By Andrew R. Johnson
Existing laws may not fully shield consumers from fraud and
other losses stemming from their use of emerging mobile-payments
systems, according to federal regulators.
The Federal Reserve, Consumer Financial Protection Bureau and
Treasury Department are zeroing in on the technology as major
financial-services players like Visa Inc. (V), MasterCard Inc.
(MA), J.P. Morgan Chase & Co. (JPM) and a slew of tech firms
like Google Inc. (GOOG) and eBay Inc.'s (EBAY) PayPal are rolling
out phone-based payment services.
Some services allow a consumer to make purchases at merchants by
tapping smartphones equipped with special chip technology against a
payment terminal. Others let consumers send money to other
consumers via text message or a mobile app installed on their
phone.
While current laws governing the use of plastic credit and debit
cards would cover consumers who lose their phones or incur
fraudulent charges on their phone-based accounts, the involvement
of non-banking companies poses gaps in their ability to dispute
charges and recoup losses, regulators testified Friday at a House
subcommittee hearing.
"Consumers may make payments in new ways using the services of
entities that have not traditionally been in the payments
business," Stephanie Martin, associate general counsel for the
Federal Reserve Board, said in prepared remarks released prior to
the hearing. "For example, a consumer may settle a mobile payment
transaction via a bill from a telephone company. Making payments
through nontraditional arrangements may change the legal
protections related to the purchase, depending on the details of
the arrangement and the applicable federal or state statutes and
rules."
Existing laws, such as the Electronic Funds Transfer Act and
Truth In Lending Act, limit consumers' liability if they experience
fraud on their debit and credit cards. Because some "mobile wallet"
services available today allow customers to fund virtual accounts
with existing cards, those rules would still apply if a user lost
their phone, witnesses said.
And while some non-bank entities, such marketers of prepaid
cards, have adopted the protections voluntarily, they technically
are not subject to the same rules.
"It's not quite the same thing as having it apply to them by
rule," Martin said.
The hearing, held by the House Subcommittee on Financial
Institutions and Consumer Credit, comes as analysts are predicting
an explosion in mobile-payment services. The value of worldwide
mobile-payment transactions is expected to reach $617 billion by
2016, up from $171.5 billion this year, according to research firm
Gartner Inc.
Lawmakers questioned regulators about whether new rules are
necessary to ensure certain systems don't fall through the legal
cracks, echoing concerns raised by consumer advocates.
The Consumers Union, publisher of Consumer Reports, has
expressed concerns that services allowing people to apply purchases
directly to their cell phone bills - often referred to as carrier
billing - could expose them to extra risks given such systems
aren't directly governed by existing debit and credit cards.
"Existing rules may not have anticipated new developments
enabled by modern technology and may prove inadequate for
addressing emerging concerns," Marla Blow, assistant director for
card and payment markets at the Consumer Financial Protection
Bureau, said in written testimony submitted to the subcommittee.
"To the extent that technology companies begin to play roles
traditionally performed by banking institutions, we may need to
reconsider how well our existing regulations apply to a changed
environment."
Ms. Blow added that mobile devices have small screens that make
"meaningful disclosure difficult" and "may cause consumers to be
less critical in accepting new charges or understanding new
products."
Numerous "digital wallets" that allow users to store virtual
versions of their bankcards and loyalty cards have been announced
in the last year.
Google rolled out a service last year that uses a technology
called near-field communication, enabling customers to make
tap-and-go payments with certain Android smartphones. The service,
Google Wallet, is currently offered by Citigroup Inc. (C), which
allows its customers to load certain MasterCard-branded cards in to
the software.
AT&T Inc. (T), T-Mobile USA and Verizon Wireless are pushing
their own digital wallet called Isis that also will allow consumers
to load bank-issued credit and debit cards in to the application.
Like with Google Wallet, the four main card networks - Visa,
MasterCard, American Express Co. (AXP) and Discover Financial
Services (DFS) - have said they will support the service. Banks
including J.P. Morgan and Capital One Financial Corp. (COF) said
earlier this year they plan to test the service.
Independently, Visa, MasterCard and American Express are all
marketing their own digital wallets, which aim to simplify how
consumers pay for purchases on e-commerce websites as well as check
out at brick-and-mortar merchants.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com