Pandora’s digital box: The promise and perils of digital wallets

Pandora’s digital box: The promise and perils of digital wallets

 By Adam J. Levitin (Georgetown University) 

Abstract:     Digital wallets, such as ApplePay and Android Pay, are “smart” payment devices that can integrate payments with two-way, real-time communications of any type of data. Integration of payments with real-time communications holds out tremendous promise for consumers and merchants alike: the combination, in a single, convenient platform, of search functions, advertising, payment, shipping, customer service, and loyalty programs. Such an integrated retail platform offers consumers a faster and easier way to transact, and offers brick-and-mortar retailers an ecommerce-type ability to identify, attract, and retain customers. At the same time, however, digital wallets present materially different risks for both consumers and merchants than traditional plastic card payments precisely because of their “smart” nature.

For consumers, digital wallets can trigger an unfavorable shift in the applicable legal regime governing the transactions, increase fraud risk, create confusion regarding error resolution, expose consumers to non-FDIC-insured accounts, and substantially erode transactional privacy. These risks are often not salient to consumers, who cannot distinguish them by digital wallet. Consumers’ inability to protect against these risks points to a need for regulatory intervention by the Consumer Financial Protection Bureau to ensure minimum standards for digital wallets.

For merchants, digital wallets can deprive them of valuable customer information used for anti-fraud, advertising, loyalty, and customer service purposes. Digital wallets can also facilitate poaching of customers by competitors, impair merchants’ customer relationship management, deprive merchants of influence over consumers’ payment choice and routing, increase fraud risk, subject merchants to patent infringement liability, and ultimately increase the costs of accepting payments. Merchants are constrained in their ability to refuse or condition payments from digital wallets based on the risks presented because of merchant rules promulgated by credit card networks. These rules raise antitrust concerns because they foreclose entry to those digital wallets that offer merchants the most attractive valuation proposition, namely those wallets that do not use the credit card networks for payments.

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