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Devil's Advocate

Roger Elwell - Yes Please

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A Debit Card Development that Could Cost Us A Packet

22 January 2010  |  4627 views  |  1

I saw an interesting article in the Daily Telegraph the other day, which suggested that the Authorities are considering adding connected lender liability to debit card purchases.  If this gains traction, I think it is a bad development for banks, that they should resist with all the force available to them.


The argument seems to go that too many people are losing out when they buy something that turns out to be faulty, or doesn't turn up at all.  Why the hell should that be a problem for the payment provider?

If I remember correctly, credit cards inherited connected lender liability (which is the concept that gives people the right to claim money back from them)  when the Consumer Credit Act 1971 came into force later in that decade.  Memory tells me that the CCA included a clause saddling the lender with liability for the provision of whatever the customer was buying, in the first instance because the loan a customer took out was for a specific purchase.  Credit cards were caught by the act (unfairly, I have always thought) because it was deemed a credit instrument governed by the CCA.  This despite the fact that there was no specific link between the finance (the card and its credit limit) and a specific purchase. Interestingly, the CCA did not apply to current account overdrafts, presumably because there wasn't that specific link between loan and purchase (and also possibly because the overdraft fluctuates and even clears from time to time - much like a credit card).

I remember, as a credit card product manager in the mid 1990's, the unsuccessful attempt by the banks to avoid the extension of connected lender liability to overseas transactions, which was a further injustice piled on the banks.

Now it seems the banking industry may well be clobbered with connected the extension of lender liability to an instrument which is not a credit product at all, and all in the name of 'consumer fairness'.  I think that this is a sinister development that, by extension, could lead to the banks being required to provide a guarantee of some sort for any purchase made by any payment mechanism.  After all, why should there be a guarantee attached to a debit card, but not to a cheque, an internet payment, direct debit or even, God forbid, to cash?  After all, these are also payment mechanisms that are provided by the banks.

Adding this liability to debit cards can only increase the banks' costs, which will probably hammer another nail in the coffin of free banking.  Do we really want that?

If the Government wants to remove the confusion surrounding which cards carry connected lender liability and which don't, they should remove credit cards from the rules, which were never intended to cover such an instrument in the first place.

TagsCardsRetail banking

Comments: (1)

Nick Collin
Nick Collin - Collin Consulting Ltd - London | 25 January, 2010, 11:49

Nice blog!  I've often wondered how the banks got saddled with lender liability for credit cards, and I agree with you, it would be ridiculous if that was extended to debit cards as well.

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member since 2008
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Consulting to the financial services industry with a specific expertise in the cards business - issuing and acquiring.

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