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Smartphones replacing cash

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You just wanted a cup of coffee to start the morning.

Now, as you fumble with your wallet, taking it out, retrieving the cash or credit card, you can feel the glares and impatience of the other java drinkers standing behind you, waiting, needing to get to work.

Enter an emerging technology which makes paying for that coffee as easy and convenient as waving your smartphone. Mobile payments are a new trend which enables consumers to make retail purchases without using their credit or debit cards or cash. It can turn that morning “argh” moment into “ahhh.”

IL_Scan_Phone04-15col.jpg Research shows that the use of mobile payments will quadruple globally to more than $1.3 trillion over the next five years. (IL Photo/ Perry Reichanadter)

However, how that mobile payment is processed has been compared to the Wild West. With the transaction potentially passing through many hands before it reaches the bank, using your smartphone could be the equivalent of giving your card numbers, account numbers, pin codes, passwords and personal data to strangers.

Suddenly that “ahhh” has changed to “uh-oh.”

Adding to the financially damaging situation, if a consumer discovers fraud or theft linked to the mobile payment, he or she may learn that the traditional consumer protections that apply to banks do not apply here.

hughes Hughes

“It’s the Wild West, it’s just nobody knows it,” said Sarah Jane Hughes, scholar and fellow in commercial law at Indiana University Maurer School of Law.

The innovation can be divided into two categories: mobile banking and mobile payments.

Mobile banking gives direct access to a bank account and comes with all the protection and security that covers a bank. The primary law governing this kind of transaction is the Electronic Fund Transfer Act and Regulation E of the Federal Reserve Board. Enacted by the U.S. Congress in 1978 in response to the introduction of ATMs, the EFTA defines the rights and liabilities of consumers along with the responsibilities of all participants in the electronic transfer activity.

Mobile payments that directly access the consumer’s credit card are governed by the federal Truth in Lending Act and Regulation Z of the Federal Reserve Board. Those that draw from a debit card are generally regulated by the federal EFTA and the state’s Uniform Commercial Code.

cohen Cohen

The least consumer protection comes with mobile payments that rely on intermediaries to process the transaction. For example, the account information used in making the mobile payment will travel from the consumer to the merchant, then to a payment provider, then possibly to the bank or to the mobile service provider like AT&T or Verizon where the charge will show up on the individual’s phone bill.

In a presentation during the International Payments Policy Conference at the Federal Reserve Bank of Kansas City, Mo., Hughes pointed out the mixed bag that

comes with mobile payments. While payment providers’ innovations are making payments faster, easier and maybe less costly, these new products are not covered, as a whole or in part, by the traditional regulatory regimes. Consequently, consumers and merchants could be uncertain of their rights and responsibilities.

hilsshea Shea

“The disparity between the regulation of mobile payments made via access devices directly between the sender’s demand account to a merchant and those that use processing intermediaries including telecom and other nondepositary providers to handle such payments is likely to remain until Congress acts,” Hughes told the conference.

Capitol Hill has convened a couple of hearings on mobile payments but attorneys do not see nor expect any new laws to be enacted in the near future regarding this technology.

Tom Walsh, partner at Ice Miller LLP, looked back to the late 1990s when consumers turned to buying goods and services over the Internet. At that time, regulations had to play catch-up because many businesses took advantage of loose privacy laws, collecting and selling personal data which put consumers at risk.

He does not see any gapping hole in the regulatory polices that are leaving consumers exposed as they make mobile payments. The framework is now in place so the regulations will just have to be adapted rather than created from a consumer protection standpoint.

bray Bray

Despite the questions about safeguards, customers seem to be embracing mobile payments. Juniper Research predicted that over the next five years, mobile payments will quadruple globally to more than $1.3 trillion. Also, a survey of stakeholders by the Pew Internet & American Life Project found that 65 percent of respondents believe by 2020 “most people” will be using smart devices to make purchases.

One thing that will attract Congressional attention and make consumers nervous is bad behavior. A major event like large-scale fraud or identity theft linked to mobile payments that injures a significant portion of the public would likely slow adaptation and trigger new laws and rules.

States usually defer to the federal government to regulate the banking industry, said Howard Cohen and Jane Shea, attorneys at Frost Brown Todd LLC. One way that states could implement new rules would be to amend the Uniform Commercial Code, but that process can take many years because, in order to keep the code consistent across state lines, most if not all states would have to adopt the same language.

However, a rule change could be done relatively quickly through the Federal Reserve Board. Even though the board is required to publish its proposals and solicit public comment, the process could be completed in months.

Currently, consumers do not always have a clear understanding of which government agency or business in the mobile payment chain to call when they discover irregular activity on their accounts. All the stakeholders, said Michelle Kaiser Bray, partner at Faegre Baker Daniels LLP in Indianapolis, are collaborating, along with looking for regulatory guidance, to address data protection, risk management, privacy and security concerns.

Bray cautioned against the government becoming heavy-handed.

“We don’t want to be so bogged down in regulatory framework that we freeze the innovation itself,” Bray said. “It will chill innovation and all the stakeholders will be less inclined to come up with product which, at the end of the day, hurts consumers.”

Just like the Wild West of old, consumers today will have to be very proactive in protecting themselves. Log-ins and passwords are no longer sufficient security, according to attorneys. Consumers should install on their mobile devices the ability to lock it down and wipe it clean if it is lost or stolen. And, just like when a wallet is lost, consumers should know the phone numbers of the financial institutions and service providers to call immediately.

Also, consumers should read the contracts and privacy agreements that come from their banks, mobile providers and with the apps they purchase. Instead of rapidly scrolling through the contracts and clicking “I Accept,” attorneys said consumers should read them so they know what to do and whom to contact if their accounts are compromised.

“They aren’t easy to read,” said Abby Kuzma, director of the Consumer Protection Division at the Office of the Indiana Attorney General, “but, nonetheless, that’s the reality.”•

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  1. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  2. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  3. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

  4. When I hear 'Juvenile Lawyer' I think of an attorney helping a high school aged kid through the court system for a poor decision; like smashing mailboxes. Thank you for opening up my eyes to the bigger picture of the need for juvenile attorneys. It made me sad, but also fascinated, when it was explained, in the sixth paragraph, that parents making poor decisions (such as drug abuse) can cause situations where children need legal representation and aid from a lawyer.

  5. Some in the Hoosier legal elite consider this prayer recommended by the AG seditious, not to mention the Saint who pledged loyalty to God over King and went to the axe for so doing: "Thomas More, counselor of law and statesman of integrity, merry martyr and most human of saints: Pray that, for the glory of God and in the pursuit of His justice, I may be trustworthy with confidences, keen in study, accurate in analysis, correct in conclusion, able in argument, loyal to clients, honest with all, courteous to adversaries, ever attentive to conscience. Sit with me at my desk and listen with me to my clients' tales. Read with me in my library and stand always beside me so that today I shall not, to win a point, lose my soul. Pray that my family may find in me what yours found in you: friendship and courage, cheerfulness and charity, diligence in duties, counsel in adversity, patience in pain—their good servant, and God's first. Amen."

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