphones in Asia, Europe and even Africa for years and the apocalypse hasn’t come.

    And when it does finally get to the New World, PayPal should have NOTHING to do with it.