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FTC Releases Report on Mobile Payment Systems

By William MacDonald*

The FTC notes that mobile payment systems, which are gaining popularity, can provide innovative and convenient options for consumers. The report, however, highlights three primary areas of potential concern for consumers.

Earlier this month the FTC released, Paper, Plastic... or Mobile? An FTC Workshop on Mobile Payments, a staff report on mobile payment systems. The FTC notes that mobile payment systems, which are gaining popularity, can provide innovative and convenient options for consumers. The report, however, highlights three primary areas of potential concern for consumers.

1. Fraudulent and Unauthorized Charges. The FTC notes that one of the most significant concerns for users of mobile payments is how to resolve disputes in the case of fraudulent payments or unauthorized charges. Accordingly, the report encourages companies to develop clear policies on how consumers can resolve disputes arising from a fraudulent mobile payment or an unauthorized charge. The FTC notes that consumers fund mobile purchases using a variety of sources, from credit cards to prepaid debit cards to charges placed on their mobile phone bills. Under current regulations, each of these funding methods has a different process for consumers to dispute unauthorized charges, with varying levels of consumer protection.

The report also highlights the growing problem of mobile "cramming," which occurs when third parties place unauthorized charges onto consumers' mobile phone bills. The FTC also discussed this issue in its previous comment to the Federal Communications Commission, and the FTC staff has announced a mobile cramming roundtable to be held on May 8th. The FTC notes that consumers should receive basic protections against mobile cramming, including (i) the ability to block all third-party charges on their (and their children's) mobile accounts, (ii) clear and prominent notice from mobile carriers that third-party charges may be placed on customers' accounts and information on how to block such charges, and (iii) the availability of a clear and consistent process for customers to dispute suspicious charges placed on their account and to obtain reimbursement.

2. Security. The FTC notes that a study issued last year by the Board of Governors of the Federal Reserve System, Consumers and Mobile Financial Services, reported that 42% of consumers were concerned about data security, and that this concern was the most cited reason why consumers have not used mobile payments. Accordingly, the report encourages industry-wide adoption of strong measures to ensure security throughout the mobile payment process. The report addresses ways sensitive financial information can be kept secure during the mobile payment process, such as through end-to-end encryption. The possibilities for encryption listed in the report cover everything from the authentication of data during the transaction to the secure storage of information on a mobile device.

3. Privacy. The FTC notes that the use of mobile payments raises significant privacy concerns, due to both the high number of companies involved in the mobile payments ecosystem and the large amount of data being collected. The FTC notes that its earlier report, Protecting Consumer Privacy in an Era of Rapid Change, applies equally to companies in the mobile payment marketplace and urges companies to adopt three basic practices: (i) "privacy by design," (ii) simplified choice for businesses and consumers, and (iii) greater transparency.

While it's clear the FTC is acknowledging the great potential for mobile payment systems, it's also clear that the FTC wants operators to make sure that customers' privacy and data is safe and to provide them with understandable recourse in case of fraudulent or unauthorized charges.

*Mr. MacDonald was formerly a lawyer with Olshan's IP Department.

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