PSD2: Ready or Not, Here It Comes
By Michelle Arguelles /
12 Aug 2019
Note: Since publication, the deadline to implement SCA to comply with PSD2 has been pushed back 18 months to 2020.
The September deadline to implement Strong Customer Authentication (SCA) to comply with the revised Payments Services Directive (PSD2) is fast approaching, and with it, comes new opportunities and challenges. With only a little over a month left, what do we know about the impact it will have on merchants and what can they do to prepare?
PSD2 in a nutshell
Before talking tactics, it’s helpful to review what PSD2 is and what it requires.
PSD2 aims to create a more open and secure payments environment which fosters innovation and increases consumer protection across Europe. With a more open environment, emerging fintech companies can compete with established banks to deliver consumers more convenience, better security, and lower prices. Banks can also benefit by increasing partnerships to offer better, more secure services.
PSD2 also requires merchants transacting in Europe to implement SCA – likely a form of 3DS 2.0 – on all payments by September 14, 2019. There are some transactions that are considered out of scope, and another set of transactions that can be exempted to skip authentication. That said, the added friction of SCA on a majority of payments is expected to lead to lower conversion rate, and merchants who aren’t ready by the deadline face spikes in decline rates.
In other words – lost revenue.
|Out of scope and exempted transactions|
|One leg out transactions||If either the acquiring bank or issuing bank in a transaction is outside of the European Economic Area, no SCA is required.|
|MOTO||Mail Order and Telephone Order (MOTO) transactions are not considered “digital” and are out of scope.|
|Corporate payments||Payments made with lodged corporate cards and virtual card numbers are exempt.|
|Payments under €30||“Low value” transactions under €30 are generally exempt. However, if the sum of previous low value transactions exceeds €100 OR it’s the sixth time the exemption has been used, SCA is required.|
|Recurring subscriptions||Recurring payments for the same amount from the same card are exempt from SCA.|
|Low risk transactions||More exemptions can be granted as long as low fraud rates are maintained and a real-time solution for Transaction Risk Analysis (TRA) is in place. |
The fraud rates and exemption limits are as follows (90 days): Up to 0.01% – Up to €500 Up to 0.06% – Up to €250 Up to 0.13% – Up to €100
PSD2 preparedness (or lack thereof)
How much will these changes impact businesses? A recent study from Stripe and 451 Research estimates the legislation could cost up to €57 billion in the first year of SCA requirements.
The deadline may loom large, but recent surveys suggest that merchants have low awareness, preparation, and readiness which translates to higher loss downstream. A recent study commissioned from Stripe and 451 Research found that only 40% of businesses feel prepared to meet the new requirements.
Awareness among consumers is even lower, but expectations for convenience remain high. According to a recent Mastercard study, 85% of consumers in Europe don’t know about PSD2. The survey also showed that consumers favored experiences that were easy to use and offered both transparency and flexibility – something that doesn’t come with mandatory SCA.Despite the lack of preparedness, The European Banking Authority recently announced that it was willing to extend the deadline only for select, qualified retailers.
What’s a merchant to do?
PSD2 comes with challenges, but it also presents an opportunity for merchants to earn customer trust. Adopting a Digital Trust & Safety approach looks at your users holistically in real time so you can proactively mitigate risk and ensure revenue is high.
An action plan powered by a Digital Trust & Safety solution like Sift means you can:
- Keep fraud rates low – It’s important to protect your business from fraud that could occur on exemptions and out of scope transactions. Even transactions that go through SCA could still be fraudulent, and while liability is shifted, responsibility is not, meaning you can still find yourself on a chargeback program.
- Maximize exemptions to increase conversion – Start conversations with your payment providers about exemption strategy and ensure its optimized for exemptions. A real-time machine learning solution like Sift can keep your fraud rates low, and, if you think it’s right for you, be used to request TRA exemptions.