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Regulators Say New Rules May be Necessary for Mobile Payments

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

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