Do mobile payments equal big risks?

Until something goes wrong, consumers rarely consider the risks that come with various forms of payments. Sure, we recognize that we could accidentally lose cash, or that a thief could steal a wallet and take not just our money but our credit cards, too. But thanks to longstanding Federal Reserve protections, the downside of losing a credit card is mostly measured in hassle, not dollars.

The downside of losing a debit card can be greater, since whoever finds it or steals it can quickly empty your bank account, and you may have to fight to get the money back.  Still, Fed regulations also limit debit-card holders' liability, if not as thoroughly as the credit-card rules, and Visa and MasterCard have extended  additional protections to promote debit-card use.  The bottom line: If there was a fraudulent or unauthorized transaction on your debit card, or via a direct debit from your bank account, and you report it in a timely fashion, you should eventually be able to get most of your money back.

But what about with the new forms of mobile payments? These are the systems pitched by a wave of businesses, including prominent technology and mobile-phone companies as well as start-ups, that want to replace credit and debit cards with mobile devices? A new study by Consumers Union warns that the risks could be far greater than you might imagine - perhaps even exposing you to unlimited liability.

Without new laws or regulations, CU says the risks vary according to the underlying method of payment. Some systems are linked to credit cards or debit cards, and thus enjoy those systems' protections. But if a card is linked directly to your mobile-phone account - as it might be, say, under a new partnership announced between Verizon Wireless and Payfone -  you're at the mercy of your carrier's terms of service. And there may be little or no protection if you link the phone to a prepaid card.

Consumers Union says:

... 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.

And do those contracts offer much solace? Don't count on it. Consumers Union says, for example, that under 16 of 18 wireless carriers' contracts it examined, a customer who challenges a charge will have to cover the charge while the dispute is being investigated. Seven of the 18 "explicitly require consumers to pay late fees if they decide to withhold payments for disputed charges," the report says. Only one carrier, CREDO Mobile, clearly states that payment is not due during a dispute inquiry.

Michelle Jun, a senior attorney at Consumers Union and author of the report, told me that the group is so far unaware of consumers' getting billed for large amounts in unauthorized usage. "We haven’t heard of any instances yet. It’s kind of a new frontier," Jun says.  She said the goal of the study was to outline the risks and urge a coordinated policy response, so that all consumers are protected before some lose thousands of dollars to a thief - or, perhaps, to a phone hacker.

CU says:

Consumers should have the strongest guaranteed protections against unauthorized use and other errors regardless of the payment method used for the mobile payment transaction. Consumers should be able to dispute any unauthorized transaction, whether it was a result of a lost or stolen phone or if a merchant error was discovered on a mobile phone statement. Consumers should be able to withhold payment of disputed amounts and should be recredited in a timely fashion if they’ve already paid for the disputed transaction.

Personally, I'm not convinced of the necessity of mobile-phone payments - I'm perfectly happy with that highly mobile payment device I already carry everywhere I go, called a credit card. But this is a payment system growing by leaps and bounds - according to one study CU cites, worldwide mobile payments totaled about $69 billion in 2009, and are expected to top $633 billion by 2014.

Consumers Union is right: Phone users need strong protections against the risks from lost or stolen cards and from other unauthorized transactions. 

And the marketplace needs them, too. Face it: Bad things inevitably will happen to at least some users of mobile-payment systems.  So without protections as reliable as those for credit or debit cards, consumers will inevitably lose trust - as they read about other consumers who got badly burned.