By Roger Alexander, Key Advisor, Chargebacks911

The debate between regulation and competition is one of the longest in modern business, and one of the least likely to ever be satisfactorily resolved. On one hand, supporters of deregulation argue that loosening rules allows companies to create more innovative products or seize upon efficiency savings. Those on the other side of the argument believe it’s in fact the regulations themselves that fuel creative solutions by creating frameworks in which innovation can take place.

Often, the best answer to debates like this isn’t a firm yes or no in either direction, but to humbly admit that the reality is far more complicated than what can be summed up in a simple binary. I can see two recent points of evidence for and against the idea that over-regulation stifles competition, but is it enough to answer the debate once and for all?

Open Banking: Inventing an Entire Industry

The creation of Open Banking is an instance in which an industry, today valued at $ 25.1 billion USD, was effectively created overnight by the stroke of a pen. The Payment Services Directive 2 (PSD2) rules that were brought into effect and adopted by many European countries did much to strengthen security and increase trust, but it also created the Open Banking framework, which has been a major boon for consumers, companies and those trying to reduce chargebacks. The payments element of Open Banking doesn’t allow for chargebacks, which seems counterintuitive, but in practice allows consumers to work directly with merchants to get their money back, something that we at Chargebacks911 have always advocated for.

Open Banking could be an industry worth hundreds of billions of dollars by the 2030s and employ thousands of people. From the start, it was very explicitly engineered to increase innovation by driving competition, and it has definitively proved that it can do this.

APP Fraud Rules – stifling innovation?

On the other hand, the payment services directive is introducing rules that will come into force on October 7, 2024 that require UK payment service providers to reimburse customers who fall victim to APP fraud. A good thing surely? Not necessarily—it could stifle innovation, especially amongst the smaller UK fintech companies.

Companies will be required to pay fraud victims within five days, and each individual claim could cost them as much as £85,000 (though a typical single act of APP fraud costs a business £11,000 or a member of the public £1,500). This short time limit means that if financial institutions want to dispute a claim for compensation in a similar way to what merchants can do with chargebacks, they will have very little time to do so. Consequently, many will be forced to pay out sums that they would not be required to do if they had time to properly investigate the claims. Make no mistake, fraudsters will find a way to exploit this system. I am far from the first person to have reservations about these rules: the UK Treasury and FCA share the same concerns.

Large PSPs might be able to absorb these costs, but they shouldn’t have to. The real damage will happen to smaller and likely more innovative companies—those that could become the ‘next big thing’ if they were allowed to grow unimpeded. Ironically, some of these companies will be precisely those created by Open Banking regulations. Although the regulations are yet to come into effect, it seems that they are a prime example of how regulation can stifle growth.

So, what’s the answer?

While the answer to whether regulation helps or harms innovation is nuanced, we need transparency and a space for debate amongst financial institutions and the companies they work with. We should have complete information on upcoming regulations and a way in which to discuss them constructively in such a way that regulators can see our criticism and adjust regulations accordingly. So does regulation stifle innovation? Only if we don’t collaborate with all parties involved to ensure our systems foster fairness and growth.