As a relatively new financial service, mobile payments have the potential to significantly change how consumers buy and sell goods using their phones, tablets and other devices. While mobile payments will undoubtedly become more popular, such payments are not without risks.
There are five main types of mobile payments:
- Mobile wallet: Uses a phone’s NFC protocol that allows for encrypted exchange of payment between two devices
- Examples: Google Wallet, ISIS
- Mobile phone as POS: Allows users to attach a card reader directly to their phones to process payments
- Examples: Square, VeriFone
- Other types of mobile payments: Any mobile payment that isn’t considered a mobile wallet or mobile phone as POS
- Examples: PayPal (when bumping phones to send money to someone), Serve
- Direct carrier billing: Payments billed directly to a mobile phone account; merchants paid directly by mobile carrier, bypassing traditional payment networks
- Example: buying a ringtone or app if it is added directly to your phone bill
- Closed loop mobile payments: When companies create their own type of mobile payment system
- Example: Starbucks
According to the 2013 LexisNexis® True Cost of FraudSM Mobile Study, nearly 1 in 10 merchants accepted mobile payments in 2013, a 50% increase annually since 2011, and 25% of merchants expect to start accepting mobile payments in 2014.
Why Would Businesses Use Them?
Mobile payments are advantageous because:
- Consumers no longer need to carry around credit cards or cash, eliminating the possibility of loss or theft of those items.
- Some mobile payment systems charge less for credit card fees than credit card companies do.
- The payment is made using a phone or tablet and stores no credit card data with the company, making it harder for criminals to steal.
- They enable companies to implement loyalty programs more easily. Customers no longer need to manually keep track of purchases, reward points, etc.
- It is easier to track customer behavior because payment systems keep databases of what consumers bought and how they paid for it.
- Checkout time is decreased.
- They give consumers more ways to pay.
- They allow smaller businesses to become more competitive with larger chains.
Mobile Payment Risks
While mobile payment systems have clear advantages for businesses, they also come with a fair amount of risk.
As is the case with any new product offering, businesses interested in using mobile payment systems should have a broad review and approval process to ensure compliance with internal policies and applicable laws and regulations. Unlike most banking products that allow institutions to control much of the interaction, mobile payments require the coordinated and secure exchange of payment information among several unrelated entities.
To date, no federal laws or regulations specifically govern mobile payments. However, the laws and regulations that apply to traditional payment methods also apply to mobile payment. For example, a mobile payment funded by the user’s credit card will be covered by the laws and regulations governing traditional credit card payments.
Mobile payment technologies that do not use the existing payment infrastructure would not be subject to laws and regulations that currently cover such payments. In addition, certain mobile payment providers may be subject to the jurisdiction of one or more federal or state regulators.
Retailers lost an estimated $3.5 billion in 2012 due to online fraud, according to a study by CyberSource, a Visa subsidiary.
Businesses should be particularly conscious of the potential and perceived risk of fraud in mobile payments. Customers are more likely to adopt the use of mobile payments if they are confident that the provider has taken appropriate steps to make this service secure by protecting their funds and confidential account information. Encrypting sensitive information stored on the mobile device and providing the ability to disable or wipe the device clean if it is lost or stolen are examples of effective controls that should be carefully considered as part of any mobile payment service.
According to the LexisNexis study, small businesses lose more revenue to mobile payment fraud than larger businesses do because they are less likely to protect themselves from fraud. Mobile malware is a constant danger to these businesses, as they may not employ a full IT staff to handle various cyber threats.
The LexisNexis study also found that 58% of the fraudulent transactions against the surveyed companies involved a credit card, while just 23% involved a debit card.
Identity theft is the most popular type of fraud associated with mobile payments. Criminals can effortlessly make purchases and get access to personal information on a lost or stolen smartphone, many times without the consumer’s knowledge. The whole point of mobile payment systems is to make it easier for consumers to buy things, but that also means criminals have the same ease of use.
The more popular mobile payments become, the more they will be targeted by hackers and thieves. And since the regulatory landscape is lagging behind with these types of payment methods, they are not as safe now as they will be in the future.
While the majority of Americans own a smartphone, they may not understand the privacy implications of storing all their personal data on it. As more consumers use mobile payment systems, we should see an increase in consumer and business vigilance.
Recommendations for Minimizing Risks
There are various measures you can take to shore up the security of your mobile payment system:
- Mobile apps are generally better at protecting customers’ personal data than mobile browsers.
- Two-factor authentication is the best way to prevent fraud.
- Track fraudulent activity by payment type.
- According to the LexisNexis study, only 48% of merchants tracked fraudulent activity by payment type (online, mobile, in-person, etc.). It is easier to identify trends and prevent fraud by using this method.
- Mobile payment systems allow businesses to do this more efficiently than ever.
- Report suspicious activity immediately.
Mobile payments are becoming an increasingly important part of the payment landscape. Expect to see new types of payment options in the future, along with added security benefits and increased consumer confidence in the platform.