Merchant-Initiated Transaction Changes Could Have Unintended Consequences, EU Warned

March 4, 2024
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Unconditional refund rights that were outlined in the EU’s Payment Services Regulation have emerged as a key concern for trade associations in Brussels.

Unconditional refund rights that were outlined in the EU’s Payment Services Regulation (PSR) have emerged as a key concern for trade associations in Brussels. 

In the PSR, the European Commission reinforces the refund rights for merchant-initiated transactions (MITs), which it does so by extending the unconditional refund right under Article 62(1) that exists for direct debits to all MIT transactions. 

However, trade associations, including Payments Europe and EuroCommerce, have warned that, in essence, this means that payers would be able to request an automatic refund from payment service providers (PSPs) within eight weeks of any MIT taking place. 

"The unconditional refund right is an excessive requirement and, among other things, could to lead to more friendly fraud,” a spokesperson for Payments Europe told Vixio. 

The spokesperson continued that trade associations understand that there is a need for more consumer protection, in particular in a world where instant payments and other alternative means take a bigger market share. 

“For example, we witness more APP fraud and see a problem with subscription traps.

“However, this change would potentially cause misuse and a lot of collateral damage to companies, including e-commerce merchants,” the spokesperson said. “They will be obliged to refund goods or services that have already been delivered and/or consumed." 

In a joint letter sent to the co-legislators, the payments groups have called on co-legislators to consider removing this obligation for unconditional refund rights for MITs, except for direct debits. 

"This is not an oversight from the Commission, they may have not realised that the world has moved on,” said Atze Faas, payments advisor at EuroCommerce. “What was good in 2015 is not in 2024, and this poses risks such as fraud.”

Different use cases

MITs have a wide variety of use cases, which differ from direct debits. 

Direct debits are typically used for the payment of essential services, such as utility payments or bill payments, where the electricity provider or the water supplier charge their clients monthly.

In comparison, use cases for MITs include recurring payments, installments and delayed charges.

“There is a significant difference between direct debits and MITs, mainly as the latter are much more prone to potential abuses to refund requests,” said Boniface de Champris, senior policy manager at the Computer and Communications Industry Association. 

Refund requests could be particularly problematic for industries such as the press or streaming services, which have adapted well to recurring transactions. 

“This change could mean that even if you have watched a movie on a streaming site, you could be entitled to get a full refund,” said Andrea De Matteis, founder of De Matteis Law. 

The payments lawyer said that this unconditional refund right risks being abused by consumers and even fraudsters. “Small merchants could pay the highest price as they do not have sufficient financial resources to effectively protect themselves against a spike in fraudulent refunds.”

According to De Matteis, the EU really risks impairing the business model of subscription services with this, if the MIT changes make it into the final text of the PSR. 

“It could be a tsunami for them. I don't see how they can get around it, and it could mean investing in huge infrastructure changes for these platforms,” he said. 

Further, he argued that it will also ultimately damage payers. “Merchants will probably pass on to them the extra costs they incur due to manage unconditional refunds.”

What stakeholders do have on their side is that the European Parliament’s compromise text, which was voted on by the Economic and Monetary Affairs committee last month, does limit the unconditional refund right to direct debits. 

"MEPs have understood this, so we are rather happy with this outcome,” said de Champris. 

This was echoed by Faas, stating that he was “very pleased”. 

“Why we still wanted to come out with this position is the need to get through to the Council, and also the Commission in time for the technical trilogues."

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