Apple, PayPal Enjoy Uncharted Mobile Payment Legal Issues

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Attorney Mark D. Rasch is the former head of the U.S. Justice Department's computer crime unit and today serves as Director of Cybersecurity and Privacy Consulting at CSC in Virginia.

Last month, Apple contained yet another patent for its iWallet payment system. As Apple tries to position itself as the ultimate payment processor, the competition is heating up for which entity, and which technology, will be responsible for ensuring that retailers get paid. Although these choices may ultimately prove useful for both consumers and retailers, they present new privacy challenges to all participants. As a result, Apple, PayPal and a host of other payment processors may find the need to hire new teams of lawyers to help them comply with the inevitable subpoenas and discovery requests that will befall them.

Lots of money can be made in helping retailers process payments and making it more convenient and easier for consumers to buy things. Apple's iWallet technology, like many other existing or proposed technologies, is designed to enable consumers to make purchases both online and in brick-and-mortar stores quickly, easily and efficiently.

Under one possible configuration of the technology, a consumer selecting items at retail location would use an NFC-equipped cell phone linked to an iTunes account to purchase those items. The NFC device would communicate with the retailer, authenticate the user and validate purchase. The purchase would then be linked to the consumer's iTunes account, the same account that person uses to buy music, video and Web applications. Because the iTunes account is linked to a store credit card, the actual financial transaction would be between the consumer's linked credit card and the retailer.

So what's in it for Apple? Certainly, Apple would charge either the retailer, the consumer or both a fee for processing the payment. Or, more accurately, it would charge for facilitating this process. But wait, there's more.

An old saying (well, as old as anything can be on the Internet) says that if you are offered something for free and that thing is useful, then you are not the consumer, you are the product. What Apple gains in the transaction described is not only the transaction fee, a certain amount of brand loyalty and the ability to push even more consumers to its now NFC-enabled iPhones but perhaps the most comprehensive database of consumer activity, purchasing habits, location and other intimate personal information. Indeed, by cross-referencing and mining these data fields, Apple can know who you are, where you are, what you like, who you are with and pretty much what you were doing any time of day.

Apple will not only know what music you bought, but when you are listening to it and how often. Not just what videos you like, but how often you like them, where you are when you like them, who you are with when you like them and even when you decide to hit pause. It will know your size, height, weight, color preferences and style in shoes, hats, jeans, electronics and pretty much everything else. Not bad for a computer company. Thus, Apple will have a treasure trove of personal information.

This data aggregation function would be true of any company that collects information from multiple retailers. Thus, PayPal, Amazon, Google Wallet or any other company that acts as a third-party payment processor or payment facilitator will have a host of personal information at its disposal. Consumers' privacy is protected, therefore, not only by the retailers privacy policies but by the privacy policies of these independent third parties. Once the retailer decides to accept payments through any of these technologies, it effectively loses control of the data.The data collected by these third parties—be it Apple, Google Wallet, PayPal or some other entity—can be mined, cross-referenced, utilized or sold. It also is subject to subpoena, discovery and attack.

Take a simple example of a mass transit system like New York City's subways. For years, to ride the subways all you had to do was to buy tokens. You gave the Metropolitan Transit Authority cash, and it gave you a small round coin with a cut out "Y" in the middle that you could store and later use to ride the subway. It was, in essence, a stored value device. Later, the MTA moved to stored value cards, where you would purchase a card either with cash or by credit card, and use that card in the same way you would use a token.

As we move to a more universal and, therefore, a more attributable payment system—be it direct withdrawal from a credit card, withdrawal from an iTunes account, payment by text message or SMS, or any other form of payment—we are restoring a connection between the use of the service and the individual paying for the use of that service. As a result, the MTA would now have a record not only of the fact that you had purchased a token or a fare card but also a record of every time you got on the subway, where you got on the subway, with whom you got on the subway, when you got off the subway and, again, with whom you got off the subway. These records could be cross-referenced with surveillance videos both in the subway and on the streets to create a comprehensive database of ridership.

Because of this system, the MTA could be transformed from a subway system to a massive surveillance and data gathering system. If you want to know where John Smith was on the night of June 25, just log in to the MTA's database. If John Smith wants to establish an alibi for some crime, or simply demonstrate to his divorce attorney that he was not in a particular place at a particular time, it is simply a matter of subpoenaing the MTA for that information.

Similar attacks on databases would occur for anyone who collects intimate personal information about consumers. Retailers would be consigned to being co-conspirators in creating, storing and even utilizing this massive database.

Internet service providers, search engines, online merchants and even providers of gaming systems have found that, while they are providing the services, they are daily receiving subpoenas, search warrants and other discovery demands from law enforcement, intelligence agencies and private litigants for information about users of their systems. The more data we have, the more people want the data we have.

For retailers who have privacy policies promising their consumers that the data collected will not be shared, this puts them in a quandary. Technically, the retailer is neither collecting nor disseminating this information. Rather, it is the consumer who decides to use the iWallet technology, who is making a conscious choice to give up that information to Apple. It's much the same as consumers who use a credit card knowing that their information will be given not only to their bank but also to Visa, MasterCard, American Express and any third-party payment processor— such as First Data Corp.—who may collect that information.

On the other hand, information about the consumer's purchases at a retailer ultimately may become public. And the consumer is not likely to be happy about that.

It remains to be seen which, if any, of these technologies will end up ruling the world. What is certain, however, is that the line between who is a retailer, who is a technology provider and who is a bank is getting blurrier all the time. And blurry lines promote litigation.

If you disagree with me, I'll see you in court, buddy. If you agree with me, however, I would love to hear from you.