Can consumers make informed decisions about payment protections?

Key Findings

• There are significant gaps in consumers’ understanding of payment protections.
• Consumers recognise they are not well informed about which payment protections are provided when paying with a debit or credit card.  
• When paying with third payment payment providers such as Paypal, consumers think they have more protections than they actually do. 
• Consumer confusion and lack of understanding means people may assume they are protected when they are not. 
• This lack of knowledge and understanding causes consumers to feel frustrated, stressed and worried. 

Based on these research findings Which? are calling for payment services to: 

1. Communicate the protections clearly to consumers, and; 
2. Provide a baseline level of protections across all payment methods.

The landscape of consumer payment protections.

Payments are the most commonly used financial service in the UK, and of the 40.4 billion payments made in the UK during 2021, nearly nine out of ten payments were made by consumers. Yet how we pay is changing. Usage of cash is declining, and consumers are increasingly using other payment methods (e.g. debit and credit cards) to make purchases. 

These methods of payment can bring benefits to consumers: they expand choice, and deliver greater convenience and speed. But different payment methods offer different levels of protections to consumers when things go wrong, potentially creating complexity and confusion. Our previous research from 2019 found that many people are unsure about the safest ways to pay, with only half of Which? members saying they feel confident that they are protected when making a payment. This is perhaps unsurprising since payment protections are complicated and differ not only between payment methods used but also by the characteristics of the purchase (e.g. price). It often leaves consumers confused and unsure about what protections they have, as described by one participant from our most recent Which? Cost of Living panel.

“As I have never had to use any in the past, I am still confused, despite reading the explanations, and probably would continue to be until I had actually experienced the process in reality”

To understand consumers' understanding of payment protections and their attitudes towards the schemes currently in place, we conducted a set of online tasks with participants on the Which? Cost of Living Panel. These tasks asked participants to:

• Rate their knowledge and awareness of different payment protections, such as chargeback and section 75.
• Read three scenarios where purchases have gone wrong each using different payment methods (i.e. Paypal, credit card, debit card) and different item values. Participants were then asked what payment protections they had in each of the scenarios. 
• Read information about current payment protections and comment on their thoughts. 

When we refer to payment protections in the research we are specifically addressing the safeguards available to consumers in cases where a product didn’t arrive, doesn’t meet the advertised specifications, and the retailer/seller refuses to issue a refund or provide a replacement. In cases like these, consumers might need to look elsewhere in order to get their money back, for example to the protections offered by their chosen method of payment.

Consumers overestimate the protection available to them when paying with a credit card

Payment protections are known for being an area of confusion for consumers. The confusion is not confined to newer payment methods. It also extends to protections associated with more traditional and widely-used payment methods such as credit and debit cards. 

Many consumers do not have accurate knowledge of when they are protected when things go wrong with purchases.  Our research suggests that consumers often tend to overestimate the extent to which they are protected when using credit and debit cards for purchases. During the study, we asked participants to think about the protections in place when using this traditional payment method. Participants were presented with a list of protections and asked to identify which ones they thought applied to buying with a credit/debit card. We found that they believe they were automatically protected regardless of the purchase and cost of it. 

This misconception was apparent in a number of responses to the task, with one participant saying the following:

“ I think there is automatic protection for purchases with a credit card”  

Yet in reality this isn’t entirely true. You are not always automatically protected when using a credit or debit card. For example a purchase of under £100 made on a credit card does not fall under the legal requirements of payment providers offered by Section 75 of the Consumer Credit Act. Whilst the consumer may be able to claim money back through the Chargeback scheme, this is not guaranteed and can depend on the terms and conditions of providers (e.g. Mastercard, Visa and American Express).

Those consumers who think they are fully protected for any purchase could be putting themselves at risk and in situations where they are not protected should something go wrong, meaning they could lose out financially. 

Our research also found that participants often believed that they had automatic protection when  they used a credit card to pay through a third party. One participant explained how they believed their credit card provider was responsible despite purchasing through Paypal. 

“Because I paid by credit card through Paypal I should be entitled to a refund as the product I purchased isn’t right.”

This isn’t necessarily the case. Once a third party is introduced (e.g. Paypal), it adds further complication and the consumer's purchase may not have the same cover as a purchase made directly through a credit card alone. 

It means that consumers are likely putting themselves at risk of financial loss for any purchase made with a credit card through a third party. If something goes wrong they may not receive their money back for the purchase. In summary, our research identifies two misconceptions that consumers have around paying with traditional payment methods. The first is that you are automatically protected when paying with a credit card directly (regardless of the purchase cost) and the second is that you are automatically protected when using a credit card to pay through a third-party like PayPal. Our research suggests these misconceptions are because people don’t understand when they would be able to make use of Section 75 protections. In addition, the tasks showed that many participants hadn't even heard of either Section 75 or Chargeback so were entirely unaware of whether their purchases are protected.

Consumers feel initially confident about third party payment protections, but fail to offer the correct answers when presented with scenario testing.

Over the past few years, new ways for consumers to pay such as via third party payment providers like Paypal have been introduced to the market. These have given consumers more choice and convenience. Yet, when purchases go wrong, paying through third parties such as Paypal can affect the level of protection offered to consumers.

In the research we explored whether consumers understood their level of protection when using providers such as Paypal. We asked participants what they thought they were protected for when using third parties and then tested the validity of their responses through a set of scenarios and outcomes (see Figure 1 for an example).

Figure 1: Scenario testing of a real life situation using Paypal

Our research suggests that many consumers believe they have better knowledge when it comes to newer forms of payments, such as Paypal guarantee (Paypal’s version of protection). 14 out of 15 participants told us they felt confident, that they were aware of Paypal protections, and that they knew how the protections worked and what the protections covered. 

Yet when we tested and validated participant’s knowledge using real life scenarios, we discovered that their confidence was misplaced and they couldn’t give us the correct answers. For example, the Figure 1 scenario involved participants having purchased a bed using their credit card linked to their Paypal account. We asked them if this transaction meant that they were protected by any of the payment protections. The correct answer is that they will be protected by Paypal guarantee. However, the majority of participants thought that this would not be covered under the Paypal guarantee and answered incorrectly. 

When a third party payment provider like Paypal is used in the purchasing process, it can impact consumers' payment protections. The use of Paypal adds an additional link in the chain between the consumer and the supplier. Consequently, consumers may lose their Section 75 rights even when paying with a credit card via Paypal, though there are exceptions, and this can be quite complex! 

Given this complexity, it’s no wonder consumers find themselves confused about the payment protections that are available when purchases go wrong. Participants in the research explained their confusion when an extra layer of complexity is introduced. As one participant pointed out, the introduction of third parties, such as Paypal, introduces a lot of grey areas when it comes to protections:

“I'm also aware that you can open disputes with PayPal, but I don't know if you need to make the purchase using a credit card linked to PayPal or whether it needs to be directly through PayPal.”

As participant’s became aware of how the use of newer third party payment providers could impact their protections, many began to express concerns. This raised the possibility that these payment providers might have an avenue to avoid supporting consumers when issues arise, potentially leading to financial losses for consumers.

“Too many get out clauses” 

“You don’t have much other protection” 

“Seems like they backtrack on cover”

Conclusion

There are significant gaps in consumers' knowledge about payment protections, whether they are paying with a debit or credit card or using newer ways to pay involving third party providers such as Paypal. 

This confusion, lack of understanding and perceived gaps in protection can lead to consumers to lose out financially. Firstly, consumers may lose out because they believe they are protected but may not be, for example using a credit card for purchases under £100 and not being protected by Section 75 of the Consumer Credit Act. Consumers can also miss out financially, because the perceived complicated process for claiming may put them off claiming all together.

“I think the payment protections are good, but only if you know what to do and understand them. I think people who don’t know or understand will just leave the claim”

The consumer harms go beyond financial impacts however. There is potential time harm as consumers may take the time to make a claim such as Section 75, with the belief they are covered but actually are not. This will also lead to consumers feeling frustrated and stressed about the situation, and their inability to address the problem. However it is clear, even without having to go through the process, the lack of knowledge and understanding of protections lead to many consumers feeling worried and confused about payment protections, therefore questioning how best to purchase items.  

Due to the clear consumer harm within this area, there is a need to ensure consumers are protected. This can be addressed in two complementary ways:

1. Communicating the protections clearly for consumers

Firstly, communication of these protections should be clearer for consumers, with many consumers within the research explaining how they felt the reliance was on the consumer to do their research and the information wasn’t always easy to understand. However, better communication can only take us so far. It was clear within the research, even when payment protections were explained, the level of complexity and intricacies within each protection meant many consumers went away still very confused about when they are and aren’t protected, suggesting a need for further intervention.

 2. Providing baseline level of protections across all payment methods

Clarity and awareness raising are unlikely to be enough, and all the onus should not be placed on the consumer to navigate this complex area. Instead, consumers should be able to rely on a consistent baseline level of protections in the event that something goes wrong with their purchase. With the advent and expansion of newer payment methods, such as payments made via Open Banking, it will become even more important that consumers can rely on a consistent standard of minimum consumer protections.

Methodology

In September 2023, Which? carried out qualitative online tasks on payment protections with the Which? Cost of Living panel. Households within the panel were asked a series of questions about payment protections, this included a series of scenario questions regarding what protections they have if things go wrong. The panel consists of 29 households from across the UK, who regularly participate in monthly online tasks and in-depth interviews.