The opinions expressed here are those of the authors. They do not necessarily reflect the views or positions of UK Finance or its members.

But with changes in government and management at the PSR taking place recently, as well as intense lobbying from some parts, much is uncertain about how the regulations will look when they finally come into force. 

The new split reimbursement model as it is currently outlined will divide liability for fraud cases equally between paying and receiving firms, meaning that as a precaution, banks and payment service providers will need to put fraud controls around inbound as well as outbound payments with the ultimate goal of safeguarding consumers from scams.

With these bold regulatory changes set to have such a fundamental impact on financial services, we take a look at some of the moving parts and possible unintended consequences of these controversial rules if they were to come into force in their current state.

Will the current reimbursement limit cause a decline in innovation and competitive standards?

PSR reimbursements are currently to be capped at £415k: a figure chosen to keep in line with the £430k award limit for complaints with the Financial Ombudsman Service and covers 99.98% of fraud cases.

However, there are arguments that this cap is too high and prohibitive for many organisations, particularly the smaller challenger banks, FinTechs and neo-banks most commonly associated with driving innovation. 

The fear is that PSR changes will stifle innovation and slam the brakes on an industry that adds huge value to the UK economy unless the upper threshold of reimbursement payouts is reduced.

Will we start seeing divisions and a souring of relationships between different banks and PSPs?

Historically, banks and PSPs have focused fraud prevention on outgoing payments. Regardless of the reimbursement cap, the PSR changes require measures for inbound payments, which will push firms to re-assess their risk tolerance and approach to higher-risk partners. 

This could create a two-tier system between organisations who view one another as safe vs outsiders seen as higher risk, who face stricter scrutiny and disrupted service delivery for customers. Some building societies are already withdrawing from Faster Payments, which is possibly an early indicator of this shift. 

Additionally, holding payment companies solely liable for APP fraud may increase the divide between regulated and unregulated sectors, fragmenting industries and reducing consumer connectivity when collaboration is crucial for combatting fraud.

Will customer service decline?

If FinTech innovation is hindered and divisions grow between financial services companies, customer experience will likely decline, despite mandatory reimbursement for scam victims being an overall positive objective.

Consumers have embraced frictionless services like Faster Payments, but delays to inbound payments can be exponentially more disruptive compared to outbound. Poorer partnerships between financial institutions could severely impact individuals, especially if payments for essential needs like rent or dept repayments are delayed. 

As banks and PSPs adjust to changes in inbound payments, it's crucial to avoid disproportionate disruptions to consumers' daily lives.

Will customer behaviour fundamentally change?

There is debate on whether PSR changes will make customers more ambivalent to scams, knowing they are covered by their payment providers. 

Counterarguments suggest that existing fraud protection in many Tier 1 banks has already insulated consumers without increasing fraud due to recklessness. Additionally, the inconvenience and emotional toll of being scammed may keep consumers vigilant, plus the trend that people are increasingly wary of account security from other channels outside of financial services resulting in greater awareness in general. 

However, PSR changes represent a significant shift, and historic trends may not predict future behaviour, necessitating close industry monitoring.

Will we see more customers wrongly debanked?

As fraud becomes more sophisticated, instances of unwitting money mule accounts are increasing. These customers need different treatment than deliberate fraudsters. Freezing accounts and cancelling payments is disruptive and unfair to victims of the fraud and unwitting mule victims.  

Although solutions exist using shared intelligence and machine learning, many organizations lack measures to distinguish between complicit, witting and unwitting money mules. 

Consequently, as fraud risks and reimbursement costs rise, so does the risk of wrongful debanking. Firms must develop strategies to prevent wrongful debanking and ensure approbate paths back into accessing banking services for affected customers.

In summary

The PSR’s rules aim to protect consumers and fight fraud but risk destabilising the financial ecosystem. Solutions exist to help firms manage fraud risk, but the impact of these regulations must be monitored to address unintended consequences effectively and prevent fraudsters from exploiting new opportunities.

To learn more about fraud protection and PSR requirements or to discuss the support available to you, please visit our website or get in touch directly.