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Hidden Costs In Cell-Phone, Digital-Wallet Payment Services?

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A mobile phone with a credit card function is place on a reader to purchase train tickets. (Getty Images)

A mobile phone with a credit card function is place on a reader to purchase train tickets. (Getty Images)

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DETROIT (WWJ) – While Americans are still using plenty of cash, checks, credit and debit cards to pay their bills, new electronic methods such as paying by cell phone or digital wallets are emerging. Before jumping in, consumers should be aware of the disparity in loss liability and consumer protections they offer, according to Consumer Reports (CR).

CR’s latest investigation into these new payment options finds that banks and technology companies are jostling for a greater share of the $50 billion a year in fees generated by everyday transactions.

Some services by PayPal, Obopay, Square, Zong, and FaceCash already allow you to pay for purchases with your cell phone, but so-called digital wallet services are scheduled to hit the market soon.

Google said in May that it planned to launch its version this summer. At least three competing digital wallets are planned for launch later this year and in 2012 from: Visa in partnership with more than a dozen banks; Isis, a joint venture of AT&T Mobility, T-Mobile, and Verizon Wireless; and PayPal Mobile’s point-of-sale technology.

“As these new forms of payment grow more popular, consumers must be careful to understand the costs, and disparities in protections associated with the promise of new convenience,” Jeff Blyskal, sr. editor CR, said in a release.

Despite all the hype, consumers don’t seem to be clamoring to pay with their phones yet. According to a recent CR survey, only 5 percent of survey respondents have used their cell phone to pay for day-to-day purchases in the previous month. Somewhat more (10 percent) use other fairly new forms of payment, including billing to their home or cell phone account.

Most of the new electronic payment options are tied to credit and debit cards, so whatever costs consumers incur in using their plastic will transfer to the new methods.

But paying by mobile phone won’t save them money. Google Wallet merchant transaction fees are the same as those charged on plastic payments, and the same is expected to be true for Visa’s digital wallet. Square and PayPal Mobile charge merchants even more than the average big bank fee, 2.75 and 2.9 percent of the transaction amount, respectively.

Among payment processors CR looked at, only Obopay charges consumers (not merchants) an explicit flat 50-cent fee for payments over $10. You can transfer funds to your Obopay account from a bank account at no cost, but if you link a transaction to a debit or credit card, you’ll pay a 1.5 percent fee. So on a $100 payment, fees can run from 50 cents to $2.

Prepaid debit cards can be especially costly, whether you use them by themselves or link them to an alternative payment method. Many prepaid debit cards charge fees for activating and maintaining the accounts, and for transactions, balance inquiries, and reloading.

Things often go wrong during the processing of 300 million noncash payments each day. In a CR survey, one in four Americans said they had an unauthorized charge, billing error, noncredited payment, or other problem in the last year when paying for purchases or paying bills.

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.

Again, the underlying method of payment tied to your mobile device will govern their rights in such instances. 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.

Prepaid cards offer consumers no guaranteed protections against unauthorized transactions. The cards may have some protections in their contracts, but they’re essentially voluntary and can be rescinded at any time.

For consumers who opt for direct-to-phone bill charges, their rights in this area are unclear. Any protections are based on the wireless carrier’s contract, and they vary widely.

Consumers may have some rights under state laws or public utility agency rules, but those also vary from state to state. So far, only the California Public Utilities Commission provides its state’s residents the right to reverse unauthorized charges.

The bottom line, know when you’re getting into before considering the jump to any new form of digital payment service.

Here are some suggestions from CR:

  • 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.
  • 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.
  • 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.

You can control the risk of loss by knowing the threats with each form of payment and taking steps to protect yourself.

For more information, visit www.consumerreports.org.

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