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The Risks in Your Digital Wallet

In case of fraud, your legal protections may be limited.

A variety of companies, including American Express, Google and Visa, are trying to entice smart-phone devotees to use their phone as a digital wallet. Once you enroll in a program, you may pay for purchases with a credit card, debit card, gift card, bank account or even your mobile-phone account by waving your phone at the register or tapping a reader. American Express’s Serve is available now; Visa’s digital wallet and Google Wallet will be offered soon.

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It sounds simple, but what happens if you lose your phone and someone goes on a spending spree? Advanced encryption technology and the password required before you wave are safeguards. But if fraud occurs, the legal protections available vary dramatically depending on how you fund your digital wallet.

If you use your credit card, you have all the protections you’d have if you’d swiped that card -- you’re liable for a maximum of $50 (Visa and MasterCard offer zero liability). With payments linked to debit cards and bank accounts, you have a $50 liability if you report a problem within two days, and the same zero-liability promise from MasterCard and Visa. Pay with a prepaid card or gift card, or charge the purchase to a mobile-phone bill, and you’re on the hook for purchases made up until you report a problem.

For more protection, many banks will alert you to transactions that take place without a card swipe. You can also set dollar limits on purchases, and install software that lets you erase your phone’s memory remotely -- just in case you lose your digital wallet.

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