Consumer advocates have some advice for the growing number of people turning to mobile commerce for faster buying: Slow your roll. Federal consumer protection laws haven't kept up with the emerging payment options available today.

Mobile payment systems have exploded so you no longer have to pull out your wallet to  make a purchase. If you have the right gadget, you can buy that new pair of jeans or get through the subway turnstile with a wave or a tap. Handheld gaming devices, iPods, iPads, e-book readers, radio frequency and Near Field Communication-enabled devices, chips embedded in smart phones -- all can spend your money. 

But ultimately, a purchasing device has to be tied to a way to pay -- whether it be a credit card  or debit account, or a phone bill. A consumer's level of legal protection varies by the type of payment method used. Some enjoy the protection of federal laws, others don't. Although the wireless industry has developed a set of voluntary best practices for mobile financial services providers, those guidelines do not have the force of law, consumer advocates say.

"In the absence of the law, they have to go to the payment provider and ask what they provide," says Mark MacCarthy, a professor in the communication, culture and technology program at Georgetown University and a former senior vice president for Visa Inc. "The good news in the payment card world is that those [credit card] protections are guaranteed by law. You don't have to actually go through the fine print of those contracts to insure that you're protected. That's not the case in the mobile world."

Consumer groups warn that if not set up correctly, mobile payments can leave you unprotected from losses if the mobile device is stolen or used to make unauthorized purchases or when buying defective products. (See the do's and don'ts of mobile payments.)

Different levels of protection

Experts say purchases tied to credit cards offer the best protection against unauthorized uses and disputes with merchants over billing or defective products. When purchasing merchandise and services with credit cards, federal law (the Fair Credit Billing Act) protects card users from losses of more than $50. The payment card networks voluntarily extend the protection to zero liability for cardholders. If you buy a TV or another item that arrives broken or defective, the credit card company can withhold or take back payment from the store or merchant if the issue is not resolved. The same is true for billing disputes.

Debit cards, which are covered under the Electronic Funds Transfer Act, offer less protection against losses if the mobile device is stolen and no help for disputes with merchants. Debit card purchases limit customer liability to $500 but could be higher depending on how quickly the cardholder reports the problem.

Prepaid cards offer the least consumer protections

Prepaid cards, which are rising in popularity and may soon be the sole avenue for receiving Social Security and other federal government benefits, are not currently required by law to offer consumer protection against fraud or billing disputes.

Consumers Union, the nonprofit owner of Consumer Reports magazine, and other groups have already asked the Federal Reserve to put prepaid cards on the same level as credit cards for consumers' liability.

"If the mobile payment is tied to a prepaid card, it's neither a debit card nor is it a credit card. Those are going to fall through the cracks," says Michelle Jun, staff attorney at Consumers Union. Consumer advocates want federal regulators to put all forms of payment on the same level when it comes to consumer protection. "Now that mobile payment ventures are emerging in the United States, it's time to harmonize and extend consumer protections for all payment services."

Jun notes that a portion of the U.S. population is unbanked, may have bad credit and may only have access to prepaid cards for online or mobile purchases. Those consumers should "keep track of your transactions as closely as possible and make reports as soon as possible. There really isn't that safety net to hold them if something goes wrong," Jun says.

Mobile commerce is expected to skyrocket in the coming years. Retailers are anxious to take advantage of the many direct marketing and speedy customer service opportunities that can present themselves when, for instance, customers roam stores with GPS-equipped phones that allow wireless interaction with buyers. The National Retail Federation has developed a Mobile Retail Initiative, a 177-page blueprint to help guide retailers into the emerging mobile commerce arena.

ABI Research, a marketing research firm, purchases made via mobile phones in the United States nearly tripled between 2008 and 2009 from $396 million to $1.2 billion. MasterCard, in its 2011 Advanced Payments Report, projects worldwide mobile phone payments will reach $680 billion by 2016. The report says that contactless payments will make up $320 billion of that.

With new mobile payment options announced almost weekly, Jun, the consumer attorney, says it's important for consumers to be aware of the potential risks they face if something goes wrong. However, she adds: "Consumers should not be expected to figure out what protections apply to each competing new payments venture."

Will financial watchdog agency address the problem?

Consumer groups are hoping the new Consumer Financial Protection Bureau (CFPB) -- approved as part of the massive Wall Street reform law -- will address mobile payment and card protections when it launches in July 2011. Many details around the agency remain in flux, however. As of April 2011, Harvard law professor and Obama adviser Elizabeth Warren is overseeing the creation of the bureau, but there has been no official nomination of a director for the bureau. 

"The new Consumer Financial Protection Bureau has been vested with strong authority to address unfair payment practices," U.S. Rep. Carolyn B. Maloney, the New York congresswoman credited with ushering the credit card reform law through Congress, said in a statement to CreditCards.com. "Consumers Union raises fair points about the flaws in new forms of payment, and I believe the CFPB should look closely at them, and take action if consumers need help."

"Many people are offering new services, and they are trying to link them to utilizing the phone. We're really happy that people are choosing the wireless phone to do this," says Kate Kingberger, director of wireless Internet development for CTIA The Wireless Association, a 300-member group that includes the major U.S. cell phone carriers as well as cell phone manufacturers and tower providers.

Some of the new mobile financial services products can be provided by a number of different players, including financial institutions (offering mobile banking options), software development companies (such as developers of mobile parking meter payment applications) or telecommunications providers (such as a wireless cell phone company that provides its own mobile financial services to its customers). Kingberger says CTIA members who partner with new mobile service providers on new products require them to follow the best practices. She said all of the wireless carriers are "fully compliant to CTIA's best practices."

The association's guidelines call for mobile financial services providers to voluntarily create policies that, at the minimum, limit customer liability. When there is unauthorized use of the mobile device, those policies, according to the wireless association, should mirror the higher standards established by federal law for payment cards: a $50 cap for credit cards and the $500 cap for debit cards.

Wireless guidelines vague on dispute resolution

Although the wireless industry has been proactive and early in drafting best practices, their guidelines still leave the door open for potential problems for consumer who are unsatisfied with the products or services they receive. When it comes to dispute resolution, CTIA's guidelines simply state that mobile financial services providers "should develop reasonable dispute resolution processes for handling disputed payments and transactions." It does not go into specifics about what should be included in those procedures.

MacCarthy, the former Visa executive, says that's not good enough.

"It's not clear if consumers can bring a merchant complaint to a carrier the way they can with a credit card," he says. "It's just not crystal clear that if you go a carrier you get help."

MacCarthy, who co-authored an article on the need for more consumer protections for mobile paymentsthat was published in the banking industry trade publication, American Banker, cites an example of purchasing ringtones for your cell phone.

"Say you sign up for ring tones. You try to reach the ring tone provider and you can't reach them. Can you go to the carrier and say, 'Stop putting the $2.98 charge on my bill every month. I don't want it'? If it were a credit card and you had this problem, they would take it off and try to resolve the problem. It's not clear yet that the carriers have that kind of process in place."

Kingberger, from the wireless association, said customers must go to the merchant with disputes about purchases -- not the cell phone carrier.

"The wireless phone is just a conduit of the information," Kingberger says. She cites the example of someone who has set up a speed pass account by sending $50 to local transit authority. Their wireless phone can allow them to go through toll booths or turnstiles and deduct the toll or fare from their transit account as they drive or pass by.

"If your speed pass or your toll booth account all of sudden came up $20 less, you would call the people to whom you sent the original $50 -- to whomever the service provider was. They have to uphold their consumer protections and handle their issues for unauthorized use," Kingberger says. The toll charge would not appear as a separate item on the cell phone bill. "You would have one more data usage for the month," she adds.

However, some types of mobile transactions are billed directly to cell phone bills, including ring tones and what's known in the industry as "short codes." That's when you send a text that includes a short word or series of numbers -- such as "Haiti" or "REDCROSS." If there is a billing dispute, those are governed only by the wireless industry's voluntary guidelines.

More confusion: Who ya gonna call?

Kingberger acknowledges that many consumers who are taking advantage of the convenient mobile payment options that are emerging may be confused about where to go if there is a problem. Those using their cell phones to make purchases might place their first call for help to their cell phone provider.

"Many people will by default call their phone company first," she says, adding the major cell phone carriers are training their customer service representatives on how to handle these calls to direct customers to the right place. She says the carriers are educating cell phone users via e-mails and other methods.

MacCarthy and Kingberger agree that Asia, Europe and other parts of the world are ahead of the United States in adopting mobile payment technology. In many places across the globe, however, consumer protections lag behind the United States. 

Kingsberger predicts the United States will "leapfrog over them in the coming years." She adds: "We have learned a lot from some of their missteps as well."

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