Your smartphone will soon replace your wallet--or so the mantra goes. Companies are racing each other to roll out payment systems that will enable consumers to make transactions using a mobile phone rather than having to carry around cash or credit cards. Consumer Reports cautions that there are some serious caveats and pitfalls to consider, though, before you jump on board with digital payments.
It sounds great. You don't have to carry your wallet or credit cards because your mobile phone will be tied to some form of payment funding system on the backend and you can just take care of transactions using a device you probably have with you all the time anyway. What could go wrong?
Consumer Reports examined the various mobile wallets and digital payment services that are emerging, and found that it isn't always clear just what fees are involved, or how much protection consumers have in the event of accidental or fraudulent charges.
With roughly 300 million non-cash transactions processed every day, things frequently don't work as planned. According to Consumer Reports, one in four Americans has reported a billing error of some sort--an unauthorized charge, billing error, non-credited payment, or other problem--in the last year.
A statement from Consumer Reports explains, "A consumer's right to get their money back when something goes wrong--errors, goods not delivered as promised, fraud--varies by the payment option used," adding, "Cell phone and digital wallet payment services linked to a credit card offer consumers the most protection. However, there is a large disparity in protection for services that link to prepaid debit cards and direct billing to consumers' phone bill."
The problem is that prepaid cards do not offer any guaranteed protection against unauthorized transactions. Visa and Mastercard prepaid cards do have some assurances, but there are loopholes, and getting relief or protection with a prepaid card can be like trying to cash in frequent flyer miles or credit card reward points--you don't really learn what the rules and exclusions are until you try to use it.
Digital payment systems that use direct-to-phone bill charges are an ever murkier gray area. The protections offered are based on the wireless carrier's contract. Consumer Reports indicates that a review of 18 wireless carrier contracts to determine what baseline protection is provided found that none of them have protection equivalent to the guarantees enforced by law when using a credit or debit card.
For consumers anxious to stay on the cutting edge and embrace digital payment services, Consumer Reports offers the following advice:
• Before signing up for a new payment method, read the fine print and check the transaction costs.
• Pay by credit card to get the best protections whenever you buy online or pay via cell phone, make a major purchase in a store, or worry that a seller might not deliver as promised. Avoid prepaid debit cards and billing to your telephone account. Ask your carrier to block third-party charges to your landline and cell phone.
• Take convenience claims with a grain of salt. Consider new payment choices, but separate true benefits from marketing hype. Keep your mobile shopping tools independent from any branded digital wallet you might choose.
• You can control the risk of loss by knowing the threats with each form of payment and taking steps to protect yourself. Don't share your personal identification and account information, use security software and procedures for your e-commerce, and always keep cash and payment cards in a safe place.