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Payment firms fear the unintended consequences of the government-approved delays to payments, which are aimed at giving banks time to investigate potentially fraudulent transactions.
In October 2024, HM Treasury announced that banks in the UK would be granted new powers to delay and investigate payments that are suspected of being fraudulent, in a bid to help protect consumers against scammers.
New laws proposed by the government extend the time that payments can be delayed by 72 hours where there are reasonable grounds to suspect a payment is fraudulent and more time is needed for the bank to investigate.
The announcement garnered a positive response from some parts of the ecosystem.
For example, UK Finance economic crime chief Ben Donaldson said “we are delighted to see proposed new laws supporting this”, and Which? consumer advocacy head Rocio Concha stressed that it was important and that it “is a positive step in the fight against fraud”.
However, the news was less warmly received in the payments world, where there is a feeling that the new rule will not be a silver bullet, and could in fact be a negative for payments.
A challenge for payment providers
“The UK government’s plans to delay payments by up to 72 hours to prevent fraud is well-intentioned, but just like the newly mandated APP reimbursement regulations, it could lead to a host of unintended and unfortunate consequences, and it will be consumers who lose out the most,” said Alex Reddish, head of market expansion at Tribe Payments.
Reddish explained that, on the surface, it seems sensible to give banks and payment service providers (PSPs) more time to investigate suspected fraud.
“But it’s clear that the tight investigation timeframe of five days under the APP reimbursement rules has now created a situation where consumers will face even more friction in their payments, at a time when the industry has made huge strides in removing friction without compromising payment security.”
He pointed out that “jamming payment flows” while also encouraging instant payments is counterintuitive to the government’s aim of making payments more efficient, and questioned how this will affect PSPs’ obligations under other regulations, such as the Financial Conduct Authority’s (FCA) Consumer Duty.
“Not only will these delays cause huge frustration and anxiety for customers, but it could also cause them to be subject to late payment fees and penalties, and potentially damage their credit records.”
He went on to warn that, for businesses, it could mean liquidity and cashflow problems while transactions are investigated.
Some in the payments industry have said, meanwhile, that slowing down the payments process will add to more friction and be anti-growth.
Indeed, there is even a feeling that payment and e-money institutions could bear the brunt of the friction — for example, if banks opt to block payments coming from payments and e-money institution-derived accounts.
How fintechs should respond
John Burns, advisor at Cosegic, was more measured about whether the new rules are a meaningful threat to the ecosystem.
“While fintechs may suspect that some banks may use this as an excuse to delay payments going to accounts with firms in the fintech sector, the mere fact that a payment is going to an account at a fintech firm would be insufficient in and of itself as the required ‘reasonable grounds for suspicion’," he said.
Burns pointed out that any bank engaging in such practices regularly would be open to scrutiny by the regulator.
“This approach could upset customers. It's reasonable to ask questions, but there must be justifiable grounds to suspect fraud or dishonesty. An authorised fintech firm would not typically present such grounds for suspicion."
The former regulator suggested that if fintech firms feel this is a real issue, it may be beneficial to lobby for the FCA to explicitly state that delays based on fintech grounds would not be acceptable.
“If firms have evidence that this is happening, they should inform the FCA if they feel undermined.
“For instance, I have seen in the past that they do not open safeguarding accounts, which is directly in contradiction to the Payment Services Regulation,” he said.
“In that instance, I wrote to the bank to complain, copying in the bank’s supervisor at the FCA.”’
“I’d suggest any fintech firm feeling a bank is acting unfairly and in breach of the FCA’s guidance should do the same."
Why these rules could impact payment firms negatively
According to Tribe’s Reddish, the Treasury’s approach could stifle the broader fintech ecosystem.
“Fintechs rely heavily on banks to drive innovation in payments, but with new players already under more pressure than ever, slowing down payment flows adds friction that could hinder growth across the sector,” he said.
“If the government is serious about positioning the UK as the world’s leading fintech hub, then half-baked plans like these which may dampen innovation and competition are not the way to go about it.”
The banking and payments industries have hardly been the best of friends in Europe since the advent of the EU’s revised Payments Services Directive (PSD2) and the UK’s Competition and Markets Authority Retail Banking Order.
Ultimately, these measures have resulted in banks having to open up their data without a price tag to payments and e-money players, which have been disrupters seemingly backed by the regulatory authorities.
However, weak anti-money laundering (AML) controls and poor fraud detection systems at some of these fintech players have been exposed by the regulators and the media, at times triggering a more negative environment in the payments and e-money industry.
This includes instances of de-risking by banks that do not want to hold their safeguarding funds in case of reputation damage.
If banks perceive payments related to e-money firms as high risk, they may preemptively delay or block transactions with this new rule, creating significant operational challenges for these firms.
Limited collaboration further exacerbates the issue, as banks may be reluctant to cooperate on fraud investigations, slowing the resolution of flagged payments. Inefficient communication channels can amplify these delays, causing frustration for both firms and their customers.
Frequent delays or disruptions linked to e-money firms could also tarnish the reputation of those organisations, even if the issues arise from bank actions rather than the firms themselves.
Consumers might associate these problems with the e-money firms, leading to a loss of trust and a competitive disadvantage.
To mitigate these risks, e-money and payment firms would do well to build bridges and prioritise building strong relationships with banks, ensuring clear processes for fraud investigations to avoid unnecessary disruptions.
In addition, investing in advanced fraud detection systems could help reduce the number of legitimate transactions being flagged, delivering better customer experiences and less reputational risk.
But what about AI?
Another reason industry insiders have been scratching their heads about the government’s decision to press ahead with these plans is that the rule is coming at the same time as the rapid adoption of AI tools, which have been markedly beneficial in identifying fraud and financial crime trends for firms.
“The legislation risks tipping that fine balance between security and convenience too much in favour of security,” said Ryta Zasiekina, founder of fintech consultancy Concryt.
Although she conceded that stopping the clock “could certainly be seen as a positive move for consumers”, Zasiekina warned that there “is a flip side”.
“It could seriously impact the user experience, especially when it comes to things like mortgage payments,” she said.
“Consumers have become accustomed to frictionless payment journeys, and this very much feels like a step backwards, especially given developments in advanced AI fraud detection technologies.”
Zasiekina added fraud detection systems that can pre-emptively identify threats “are the best way to address security concerns, without unnecessarily disrupting the user experience”.
