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Digital wallets subject to fees, security concerns

Mar 25, 2013 Dave King

Digital wallets subject to fees, security concerns

With the move to increased use of digital wallets across all channels emerging as a trend in the payments industry, it may be time for vendors to start paying attention. Services like those offered by PayPal are becoming popular tools for consumers both on and offline as more brick-and-mortar shops enable mobile payments. Recently, MasterCard announced that it plans to institute fees for digital wallet use, and it seems that other major financial institutions may follow suit. This could have a significant affect on how some merchants gauge whether to allow these transactions.

Charging for use

According to Reuters, now that MasterCard has planned fees on transactions powered by PayPal, Google Wallet and Square to begin this summer, Visa's CEO, Charlie Scharf, has come out as a supporter of the move, and has suggested that Visa may roll out a similar initiative in the future.

Scharf told the news source that he felt MasterCard's actions seemed appropriate, especially considering the nature of competition in the payments sphere. Many companies that start by offering certain specialized services eventually expand or change directions with time, and in these cases fellow businesses must adjust their strategies to stay competitive. If MasterCard and Visa both charge fees for the use of mobile wallets, merchants may have to bear the brunt of the costs. This may translate into more businesses, especially for small ones with tighter budgets that stick to traditional electronic payments methods.

Reuters noted that the solutions currently affected by MasterCard's new policies are "staged" digital wallets, which tend to share less information with financial networks. This sometimes results in customer service problems as well as issues with effectively managing card-based loyalty reward programs.

Theft threats may warrant risk management solutions?
While Scharf points to the idea of competition as the main reason for levying fees against digital wallet use, there may be more factors at play. When consumers use third party mobile payments services that connect to a credit card or bank account, financial institutions may fear what will happen if they lose control of security. If a consumer uses digital wallet technologies and then experiences identity theft, banks and card companies will likely have to deal with some of the fallout.

Mobile wallets open customers up to a slew of negative effects if they aren't cautious in choosing secure services and taking extra steps to safeguard their data. A data breach could result not only in damage to their consumer credit reports, but other problems depending on what information is leaked. And sometimes, it may not even take a breach for information to escape an individual's control.

"All of a sudden the mobile phone is about to be transformed beyond a spy in your pocket to your bank, your mortgage lender and your landlord," Jeffrey Chester, the executive director of the nonprofit Center for Digital Democracy in Washington, told TribLive. "In a way, it's kind of a privacy tipping point, because one single device knows wherever you go your geographic history, your social media connections and your financial behaviors."

While mobile payments technologies have many benefits, it is crucial that providers make sure they're investing in the best systems and security features to keep consumers secure. When shoppers place themselves at potential risk of fraud, it can also affect lending and retail organizations by shrinking their pool of customers. For this reason, businesses must demand more secure ways for their clientele to use the latest technology. After all, bad consumer credit data hurts more than the individual.