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Dangers of digital wallets

While Americans are still using plenty of cash, checks, credit and debit cards to pay their bills, new electronic methods such as paying by cellphone or digital wallets are emerging. Before jumping in, consumers should be aware of the disparity of protections they offer, according to Consumer Reports.

CR's latest investigation into these new payment options finds that banks and technology companies are jostling for a greater share of the $50 billion a year in fees generated by everyday transactions. Some services by PayPal, Obo Pay, Square, Zong and FaceCash already allow you to pay for purchases with your cellphone, and so-called digital wallet services are hitting the market.

Despite all the hype, consumers don't seem to be clamoring to pay with their phones yet. According to a recent representative survey by the Consumer Reports National Research Center, only 5 percent of respondents questioned said they used their cellphone to pay for day-to-day purchases in the previous month. Somewhat more used other fairly new forms of payment, including billing to their home or cellphone account (10 percent).

Things often go wrong during the processing of 300 million noncash payments each day. In CR's survey, one in four Americans said they had an unauthorized charge, billing error, noncredited payment or other problem in the last year when paying for purchases or paying bills.

Consumers' right to get their money back when something goes wrong -- errors, goods not delivered as promised and fraud -- varies by the payment option used. Again, the underlying method of payment tied to your mobile device will govern their rights in such instances.

Cellphone and digital wallet payment services linked to credit cards 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 a consumer's phone bill.

Prepaid cards offer no guaranteed protections against unauthorized transactions. The cards may have some protections in their contracts, but they're essentially voluntary and can be rescinded at any time.

Visa and MasterCard prepaid-card holders may get assurances from those brands' zero-liability policies, which protect against unauthorized use and require issuing banks to give provisional credit for losses from unauthorized use within five business days of notification.

But those policies have loopholes. Visa's doesn't cover ATM or PIN transactions not processed by the Visa network. MasterCard's policy offers no protection if a consumer reported two or more unauthorized events in the past 12 months, and it doesn't cover ATM or PIN transactions.

CR offers this advice for those considering 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 by cellphone, 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.

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.

By the editors of Consumer Reports at www.consumerreports.org.

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