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The UK’s Payments Systems Regulator (PSR) has just published responses to a consultation it ran between January and April this year on consumer protections in interbank payments. Although the consultation covered many topics, a primary concern was the use of Faster Payments, the UK’s real-time payments system, at retailers, and whether it offers sufficient consumer protections compared with other payment mechanisms.
In particular, the PSR highlighted chargebacks as a significant area of distinction between card schemes and Faster Payments at the point of sale. Card payments are protected by scheme rules for chargebacks that lets cardholders claim a refund for goods that have not arrived, are damaged or are different to how they were described, or if the merchant stops trading. This means if you were to purchase an airline ticket and the airline went bust, you could claim back your money.
When Faster Payments was launched in 2008, smartphones were still in their infancy. It was not specifically designed as a means to pay instore, and therefore the protections and rules the scheme offers were based around traditional interbank money transfers.
According to the PSR: “Until now, people have not used it extensively to buy goods and services, even though it is possible. New developments — including propositions developed through open banking — could change all that.”
A recent survey from the British Retail Consortium (BRC) confirms this. Today, the vast majority of payments made at retailers are card (which account for four in five payments); just 4 percent of transactions are made with alternative non-cash payments.
Interbank rails, however, are widely used for buying goods and services in many other countries around the world. In India, the use of real-time service Universal Payments Interface has leapfrogged card payments. In Europe too, iDEAL in the Netherlands is a widely used alternative payments for e-commerce, while a pay by bank button is the most commonly used online checkout method in Finland, to name just a few examples.
Low development of alternative payments at retail in the UK was a common theme from many consultation respondents. Many questioned the need for PSR intervention at this stage. HSBC, for example, noted “such intervention would take place in a nascent market when, in theory, there could be competitively motivated offerings or industry intervention in the PISP model to address this without the need for regulatory action”.
The bank pointed to examples of PayPal* and Pay by Bank app from Mastercard, which provide a parallel offering similar to chargeback and use Faster Payments.
The difference is that there is an intermediary between the Faster Payments scheme and the merchant. The Pay by Bank app, for example, is a scheme designed for retail payments which utilises the Faster Payments rails but works similar to the four-party model that the card schemes offer.
The BRC, however, is concerned that the market avoids any new expensive scheme. While acknowledging that consumer protections need to be improved to interbank payments to ensure confidence among consumers, it notes: “If the same consumer protections, and associated costs, are to be replicated for interbank payments as exist for payment cards then any competitive advantage that interbank payments would have over card payments will be lost.”
Mastercard, which has multiple stakes in this consultation as both a card network and owner of Vocalink, which runs the infrastructure on behalf of Faster Payments, appears partially in agreement with the BRC. Focusing on consumer choice, it argues that for the PSR to maximise and equalise consumer protections for different payment methods, it will remove competitive differentiation between them. It claims this will distort the market by adding costs and obligations on merchants.
“Perversely, this may reduce merchant’s incentives to accept these payment methods, thereby limiting choice to consumers, who will have gained no additional benefit as a result.”
However, for Barclays, which is both a leading issuer and merchant acquirer, potential unevenness across payment types is a concern and that the “sector’s high level of consumer protections remain consistent across all participants”.
According to the bank: “Transparency is a critical foundation for any market, and we believe should be prioritised in any regulatory interventions from the PSR and its counterparts. Ensuring that consumers have a full understanding of the benefits and risks associated with different payment methods means that they can take an informed decision.”
The primary use case for interbank payments according to many respondents will be driven by the adoption of payment initiation services providers (PISPs). These are third-party payments services that will utilise the banks' access to the Faster Payments network on behalf of their customer.
According to Monzo: “PISPs offer users an easier way to initiate bank transfers, and a competitive solution for merchants compared to card payments.” However, these services are still in infancy: “These services need time to scale, and respond to consumer or merchant demand from the market. Merchants are incentivised to utilise new payment methods for a number of reasons, including cost. As such, they are well incentivised to build consumer trust in these solutions, as are the regulated providers offering them.”
Several PISPs disagreed with the premise of the PSR's assertion on which its consultation was based. Modulr argues there is insufficient evidence to the claim made by the PSR that “there is insufficient consumer protection for interbank retail payments”, while TrueLayer claims there are already strong protections required by the PSR for users of interbank payments, “which are equivalent, if not stronger than those required for users of cards”.
Similarly, Trustly believes that the “PSR is seeking to solve problems that do not currently exist”, while echoing the need for further evidence that there are issues due to insufficient consumer protection currently provided by PISPs.
Getting the balance right in payments is a challenge, as there can be a trade-off between security, cost and ease of use for both merchants and consumers.
Extend the rope too far and it will compromise the viability of the payment. For example, it is possible to add so many layers of security and safeguards to a payment that a consumer would be protected from virtually any eventuality. However, in doing so, it could mean prohibitively high costs and a level of complexity that would frustrate users. There is a trade-off to maintain balance and this is reflected in some of the industry responses.
The PSR plans to set out its proposed next steps in a statement in the fourth quarter of 2021.
*Contrary to HSBC’s claim, PayPal primarily uses BACS Direct Debit to fund purchases, not Faster Payments. The latter is used to transfer money from the app back to the person's bank account.
