---

Report finds hidden costs in digital payment services

Tuesday, August 02, 2011

New ways to pay your bills are emerging almost daily in today's techno-centered world. Digital payment services are the latest way that companies are clamoring to dip into the estimated $50 billion market of everyday consumer transactions, with services by PayPal, Obopay, Square, Zong, and FaceCash already allowing consumers to pay for purchases with a cell phone, and so-called digital "wallet" services scheduled to hit the market soon. Google plans to launch a service called Google Wallet this summer, and other versions from Visa and Isis, a joint venture of AT&T Mobility, T-Mobile, and Verizon Wireless, are expected soon.

Before jumping on the digital payment bandwagon, though, Consumer Reports is cautioning that many of these services come with fees and do not offer loss liability or other consumer protections.

Most of the new electronic payment options are tied to credit and debit cards, so consumers won't intrinsically save 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.

Payment processor Obopay charges consumers 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, which means 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.

The report also found that your right to get your money back when something goes wrong 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.

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 Union reviewed the contracts of 18 wireless carriers to find out what kind of baseline protections they contained; none provided protections for mobile payment transactions that are as strong as those guaranteed by law when consumers use a credit card or debit card.

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. California consumers can also bar third parties from putting charges on their phone bill.

Consumer Reports offers the following advice for those considering the jump to any new form of digital payment service:

- 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. Avoid prepaid debit cards and billing to your telephone account. Ask your carrier to block third-party charges to your landline and cell phone.

- 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.

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