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FTC: Mobile Payments on the Rise

In early March 2013, the Federal Trade Commission (FTC) released a report entitled Paper, Plastic… or Mobile? which highlighted key consumer and privacy issues resulting from the increasingly widespread use of mobile payments.

What are mobile payments?

Mobile payments (aka mobile money, mobile money transfer and mobile wallet) usually refer to payment services operated under financial regulation and performed from or via a mobile device. Financial institutions and credit card companies, including internet companies (e.g. Google and mobile communications companies) have implemented mobile payment solutions.

According to the FTC,

“Mobile payment services typically function by linking to one or more payment sources. Many mobile payment platforms allow consumers to choose among several different funding sources for payment, such as a credit card, debit card, bank account, or mobile phone account.”

Mobile payments are considered an alternative payment method. Rather than paying with cash, checks or credit cards, consumers can use a mobile phone to pay for a wide range of services and digital or hard goods.

Here’s a quick overview of the current state of mobile payments:

  • As of the end of 2012, 7.9 million US consumers had adopted a consumer-facing NFC-compatible system (e.g. Google Wallet), or apps that use QR codes or other methods to generate a payment.
  • In-store mobile payments represent up to $640 million in transaction volume in the US, an increase from $170 million in 2011.
  • Square Wallet’s mobile payments rose to $10 billion in 2012, from $2 billion in 2011.

Three areas of concern

The FTC report noted the numerous benefits of mobile payments for consumers, including the ease and convenience and the potentially lower transaction costs for merchants. However, the report also identified three areas of concern with the mobile payments system:

  1. Dispute resolution
  2. Data security
  3. Privacy

The following sections discuss each of the three areas in greater detail.

Dispute Resolution

While a growing number of third parties have entered into agreements with carriers to place charges on mobile phone bills, there are still no federal statutory protections governing consumer disputes about fraudulent or unauthorized charges placed on mobile carrier bills. As with prepaid cards, consumers depend on the terms of their mobile carrier agreements or those companies’ good will when such disputes arise.

According to the FTC, consumers ought to receive basic protections against unfair charges on their mobile bills. One important issue is the practice of third parties placing fraudulent charges onto consumers’ mobile carrier bills. This practice was first identified in connection with the landline billing platform and is generally known as “cramming.”

Considering the range of potential approaches to addressing fraudulent charges on the mobile carrier platform, the FTC is in the process of organizing a roundtable on this issue in May 2013.

Data Security

Another key concern for consumers when making mobile payments is whether or not their sensitive financial information can be stolen or intercepted. A 2012 Federal Reserve study reported that 42 percent of consumers were concerned about data security and this concern represented the most cited reason why consumers have not used mobile payments. Consumers also noted their concerns about hackers gaining access to their phone remotely, or someone intercepting payment information or other sensitive data.

Given that a major impediment to consumers’ adoption of mobile payment technologies is the perceived lack of security, the incentives for industry to refine security measures should be strong. Although the technology is available to provide enhanced security in the mobile payments market, it is unclear that all companies in this market are employing it.

Privacy

The use of mobile payments raises significant privacy concerns, because of the high number of companies involved in the mobile payments ecosystem and the large amount of data being collected. In addition to the banks, merchants and payment card networks present in traditional payment systems, mobile payments often involve new actors, such as operating system manufacturers, hardware manufacturers, mobile phone carriers, application developers and coupon and loyalty program administrators. When a consumer makes a mobile payment, any or all of these parties may have access to sensitive detail about a consumer, and the consumer’s purchasing habits, as compared with data collected when making a traditional payment.

Mobile payments can allow multiple parties within the mobile payments ecosystem to gather and consolidate personal and purchase data in a way that was not possible under a traditional payment method. Such consolidation may provide benefits to consumers, such as helping merchants offer products or services that a consumer is more likely to want. This collection of data may also help to reduce the incidence of fraud. However, these practices also raise important privacy issues.

An International Perspective

Mobile payments have developed extensively worldwide. In certain countries, including Kenya and the Philippines, mobile payments take the form of mobile text messaging/SMS for remittances and person-to-person money transfers. In countries such as Japan, Korea, and parts of Europe, mobile payments deploy SMS and NFC technologies for mass transit and retail applications developed by partnerships between mobile network operators, banks, and governments.

The global volume of mobile transactions is growing rapidly and both traditional and non-traditional financial organizations are increasingly processing the transactions. Governments and international organizations are exploring common consumer protection concerns across differing markets, business models and technologies. Ensuring that consumers are adequately protected as they adopt mobile payments on a global level will be essential to consumer trust and adoption of new and innovative mobile payment systems.

Summary

This article takes a look at the mobile payments marketplace in the US and worldwide. This article introduces a recently released FTC report on mobile payments, entitled Paper, Plastic… or Mobile?

CIPP Exam Preparation

In preparation for the Certified Information Privacy Professional/United States (CIPP/US), a privacy professional should be comfortable with topics related to this post, including:

  • Regulatory authorities – FTC (I.A.d.i.)
  • Self-regulatory enforcement (I.B.h.)
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