FDIC report: Mobile payments technology still poses risks to consumers, financial institutions

220px-IPhone_keyboard_unblurredA recent report by the FDIC revealed that mobile payments, a fast-growing and widely accepted form of payment, have a number of associated risks.

Approximately one-third of all mobile phone users in 2012 used their devices to make purchases, which totaled more than $20 billion this year, though that number is expected to increase as smartphone ownership becomes more commonplace and mobile payments systems become more widespread.

The report, which was included in the FDIC’s 2012 winter issue of Supervisory Insights published by the division of risk management supervision, said that no single mobile payments technology will prevail. Because mobile payments involve the dissemination of account information and other personal data, certain risks to both financial institutions and consumers are associated with the technology

“Financial institutions should be particularly conscious of the potential and perceived risk of fraud in mobile payments,” the FDIC said. “Customers are more likely to adopt mobile payments if they are confident that the provider, often their bank, has taken appropriate steps to make this service secure by protecting the consumer’s funds and confidential account information.”

The report said that financial institutions should have “a review and approval process sufficiently broad to ensure compliance with internal policies and applicable laws and regulations.

“Depending on the type of mobile payment, financial institutions may find that the effective management of risks involves partnering with application developers, mobile network operators, handset manufacturers, specialized security firms and other.”

The report added that no safe harbors exist for the mobile payment sector, so providers must “determine how to comply with existing legal requirements when the application to mobile payments may not be readily apparent.”

“As not all mobile payments give rise to the same rights, consumers could become confused about which consumer protections apply or whether they apply at all, resulting in reputation risk,” the report said. “Consumers also may not understand which regulators supervise the parties providing the mobile payments service. Some mobile products may provide contractual rights similar to those contained in certain consumer protection statutes; however, these contractual provisions do not have the force of law…”

The FDIC said that banks will play an important role in the emerging mobile payments industry.

“The fundamentals of payments risk management should remain constant and…banks offering mobile payments need to ensure compliance with existing laws and regulations,” the FDIC said. “This is important particularly when working with non-bank third-party providers that may not be knowledgeable about the regulatory environment in which financial institutions operate. As a result, banks’ oversight of third-party relationships will become increasingly important as mobile payments evolve.”

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