Person-to-Person Payments by Smartphone and Mobile Computer Add Convenience and Pose Risks
Suppose you need to reimburse a friend for lunch but you forgot your checkbook and you don’t have enough cash in your wallet. You can always get money from an ATM or promise to pay your friend back some other time, but there’s another option becoming increasingly common, especially for people on the run. It’s the ability to send a payment using a mobile device such as a smartphone or a “tablet” computer.
This person-to-person or “P2P” payment service is offered by some banks and non-banks as an alternative to using cash, checks, debit cards or credit cards. P2P payment services have grown and are appealing to a wide range of consumers attracted to the ability to send and receive money using a mobile device, but as with any form of payment, you’ve got to understand the costs and the potential risks.
How can you protect yourself when choosing and using a P2P payment service?
Remember that bank P2P services can provide clearer legal protections. First, it’s important to know what consumer protection laws might — or might not — apply. Every P2P provider will have a “user agreement” that should describe its fees, consumer protections, dispute-resolution procedures, and other details required by federal or state rules.
The P2P services offered by banking institutions have the same federal consumer protections that you get when using your credit or debit card if the payment is funded by linking it to your credit card or checking account, respectively. That means, for example, that if someone steals your smartphone and uses it to transfer money you may have limited or no liability for that unauthorized transaction provided you report the problem in a timely manner.
In contrast, mobile payment services from non-banks may not be subject to the same federal or state laws that would protect you if you were using a bank to provide the service. The protections you will have can vary depending on the terms of the service provider’s contract, how the user’s account is funded, and other factors.
Luke Brown, an Associate Director in the FDIC’s Depositor and Consumer Protection Division, warned, “Don’t presume that the terms and protections for all mobile payment services are the same because some can have high fees and consumer-unfriendly policies. You should shop for the best deal with the strongest consumer protections.”
Be aware that security remains an issue. A recent study by a private company said that many mobile financial applications failed to safeguard consumers’ personal and sensitive information stored on mobile devices. The firm found that it could obtain information such as usernames, passwords, and PIN numbers from mobile phones used in financial transactions. In the wrong hands, this information could subject a consumer to serious consequences and financial losses.
Understand how P2P works. While each P2P service may function a little differently, here’s generally how it works. First, you would set up a P2P payment account with your bank or a non-bank service provider, such as your cell phone company. Depending on the service, the payment could be funded in several ways, perhaps by linking it to an existing checking account, credit card, prepaid card, mobile phone account or a special account just for P2P.
Some providers allow customers to only exchange funds with people who use the same P2P service, but others will transmit funds to anyone with a deposit account. In the case of the latter, you may need to provide the recipient’s account number and bank routing number in order to initiate a transaction — and that is information that people who are not relatives or close friends may be reluctant to disclose. However, many P2P providers are starting to use other alternatives, such as an e-mail address or cell phone number. Also, in most cases, a fee per transaction will be charged to the sender or the recipient.
Compare several P2P service providers before you sign up. “The bank where you have your checking account is one place to start, but there are numerous other companies that provide these services and will work with your bank to set it up,” noted Jeff Kopchik, an FDIC Senior Policy Analyst who specializes in technology issues.
It can be helpful to research what other consumers have said about their experiences with a P2P provider. “The Internet provides easy access to consumer reviews and a wealth of other information that can help consumers identify unsatisfactory experiences,” said Rob Drozdowski, a Senior Technology Specialist with the FDIC. “So stay clear of services with questionable reviews and unusually high numbers of consumer complaints.”
Manage your P2P money wisely. It’s important to monitor your balance to be sure it has enough to cover the transactions you are likely to make. Luke W. Reynolds, Acting Associate Director of the FDIC’s Community Affairs Branch, noted that because consumers can use P2P services to pay for purchases on the Internet, “one concern is that the speed of a P2P transaction — perhaps just a couple of clicks to send a payment — can make it easy to make impulse purchases when surfing the Web.” But he also said, “whether you write a check or make an electronic payment, you should exercise fiscal discipline when making purchases and record each P2P transaction to avoid overdrawing your account.”
To learn more, contact your bank, your Internet or cell-phone service provider, or one of the numerous P2P companies. If you have questions about the deposit insurance coverage of a P2P account at an FDIC-insured institution, call 1-877-ASK-FDIC (1-877-275-3342) and ask to speak to a deposit insurance specialist.