Do digital wallets stiff you on reward points?

Mobile payments are booming. But are you missing out on credit card cash-back bonuses and rewards if you use your digital wallet?

You could be. On its rewards information website, American Express warns that cardholders may not receive rewards points in eligible categories if they use digital wallets like PayPal and Google Wallet. Other card issuers, such as Chase and Discover, sent out notifications to cardholders this spring that purchases made through mobile apps may not qualify for reward points if the technology is not set up to process the purchase in that reward category.

In other words, if the mobile app purchases are incorrectly coded, issuers may not be able to identify them as qualifying for a rewards.

That's exactly what's happened to some digital-wallet users, mobile payments experts say. "This has primarily been an issue with Google Wallet and other digital wallets such as PayPal," said Kari Luckett, content director for credit-card ratings website CompareCards, who looked into the issue after receiving some complaints for digital wallet users. "The problem is that they have a card on their back-end that most consumers aren't aware of."

Although the customers have added their rewards cards to the payment app, she said, "the card being used to pay for the transaction is actually the card Google has behind-the-scenes. Then that card is later reimbursed with the real credit card."

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When someone uses the PayPal digital wallet at a merchant with a credit card in a category that offers rewards, such as a gas station, the transaction shows up as a PayPal transaction with the card issuer, not the merchant code of the gas station. "It's always been a challenge for PayPal," said Cherian Abraham, mobile commerce and payments practice lead at Experian's Global Consulting Practice. "When the merchant is masked, users are not able to receive category-driven rewards."

Apple Pay, the digital wallet on the iPhone 6, avoids this problem by working directly with the banks, Luckett said.

The Google Inc. Mobile Wallet application for cardless payment is displayed on a smartphone screen.
Chris Ratcliffe | Bloomberg | Getty Images
The Google Inc. Mobile Wallet application for cardless payment is displayed on a smartphone screen.

Not crediting transactions for reward points has been a problem for Google Wallet, acknowledged Anaik Weid, a Google spokeswoman, though how much so depends on the card issuer. But mobile payments technology moves rapidly. The company announced May 28 at its Google I/Q developers conference that it is changing Google Wallet to focus on peer-to-peer transactions.

Meanwhile, Google said it will launch Android Pay soon, an app that essentially replaces Google Wallet. That app will use technology similar to Apple Pay and will incorporate company loyalty reward programs. For example, according to Google, an Android Pay user will have MyCokeRewards automatically applied to her purchase of a Coke when she taps her Android smartphone on a vending machine that has a near field communication antenna to buy a beverage. (Samsung also plans to launch its own digital wallet, called Samsung Pay, later this summer.)

PayPal insists that users of its mobile wallet do get their reward points. "Users who add credit cards to their PayPal wallet will automatically receive their rewards points," a PayPal spokesperson said. The company said it has not recently received complaints from users about not receiving reward points.

But card issuers say they are open to correcting any errors from digital-wallet transactions if they do occur. "We do work with customers if they believe they should have earned a reward and did not," said Erin Smolenski, a Chase spokeswoman, adding that it is not a common complaint.

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Mobile payments are a small, but growing slice of the payments market. The credit-card industry will process an estimated $2.7 trillion in transactions this year in the U.S., significantly more than the projected $56.7 billion in mobile pay transactions. But Forrester Research estimates mobile payments in the U.S. will nearly triple to $142 billion by 2019.

By then, it's a good bet that many of the kinks will be worked out. But in the meantime, said Luckett, it's best to check with your card issuer if you are worried about not receiving your reward points from digital-wallet transactions.