Pay by Bank consumer protection: Where we are and what needs to happen next

At the end of January, consumer finance journalist Martin Lewis – also known as Money Saving Expert – shared his thoughts on Pay by Bank in a post on X. And, well, he wasn’t exactly singing its praises.

Preceded by the word “Warning”, his post referenced the fact that Pay by Bank is being seen a lot more at checkout, but that it offers “little protection” to shoppers.

“Ultimately it’s just a bank transfer,” he wrote. “Which means you don’t get the same refund rights like chargeback or Section 75 if things go wrong that you do when you pay by card.”

The post generated a lot of feedback – not just from payments companies, but consumers. Many pointed to the fact that they had successfully used Pay by Bank to settle their tax bill, or to pay off their credit card.

After reading it, three immediate observations sprang to mind:

1. If Martin Lewis, a hugely respected consumer rights champion in the UK, is talking about Pay by Bank, then Pay by Bank has achieved some kind of critical mass among consumers because it actually works and people are using it
2. The responses show that people are happy to talk about Pay by Bank working in particular use cases, which is encouraging, but many were also concerned by Mr Lewis’s warnings. “I’ve been using it, it works, but should I actually be worried?”
3. His concerns are of course valid, and there’s probably no one else – at least not in the UK – better positioned to raise them. They do, however, deserve to be unpacked…

Does Pay by Bank offer protection to consumers?

It’s not quite true that Pay by Bank payments are “just a bank transfer”. With Volt, the transaction and payee details are always pre-populated and ready to approve. There’s never any manual data entry. At no point will consumers have to type in account numbers and sort codes. This automation speeds up the transaction process and removes the risk of typo-induced incorrect payments.

But how, if payments are essentially automated bank transfers, can shoppers be positive that a) the businesses they’re paying are who they say they are and b) that firms will honour their purchase by delivering the desired product or service?

KYB + product innovation = consumer piece of mind

As Volt is authorised and regulated by the Financial Conduct Authority, all newly onboarded merchants undergo Know Your Business (KYB) and compliance checks.

Further, we supply merchants with tools that enable them to a) reconcile payments to particular orders, allowing them to dispatch goods or provide a service with certainty and b) issue refunds, should a customer need to return an item or be reimbursed for a service they no longer require.

This plays into Mr Lewis’s additional point around Pay by Bank users not having the same refund rights as users of card payments. It’s worth noting that all consumers, no matter which payment method they use, are protected under:

• The Consumer Rights Act 2015, which entitles customers to refunds if their item doesn’t work, is inaccurately described, or doesn’t do what it’s intended for
• The Payment Services Regulations, which entitle customers to refunds in the event of an unauthorised transaction, or when there’s been an error in the processing of a payment  

Let’s examine, however, the two card-based protections that Mr Lewis called out – chargebacks and Section 75 – and look at any Pay by Bank equivalents.

Chargebacks: What are they and how do they work?

In simple terms, chargebacks are a mechanism by which debit and credit card providers can claim money back from the merchant’s bank. Cardholders can request a chargeback for the reasons listed above, in addition to:

• Being charged an incorrect amount
• Being charged more than once
• The goods or service differing from their description
• Received goods being defective
• Agreed upon services not taking place
• The customer being unable to obtain a refund because the merchant has gone out of business

Chargebacks are designed to be requested if a merchant hasn’t honoured the customer’s initial refund request (which, by extension, may go against the Consumer Rights Act and, occasionally, merchants’ own refund policies). They have, however, become something of a default refund mechanism rather than a last resort. We’ll explain why this is problematic below.

Does Pay by Bank have a chargeback equivalent?

No, but there’s a strong argument that, in many existing use cases, chargebacks’ negatives outweigh their positives. While they undeniably give consumers an added layer of protection (though they’re not, in fact, a legal right), the reality is that they’re often misused.

Indeed, up to 86% of chargebacks may be down to friendly fraud – in other words, when consumers dispute a legitimate transaction, whether accidentally or deliberately. These cost UK businesses £128m a year, with recent research suggesting that merchants are raising the prices of their goods and services as a result.

Section 75: What is it and how does it work?

Unlike chargebacks, Section 75 (of the Consumer Credit Act 1974) is a legal right. It protects consumers when they use their credit card to make a purchase between £100 and £30,000, with card providers – as well as retailers – being liable for the cost of compensation should something go wrong.

It’s why so many UK consumers use their credit cards for high-value items such as holidays and high-end tech. Should an airline go out of business while a customer is away, and the customer has to buy new flights to get home, then their credit card provider may need to cover the additional costs.

Does Pay by Bank have a Section 75 equivalent?

No, which partially explains why the uptake of Pay by Bank has been slower in higher-ATV (average transaction value) industries like travel. Consumers, however, still have statutory rights to fall back on and, in the case of travel specifically, it’s why travel insurance is always a must (buying an insurance policy, incidentally, is a strong Pay by Bank use case).

A further point here is that Pay by Bank is generally convenient for higher-value, low-risk purchases or payments. In January 2024, for example, HMRC processed one million tax payments using Pay by Bank, to a combined value of £3.5bn.

And, despite Mr Lewis encouraging consumers to “beware with big important transactions”, it’s worth highlighting why so many people are so comfortable using Pay by Bank as a way to move so much money: security. All payments go through Strong Customer Authentication, and there’s no sharing of card details (which, of course, are always at some risk of being compromised).

Pay by Bank consumer perceptions: What should happen next?

We of course welcome Martin Lewis’s thoughts, but they should perhaps be the start of a wider debate on a) the perceived safety of Pay by Bank and b) what can be done in the consumer’s interests to aid Pay by Bank adoption. A few things to consider:

1. More needs to be done to educate consumers about Pay by Bank as a checkout option. If there was a clear takeaway from the responses to Martin Lewis’s tweet, it’s that lots of consumers use the technology without really thinking about it – namely when paying a tax or credit card bill, which is outside of the e-commerce checkout environment. Rectifying this needs to be a collaborative effort between Pay by Bank providers and consumer champions.
2. The industry needs to come together to address the consumer protection issue. As I hope this piece has highlighted, there are adequate counterpoints to Mr Lewis’s concerns; they’re just not particularly easy or snappy to explain. Reassurance comes from the government’s National Payments Vision, which highlights the importance of a proportionate, and not one-size-fits-all, consumer protection framework. “Not all types of payment require the same degree of protection,” it says. “For example, an ability to swiftly obtain a refund, and clarity on how to go about this, is more important when buying an airplane ticket than buying a newspaper.”
3. Pay by Bank needs a clear consumer value proposition that encompasses customer protection, but which also goes beyond it. Consumers need reasons to switch from their card or wallet, and that probably involves going beyond being “quicker and easier” (to use Martin Lewis’s very accurate words).