Report: Mobile payments could be risky for consumers

June 15, 2011

Emerging Mobile Payment Methods Could Pose Financial Risk to Consumers

Consumers Union Calls On Wireless Carriers to Protect Consumers
When Fraudulent Charges or Mistakes Are Made With Mobile Payments

SAN FRANCISCO, CA – Mobile payments are being touted as the next big thing for consumers but could pose a financial risk when mistakes are made by merchants or if a phone is lost or stolen and used to make fraudulent charges. Consumers Union, the nonprofit publisher of Consumer Reports, is calling on wireless carriers to make sure consumers are protected from mobile payment fraud and mistakes by adopting strong safeguards in customer contracts.

In a report on mobile payments issued today, the group highlighted how consumer protections vary widely for different mobile payment methods, how wireless carrier contracts fail to provide needed safeguards, and tips for consumers using mobile payments. Consumers Union has launched a Facebook campaign to encourage wireless carriers to adopt stronger contractual protections for mobile payments linked to wireless accounts.

“As more Americans start using mobile phones to make purchases, we need to make sure that consumer protections keep pace with all the new technological advances,” said Michelle Jun, senior attorney for Consumers Union’s Defend Your Dollars campaign (www.DefendYourDollars.org). “Consumers shouldn’t have to worry that a lost or stolen mobile phone or billing error could turn into a costly financial headache.”

On May 23, Consumers Union sent letters to 18 wireless carriers urging them to strengthen their contracts so consumers using mobile payments are provided protections similar to those offered to credit card or debit card users. CREDO Mobile is the only wireless carrier that has responded to the letter to date. CREDO maintains that it provides ample safeguards, although Consumers Union believes its contract could be strengthened to more fully protect consumers.

Federal law currently offers protection to consumers in the event that their credit card or debit card is lost, stolen or misused. Credit cards provide the strongest protections that help limit a consumer’s liability, while debit cards provide some, but not all, of these protections. If mobile payment transactions are linked to credit cards or debit cards, then consumers are entitled to the same guaranteed federal protections that apply when a credit card or debit card is used directly in a transaction.

Unfortunately, mobile charges linked to other forms of payment don’t enjoy any of these legal protections. For example, if a mobile payment transaction is funded by a prepaid card or gift card, consumers are not entitled to any federal protections that limit how much money they can lose to unauthorized transactions or errors. If the payment service is provided directly by the wireless carrier and the charges appear on the customer's cell phone bill, the product might escape consumer protections entirely unless the contract provides them. If the wireless carrier asks the consumer to make a prepaid deposit to cover future charges, protections also will be missing unless they are included in the contract.

Consumers Union reviewed the contracts of 18 wireless carriers to find out what kind of baseline protections they provided to consumers regardless of the kind of mobile payment method used to make charges:

• None of the wireless contracts provided protections for mobile payment transactions that are as strong as those guaranteed by law when consumers make purchases using a credit card or debit card. Consumers making mobile payments linked to wireless phone accounts, prepaid cards, or gift cards run the risk of losing funds to fraudulent or erroneous charges.

• 16 of the 18 wireless contracts require consumers to pay for charges resulting from merchant mistakes or other errors while an investigation of disputed charges is pending. One wireless contract did not address this issue. Consumers using mobile payments linked to credit cards have the right to withhold payments for all disputed charges, including merchant mistakes. Consumers using other forms of mobile payments, including those whose charges are linked to wireless accounts, would not have this same legal right.

• Only four of the 18 wireless contracts explicitly protect consumers from being held liable for disputed charges when a mobile device is lost or stolen. Consumers using mobile payments linked to credit cards and debit cards can limit their financial liability by promptly reporting a lost or stolen phone. Mobile charges linked to other forms of payment, including those billed to wireless accounts, do not receive these same legal protections.

• Seven of the 18 wireless carrier contracts explicitly require consumers to pay late fees if they decide to withhold payments for disputed charges. Consumers using mobile payments linked directly to wireless phone accounts would be subject to late fees if they failed to pay for disputed charges by the due date.

Consumers Union has called on wireless carriers to strengthen their contracts by adding a number of protections against unauthorized or erroneous mobile payment charges, including:

• Limit a consumer’s liability for unauthorized transactions to $50 when false charges are made due to a lost or stolen mobile device

• Limit a consumer’s liability for erroneous charges to a prepaid wireless phone deposit or a wireless phone bill

• Give consumers the right to have missing funds from disputed transactions re-credited within 10 business days

• Give consumers the right to withhold payment of any disputed charges while an investigation is pending and protection from penalties for withholding payment on these charges

• Enable consumers to set a cap on the dollar amount for mobile payments which can be directly made to wireless accounts

“Ultimately, the new Consumer Financial Protection Bureau will need to enact mandatory protections for consumers that cover all forms of mobile payments,” said Jun. “In the meantime, wireless carriers should provide strong mobile payment safeguards in their contracts so consumers don’t lose money to mistakes or fraudulent charges. Other mobile payment service providers should adopt similar protections.”

Michael McCauley or Michelle Jun – 415-431-6747 or David Butler 202-462-6262