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Utilizing Mobile Electronic Payment Services: A Double-Edged Sword

With high merchant fees associated with accepting credit card payments, many entrepreneurs and small businesses are looking for lower-cost, mobile alternatives to avoid the expense and red tape. Despite offering a convenient and inexpensive way to make payments and transfer funds, mobile payments present new challenges, particularly due to concerns regarding fraud. This newsletter outlines the pros and cons of mobile electronic payment services for entrepreneurs.

With the explosive growth of smart phones, Canadian entrepreneurs have been leveraging emerging technologies in order to provide better, more flexible payment options for their clients, as well as to lower their costs due to the high card acceptance fees charged by credit card service providers in Canada.

Canadian businesses pay some of the highest credit card merchant fees in the world, to the extent that in 2013, these prohibitive fees drew the attention of the Canada Competition Tribunal. In Canada (Commissioner of Competition) v Visa Canada Corp, the Tribunal identified impediments to merchant competition due to the limited supply of credit card services in Canada, and pledged to work closely with the federal government to reduce fees. Less than two months following the Tribunal’s decision, the federal Competition Bureau released a statement noting that as credit card merchant fees in Canada are so significant, changes to the policy of major credit card companies are required in order to retain a competitive and innovative marketplace.

In the interim, entrepreneurs and small business owners are searching for low-cost alternatives to offer consumers convenient mobile payment options. To this end, many avenues are available, including debit and credit card readers that attach to mobile devices, SMS (short messaging service) payments, payments via mobile applications, NFC (near field communication) payments and web-based WAP (wireless application protocol) payments. For traditional credit card payments, merchants can pay 4% of the purchase price in fees, depending on the type of credit card used. Most mobile payment options allow the merchant to purchase subscription plans for as little as $10.00 per month, which then lower the merchant fees well below 2%. Cumulatively, all of these technologies share a common thread, in that they require the use of a mobile device to complete payments at a much lower cost to the business owner. While the liberation provided by these technologies can greatly increase the efficiency and lower the operating costs of entrepreneurs and small business owners, uncertainty regarding customer privacy and financial security remain in this emerging field.


With five billion mobile phones worldwide and only two billion bank accounts, the ability to make payments on a mobile basis offers a competitive edge for businesses looking to reach new customers or operating in emerging markets. In addition, being able to attach a card reader to any mobile phone or tablet allows business owners to multiply their points of sale by cross-purposing devices already in their pocket rather than purchase new equipment or payment terminals.

The idea is that if the act of sending commercial email is regulated, instances of spam and abuse will be reduced, and it will be harder for annoying and threatening practises to flourish. Canadians will become more comfortable with and confident in the use of electronic commerce technology in general, and the Canadian economy will in turn benefit from the increased efficiency and resulting increased volume of transactions, i.e., the better use and adaptation of electronic commerce technology.


In a recent study, the risks associated with mobile payment systems was addressed, in particular how these systems can open business owners up to unanticipated security and fraud risks. The increased risk comes with the greater anonymity afforded to purchasers at the point of sale. This increased anonymity can facilitate identity fraud and expose merchants to a greater risk of being given illicit payments. Despite a shift in the perception of making payments through mobile applications among consumers, the reality for many merchants is that the investments needed to mitigate these new risks are prohibitively expensive.

With the advent of geotagging and fingerprinting capabilities, mobile technologies have made significant advancement in the past five years, allowing for a number of new security features. Despite these advancements, the effective utilization of these technologies to strengthen the identification of mobile purchasers and increase security has not yet been realized.

An additional challenge for mobile payments in Canada is that there is currently no legal framework governing the use of these systems. Such legislation is necessary in order to provide, consumers and businesses with the legislative framework to delineate risk and mandate accountability when it comes to electronic payments. The United States adopted the Electronic Fund Transfer Act in 1978 and the European Union has recently untaken to regulate all electronic payment providers. The absence of a comprehensive regime in Canada creates a barrier to business and consumer confidence in these technologies. Having a clear legislative framework would promote the more widespread use of these technologies, benefitting both consumers and businesses.

The lack of a comprehensive regime governing electronic payments in Canada came to light in recent weeks when Lindsay Hiltz, a long-time patron of Starbucks Coffee, had her mobile account compromised. The coffee chain allows customers to pay for their purchases using their mobile phone through an application. Without Hiltz’s knowledge, $225.00 was charged to her account by a fraudster for the purchase of gift cards.

Through an act of goodwill, her bank has offered to compensate her for her loss, but Starbucks has remained silent on this issue. Presumably, a legislative regime in Canada governing mobile electronic payments would have assisted Ms. Hiltz, by clearly establishing the rights and obligations of businesses and consumers. In this case, the risk was borne by the user of the application, the customer rather than the business. As a result, entrepreneurs should be wary of current legal uncertainty regarding the allocation of risk when mobile electronic payment systems are compromised or fraudulently used.


Mobile electronic payment services offer entrepreneurs an inexpensive way to make their products more accessible to consumers, and to reach new markets. The reduced merchant fees and ability to repurpose common mobile technologies as payment terminals creates a convenient and versatile system of collecting payments.

However, entrepreneurs should be wary of the lack of legal regime in Canada governing the use of these technologies, as the privacy concerns and allocation of risk is still largely unknown.

Garnet Brooks is a Business Lawyer, practicing corporate law and commercial law in Halifax.  Click to Contact Garnet.

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