Last week the UK Consumer Association, Which, lodged a super complaint with the UK Financial Conduct Authority and the Payments Services Regulator over the lack of
consumer redress for credit transfers. Many would say ‘and about time too!’
Which’s concern reflects growing consumer complaints over banks’ refusal to refund transfers as a result of imposter account change intercepts when making house purchases. Similarly, many consumers are blocked after using credit transfers to pay fraudulent
eCommerce merchants even though their bank holds the fraudster’s account.
However, Which members are probably unaware that they are also exposed to risk and lack of redress when using many of the new and seemingly low cost alternative forms of payment that have rapidly gained traction across the EU, often developed by the non-bank
and Fintech sector.
The credit transfer was never designed with consumer redress in mind. Its 60-year-old roots are in cash and cheque displacement supported by the interbank Automated Clearing House (ACH) payments mechanisms. Finality of settlement and no repudiation were
core features of the early credit transfer used for business to business payments and electronic payrolls. Today, across the EU, once a credit transfer is authorised, the payment is more or less absolute. There is little the consumer can do to obtain returns
of funds fraudulently obtained or even erroneously transferred to the wrong individual.
Contrast the credit transfer process with card based payments and it is obvious that there is an enormous difference. Card payments have Chip and PIN, secure online authorisation and are risk checked and monitored for merchant and cardholder fraud. Cards
allow consumers to chargeback disputed transactions and have funds returned in the event of merchant fraud and bankruptcy. In some countries (UK particularly) issuers also guarantee full refunds for faulty goods and services. Credit transfers offer none
of these features. Too often banks reply ‘caveat emptor’ to the poor consumer who’s transferred funds to a vanishing corporate fraudster.
Unfortunately, it’s not just simple credit transfers that offer no redress. For many years the card business has looked on with concern at the proliferation of new payment products based on the credit transfer. Most countries now have mobile P2P payments
based on the credit transfer. Many alternative payments use ACH infrastructure for eCommerce and for direct to merchant account top ups. Across Europe there are 30+ such payments methods, all operating with the minimum of consumer redress. Regulators in
national markets, and at an EU level, have failed to recognise these limitations. Many hoped the PSD2 would close the consumer rights gap between cards and ACH payments but
sadly the consumer has been let down.
Some suggest that it is the fault of bank and non-bank product designers who lack the long experience of card retail payments. Often, within banks, electronic payments and cards operated in silos with little communication and cross fertilisation of ideas.
As credit transfer based payments have developed, the electronic payments teams have given building of consumer redress features low priority to reduce costs and enable speed to market. Similarly, Fintech entrepreneurs assume that because they are using a
traditional bank payment method it must be fit for purpose. As a consequence, consumers across the EU, and in the UK particularly, are exposed to unknown risks, cheats and fraudsters. Only banks have the capacity and the tools to check that new merchants
and corporate accounts are not fraudulent and to block their activities.
Many banks are reticent and quite a few complacent. Their customers and the Fintech sector want low cost and simple transfers but the process of adding card-like controls and guarantees is complex and requires substantial investment and resources to deliver.
However, there is no doubt that first mover banks who offer modern redress features will undoubtedly win the competition for new customers.
So let’s hope that the UK FSA investigation recommends radical change and that consumers will soon have card benefits added to the tarnished credit transfer. In the meantime, an update to the UK’s Faster Payment voluntary code
of conduct for redress would provide immediate help to frustrated claimants.