Believe it or not, the holidays are here and, with the current pandemic, online purchases may break records this year.  Mobile payment apps (Venmo, Zelle and others) have increased in popularity because they allow a person to send money to another person (or merchant) directly, electronically and without exchanging cash or a check. 

The convenience is obvious. Two people can split a lunch bill or rent without having to write a check or get cash.  It’s quick, easy and efficient but, as with many other such means of payment, come with risk.

For example, you find an item listed for sale on a popular website (Letgo, Craiglist and others) and decide to make a purchase.  Believe it or not, the sale of puppies is a popular scam.  The seller shares their mobile payment app information and requests you pay them via the app so that they don’t have to pay the interchange fees commonly associated with credit/debit card transactions. 

What you don’t know is that the seller is a thief, the items don’t exist and they’ve just taken your money.  So, you call your bank to report the fraud to get your money back only to learn that your bank can’t refund you.  Why?

Mobile payment apps act sort of like a bank themselves.  The funds used for the payments are held in your name in an “account” with the app. They’re not at your bank. Therefore, all your transactions within the app happen from your account with the app, not with your bank.  So, your bank is not a party to the transaction and can’t reimburse your funds. 

When fraud happens, you contact the mobile app company to get help.  Their website will ask you to e mail them so a response can take days and result in the fact that the funds are gone and really can’t be returned.  Mobile app payments are almost instantaneous so the thief received your money and moved the funds. Your money is not there anymore. 

Even one of the more popular companies acknowledges this is a risk in their user agreement.  They advise you not to use the service with people you don’t know.  They go on to say that, if you do and experience fraud, “…YOU COULD LOSE BOTH THE UNDERLYING GOODS OR SERVICES AND THE MONEY SENT FOR THEM.”  It’s in all caps in their user agreement.  They mean it.  They’re warning you not to make purchases from those who are not “authorized merchants” or conduct transactions with people you don’t know. 

If you decide to use one of these services, make sure you understand their dispute policy and how you can get your money back in the case of fraud. 

Here’s something else to consider. If you send more than what is in your mobile app account, the transaction has to be paid so the company will likely use the funding source you established when you opened your account, likely your bank.  So, if you send $120 but only have $100 in your mobile payment app, the app will go to your bank account for the remaining $20. 

If the mobile app payment is fraudulent, your dispute will be with the mobile payment app, not your bank.  The transaction between the mobile payment app and your bank is legitimate.  You authorized the mobile app to seek payment from your bank account in such instances.  The fraudulent transaction happened between the mobile app and the recipient of your money.  The bank was not involved in that part of the transaction. So the dispute rules that apply to your bank account may not apply to these transactions.  Don’t be surprised if your bank can’t help you.

How do you protect yourself?

  • Don’t use the service with people you don’t know…especially for online purchases of goods or services.
  • Pay attention to who is a merchant authorized by the mobile payment app.  If they’re not, be especially wary.
  • Consider limiting their use to only those who are friends to share expenses and not for larger purchases.
  • Also pay attention to the dollar amount of the transactions.  Smaller amounts equal smaller risks.
  • Make sure you use all the security features within the app like a PIN in case your phone is lost or stolen.
  • Lastly, protect your mobile payment app identity (your handle).  Don’t share it around too much.

These apps can be very convenient and efficient…when used correctly.  But, as with all financial matters, stay on your guard and use these services with care and discernment.  Stay financially safe.

Frank Freels, Jr. is the senior vice president, security officer of Volunteer State Bank.

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