Fighting Fraud & Identifying Opportunities with PSD2 - Ekata

PSD2 Rollout Update: A game of whack-a-mole or a strategic play?

Ekata team shares research and perspectives from acquirers, issuers, merchants

Throughout 2020, Ekata conducted surveys across the payments ecosystem to investigate the readiness of players to meet the new requirements of the Payment Services Directive (PSD2). PSD2 is a European regulation that was put into effect in September, 2019 and mandates Strong Customer Authentication (SCA), or two-factor authentication, for electronic payments. PSD2 applies only to (some) EU-to-EU payments and is relevant to all local European companies and to U.S. companies who do business in European markets.

Our goal was to learn how issuers, acquirers, and merchants are meeting specific obligations, such as Strong Customer Authentication, and if/how they are taking this opportunity to differentiate themselves and gain market share.

We found a lot of market fragmentation as each country in Europe comes online with the rollout of the 3DS technology that satisfies the requirements of Strong Customer Authentication. Many merchants are left feeling like they play a perverse game of whack-a-mole, moving from fire-fight to fire-fight throughout 2021. One of the merchants we interviewed captured the perception best: “PSD2 will be brilliant, just not right now. It needs to become a habit for everyone to see the full benefits. It needs to stop being piecemeal across Europe”.

We’d like to summarize those findings here and refer you to the full reports for more information. For those new to SCA and PSD2, please review the European Banking Authority documentation.

Key Findings

We found that PSD2 SCA in particular provides rich opportunities for everyone in the payments ecosystem to strategize and win long-term. Despite short-term potential losses due to initial customer experience issues, a stronger focus on security is projected to result in higher authorization rates longer-term:

Issuers want to stay “front of wallet”. Issuers were keenly aware that it’s in their best interest to focus specifically on the customer experience and reduce any friction experienced by the consumer that could lead to an abandoned transaction.

  • 55% of issuers surveyed are focusing on compliance, the other 45% are implementing PSD2 as an engine for differentiation.
  • 95% of issuers consider SCA strategic.
  • In December 2020, while issuer readiness wasn’t where it needed to be, the general consensus was that it landed much further along than previously anticipated.

Read the full Issuer study here.

Acquirers/PSPs want to incorporate new fraud capabilities in their fraud platforms and consider PSD2 strategic. These new capabilities include things such as real-time fraud checks, Transaction Risk Analysis (TRA), and more. Acquirers are looking to differentiate in an increasingly commoditized industry by building a more predictive TRA, which will help them better serve merchants through higher exemptions and reduced fraud rates: over 80% of our respondents consider SCA a strategic opportunity for their company.

Among PSPs and acquirers profiled and surveyed, there are clear categories:

  • Leaders: Treating PSD2 as an opportunity to reinforce their leadership position.
  • Laggards: On Track to meet PSD2 deadline but lack differentiating offerings.
  • Question Marks: May not have the resources to invest, or may be a niche player.
  • Challengers: Investing in products and solutions to differentiate and take share.

The top 20 merchants in Europe have less than 20% of the eCommerce market, so acquirers and PSPs should also pay close attention to small and medium merchants (especially those merchants who will expand as generation Z takes a stronger foothold in the marketplace and impacts purchasing preferences). Read the full acquirer study here.

Merchants want to keep conversion rates high. Their interests align with building frictionless experiences for their customers (who successfully complete purchases) and also with keeping that customer long-term. This means that they are eager to look for exemptions to submitting customers to the SCA experience and only stepping up the security for customers that are risky.

  • Merchants are frustrated with acquirer preparedness, with many planning to move to multiple PSPs or putting pressure on the PSPs to provide better services.
  • Merchants would like to be more aggressive in safeguarding the customer experience throughout the PSD2 rollout, but they are severely limited by the readiness of the ecosystem.

Read the full merchant study here.

Closing thoughts

PSD2 provides issuers, acquirers, and merchants the opportunity to differentiate their business and services through transaction smart routing, machine learning fraud screening, and pre-authorization fraud screening. With Ekata’s award-winning Transaction Risk API, businesses can move beyond the compliance checkbox and stand out from the pack by offering end-users more SCA exemptions and delivering higher authorization rates.

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