At Last – Pressure for Chargebacks on Consumer Credit Transfers?

3rd October 2016

Within the context of the European Commission and EBA’s desire to ensure a level playing field between cards and credit transfers, we thought we may look at some of the other areas where card payments have inherent advantages over credit transfers. One of the most important is the ability for consumers to get refunds following merchant fraud…

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 fraud and account change intercepts. Similarly, many consumers are have lost money after using credit transfers to pay fraudulent eCommerce merchants even though their bank holds the fraudster’s account.

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 online banking initiated 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, most 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 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, some 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, 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.

The EBA also need to recognise the differences between cards and credit transfer payments and the need to enhance the latter before it becomes a equally value adding form of payment.

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