As the US begins the move to adopting NFC, the government must act to ensure that consumers get full protection against fraud, processing errors and merchant disputes — especially if they are using a prepaid account or if they are charging their purchase to their mobile phone bill — says Consumers Union.
Consumers Union, the non-profit publisher of independent information and advice for US consumers, has called on government regulators to take action to ensure that consumers making payments with their mobile phones will be covered by the strongest possible level of consumer protection.
“Recent news stories have highlighted how consumers in the US soon will be able to pay for products and services with a wave of their smart phones,” says Consumers Union. “But while mobile payment technologies may offer a convenient new way to pay for goods and services, consumers could be at risk of losing money when mistakes are made by merchants and processors or as a result of fraud.”
“Federal law protects US consumers in the event that their credit card or debit card is lost, stolen or misused,” the Consumers Union continues. But current protections are badly fragmented and don’t apply to all new types of payments, it explains:
Credit cards carry a $50 limit on consumer responsibility for unauthorized use, but fraud on debit cards can expose cardholders to $500 or more in liability, depending on how soon consumers report it. Voluntary payment network “zero liability” policies offered by debit card issuers contain significant loopholes. Prepaid cards where funds are pooled from many cardholders may lack even the protections that apply to traditional debit cards.
Consumer rights involving disputes with merchants can be even more confusing. Credit cards provide protections in case of bank errors, unauthorized use, and disputes with merchants, but debit cards provide only protections for bank errors and unauthorized use, not for disputes with the merchant.
These varying protections make it difficult for customers to determine what protections apply to new payment services. 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.
“Consumers should not be expected to figure out what protections apply to each competing new payments venture,” says Michelle Jun, staff attorney for Consumers Union. “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 US, it’s time to harmonize and extend consumer protections for all payment services.”
Consumers Union called on companies offering 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.
The consumer group also noted that regulators need to use their current statutory authority to ensure that existing consumer protections are applied to all new payment methods. For example, the Federal Reserve Board should apply full debit card protections to payments backed via a prepaid card through a simple interpretation of Regulation E.
If the Federal Reserve Board fails to act, says Consumers Union, the new Consumer Financial Protection Bureau created under the recently passed financial reform legislation has the authority to address unfair payment practices.