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WILL PSD2 LEAD TO A RISE IN DECLINES?

– Galit Michel, VP of Payments, Forter

 

Today, merchants in the European Union (EU) and European Economic Area (EEA) are increasingly concerned with two things: the revised Payment Services Directive (PSD2) that came into effect on January 1st 2021, and their ability to maintain and grow their business as COVID-19 continues to change the world.

The global pandemic has changed the behavioural patterns of consumers, driving an increasing reliance on digital shopping. This alone proves a challenge for businesses, however now with the enforcement of PSD2, merchants will also have to drastically change their processing methods and integrate an additional layer of Secure Customer Authentication (SCA) to comply with the need for multi-factor authentication.

To comply with the new directive, many payment processors will route transactions through 3D-Secure (3DS). New data from Microsoft and Amazon confirms that 3DS usage increases decline rates, and so the increased use of it across all sectors is expected to lead to a universal rise in decline rates.

eCommerce brands and online merchants that want to increase revenue generation and maintain profitability levels – especially during these unprecedented times – need to take the time to evaluate their decline rates, understand if their issuing and acquiring banks are prepared for PSD2, and prepare their business for the new directive – before it is too late.

 

How Declines Impact Future Revenue 

Decline rates don’t just impact the weekly (or even monthly) bottom line – they impact revenue generation potential for months and years to come. When a consumer experiences a decline– regardless of whether it is due to something within their control, such as having sufficient funds or correctly typing in their payment details – it negatively impacts their entire shopping experience.

Today, it is especially important to consider shoppers’ experience, as transaction volumes are twice as high as pre-COVID-19 levels, and most businesses are increasing their investment in eCommerce, stepping up overall competition. For new shoppers going online for the first time due to the recent global pandemic, a seamless purchasing experience can be the difference between retailers securing the lifetime value of a new customer – or a missed opportunity.

When new shoppers, who might not have been accustomed to shopping online, encounter difficulties, they are much more likely to abandon the process. Adding to this the fact that new customers are 5-7 times more likely to have their transaction declined as a result of over-zealous fraud prevention solutions, means it is critical for businesses to have a checkout process which is mindful of their fears and suited to their needs.

Even experienced shoppers expect frictionless transactions; a complicated checkout process may not deter an experienced online shopper from buying goods online, but it may lead them to take their business elsewhere.

Since PSD2 will inevitably lead to more declines, merchants need to implement mechanisms that reduce or recover declines and make the entire payment process as frictionless as possible.

 

Understanding Declines

To know which mechanism can help reduce the impact of declines on a business, it is necessary to know what a business’s decline rates are and why declined transactions did not go through.

Transaction declines occur for several reasons:

  • Acquirer or issuing banks reject the transaction since they believe the transaction is high-risk and do not want to assume liability.
  • Technical failure of the gateway, Payment Service Provider (PSP), acquirer, card network, 3DS provider, issuing bank or other technical issue.
  • Customer-triggered issues such as insufficient funds or entering incorrect payment details.

Merchants that want to increase their approval ratio and their bottom-line need to examine their issuing bank risk policy, analyse information from their PSP and 3DS providers, and understand where in the checkout process consumers experience friction and declines.

While analysing declines is already important for overall business health, it will become critical when PSD2 goes into effect.

 

Declines Don’t Just Impact the Bottom Line

With PSD2 going into effect, more transactions will be processed through 3DS, and because of this, merchants will suffer from additional declines.

While the impact of declines is initially on the bottom-line, that’s not all declines do to a business.

Due to the increased verification and customer authentication mechanisms merchants must put in place, all traffic will either need to be routed through 3DS or merchants will need to get an exemption. Exemptions may be declined by the processors or by the card issuers to keep fraud rates low.

At the same time, 3DS can fail due to unsuccessful authentication, and successful 3DS transactions may result in declined authorisations due to the issuers wanting to avoid taking increased liability on themselves. As this happens, decline rates will go up, further impacting eCommerce businesses’ ability to profit.

To reduce declines and increase revenue generation, many merchants may seek 3DS exemptions. Making smart decisions regarding exemptions is critical. Both the processor and the issuer need to agree to the exemption, and if an exemption is granted and a chargeback later occurs, merchants may lose their good standing with their bank and be refused future exemption requests or even not be able to process transactions at all. That is why merchants need to ensure that exemptions are only requested for the right transactions.

 

Issuer-Driven Declines 

One of the most significant problems merchants will face with PSD2, and increased use of 3DS is that many issuers across the EU and the EEA, despite having known about the PSD2 regulation for over two years, are still not prepared.

When an issuer, or any of the parties throughout the payment process, is not ready to process transactions using SCA via 3DS2 and under PSD2, they will do one of three things:

  1. Enable 3DS1 only
  2. Use Stand-in Processing
  3. Decline the transaction

If an issuing party only supports 3DS-1, the 3DS vendor or payment processor executing the 3DS will process the transaction using 3DS1 (rather than attempt to execute 3DS2). If this is not done, the transaction might be declined by the issuer. It is therefore very important for the merchant to make sure that its 3DS vendor supports fallback to 3DS1 in cases that issuer does not support 3DS2. Even when 3DS1 is properly used as a fallback to 3DS2, the result is often a poor customer purchasing experience and higher cart abandonment rates.

If the issuer is completely unprepared for PSD2 and does not even support 3SD1, or in cases where the 3DS vendor or payment processor does not have 3DS1 in place, the issuer will be forced to use what is called stand-in processing (STIP). STIP happens when Visa or MasterCard ‘stand in,’ for the issuer. They then evaluate the risk of the transaction, and decide whether or not the issuer should take liability for the chargeback. If the transaction is a low risk one, the liability shifts to the issuer. The only way for the issuer to avoid liability is to decline the authorisation. When an issuer is not ready, the merchant is the one who will suffer from more declines.

 

All is Not Lost 

While PSD2 going into effect will significantly impact overall transaction declines, there is a lot that eCommerce brands and online merchants can do to reduce the impact of declines on their business.

Selecting a payment optimisation solution will immediately impact transaction failure rates and help merchants recover declines before it is too late. Integrating dynamic 3DS based on user profiles, maximising the use of TRA exemptions, and using behavioural analytics to determine the most frictionless verification method for each customer, can increase approvals while ensuring PSD2 compliance.

Smart processing enables businesses to minimise touch-points by pushing customers towards alternative payment solutions that do not require 3DS. Additionally, having a decline recovery solution enables seamless recovery of declines before the customer even knows their transaction was declined.

With PSD2 coming into effect, it is crucial for business with consumers in the EU and EEA to have alternative payment processing solutions in place. Alternative solutions can be local payment methods, such as online banking and various wallets, pay-later methods, or even pay-by-phone options. This is the only way to reduce the use of 3DS while reducing risk and ensuring compliance.

Merchants should consider the below questions to determine if they are ready for the impact of PSD2 on decline rates:

  • Will an increase in declines impact your profitability?
  • How do you plan on handling the challenges of PSD2?
  • What SCA methods do you use today? And are they PSD2 compliant?
  • Is your payment processor/bank/gateway ready for PSD2?
  • Do you have a decline recovery solution?

Business

THE EFFECTS OF JOB HOPPING ON YOUR RETIREMENT OUTCOME

By Neli Mbara, Certified Financial Planner at Alexander Forbes

 

Job hopping – defined as spending less than two years in one position –  is a very controversial subject. It can be an easy path to a higher salary but can also be a red flag to prospective employers, not to mention your future financial goals if you are cashing in your retirement fund every time you make a move.

When changing jobs, whether it be once a year or once every decade, one has to make decisions regarding career growth and retirement plans which affect one’s long term financial plans. One of these decisions is ‘what to do with my retirement fund?’

Neli Mbara

For many people, the first thing that comes to mind is using their pension money to pay off their debt. Alexander Forbes Member Watch statistics show that 91% of members do not preserve their retirement savings when changing jobs. As we are living in times where most household income is used to finance debt, most people use job hopping to gain access to their retirement funds, and use this money to pay off debt. However, a quick fix and instant gratification comes at a price, which in this case could be a delay in your retirement plan.

Your retirement savings are simply for that, your retirement, to pay you an income once you stop working.

 

Early access of your retirement fund can result in:

  • Not having enough money at retirement – this is simply because most of us are already not saving enough for retirement
  • Robbing yourself off the compound interest you could have potentially earned from the investment.
  • Never making make up for the lost benefit
  • Creating a bad habit that will delay you from achieving your retirement plan and desired income at retirement

It is easy to cash in your money from a retirement fund at resignation but it is much harder to make up for the lost benefit (capital cashed in plus interest). Calculations show that for you to make up the lost benefit depending on your retirement age and investment time horizon, you will likely need to invest more than double your contributions towards a retirement fund.

Since only 6% of the South African population are reported to have accumulated enough to retire comfortably, without having to sacrifice their standard of living, you will most likely have to invest much more towards your retirement fund to make up for the lost savings.

Therefore, leaving your retirement fund invested and preserved in a preservation fund is the recommended option when changing jobs, as this keeps you committed to your retirement plan.

Changing jobs is a life-changing event, and it is therefore important that you seek advice from a professional financial adviser who will guide you in your retirement planning ensuring that your retirement needs are taken care of, by providing solutions that help you to ensure your financial wellbeing.

 

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Business

DISRUPT TO SURVIVE IN FINANCIAL SERVICES, BUT BEWARE: YOUR TEAM MUST BE IN SHAPE FIRST

Michael Chalmers, MD EMEA at Contino

 

COVID is forcing extraordinary change in the financial services industry. It’s happening fast, already uprooting insurance, transforming payments and changing the way we interact with our customers across the industry.

But for the 4000 UK financial services providers who are at critical risk due to COVID-19, these tales of success should come with a warning. Disruption in the industry certainly won’t come overnight.

Only the most interconnected web of people, technology and culture can produce effective disruption at this critical time. Discover below the key trends we’re seeing in financial services, and how to upskill, empower and equip teams in order to create the organisational impetus for this transformation and disruption, in an industry known for its monolithic ways of working.

 

Top Technology Trends in Financial Services for 2021

As we enter another year of uncertainty, financial services organisations–and their customers–are looking for technology solutions that promise above all, flexibility.

Partnerships between retailers and payments companies that can deliver greater flexibility for consumers as well as increased reliability for retailers will boom in 2021. Even before the pandemic, we saw the flourishing of partnerships between retailers and Klarna, the ‘buy-now-pay-later’ online payment processing firm. With the impact of the downturn likely to continue well into 2021, add-on services that offer more options to support merchant resilience will be essential.

Many companies have embraced ‘fluid’ payment ecosystems capable of handling multiple digital payment solutions but only those capable of capturing data insights to drive their product innovation and sales strategies will reap the full benefits. Real-time user profiles, fraud anomaly detection and personalisation, are all enabling marginal gains for payment providers that will differentiate them from competitors in 2021.

 

But don’t run before you can walk

Before businesses can jump on new technology trends however, it’s critical to ensure they have an innovative culture in place. This will form the foundation for effective disruption. Here are my four tips for building a solid foundation.

1)    Focus on data, with the customer at the centre

Customer experience is the central element to all disruption in the financial services today. Respond in real-time to customer queries. Better still, anticipate the customers’ next need before they’re even aware of it. All of this is made possible through a connected view of data.

Businesses should continue to embrace technologies such as AI and ML to harness customer insights and respond to customer needs–whether that’s approving a loan or recommend a new offer.

From answering customer queries and personalising banking experiences to revenue accounting and trade settlement dashboards, advanced data capabilities will continue to be critical.

 

2)    Be realistic about what your team can achieve–and up-skill if need be

In my own work, I’ve seen that digital transformation is most effective when it factors in the abilities of the existing team–but that doesn’t mean leaving them on their own.

First, collaboration is key. IT and data teams must form internal partnerships in order to get plugged into the business side of things. Critically, they must be present in the boardroom. For many years, those with technical skills have been left out of planning meetings. But their knowledge is absolutely critical, especially when it comes to choosing the right tech stack to enable innovation.

If it becomes apparent that the team is lacking in the necessary tech capabilities, outsourcing is extremely valuable. But beware: it is essential to focus on building up internal capability in order to create long-lasting change–and scrimping on the upskilling for cost reasons will only result in greater expense. Bring in fully trained teams to both implement tech and upskill to foster stronger teams internally.

 

3)    Enable innovation in a worry-free environment

In order to remain competitive in the modern marketplace, and to ensure long-term survivability, financial services organisations must transform their business models to focus on digital innovation and customer expectations.

It’s no secret that the cloud enables organisations to innovate at speed and scale. However, before teams can get stuck in, it’s crucial to ensure they have safe cloud environments in which to explore and innovate.

Developers must be given the freedom to evaluate new technologies and to make any necessary changes to enable rapid creation of business value. Having this flexibility and foresight when implementing and rolling out your public cloud solutions means that ideas can truly come from anywhere in the organisation.

 

4)    Don’t just get the cloud, get the cloud right

The adoption of cloud is now widespread, but those who can optimise it will be reaping the rewards in speed, efficiency and, ultimately, customer satisfaction. Cloud shouldn’t just be a platform to build in–it should help to inform decisions and facilitate new ways of working, ultimately producing something greater than the sum of its parts. Building out cloud-native engineering, culture and operating models will future proof the capability of financial services organisations.

Finally, cloud capabilities should be rolled out right across the organisation. Contino research shows that, while 77% of organisations have adopted the public cloud, only a tiny proportion have actually scaled this out across the organisation. To do so means you’re able to share data across every department, to every person, creating a data-driven culture which will hugely benefit all decision-making going forward.

 

Prepare the ground and seeds will grow

Disruption is achievable for every financial service organisation in the UK market today – yes, even legacy brands. But the saving grace for those that are struggling at the moment needn’t be the debut of an exciting new product or pipping a competitor to the post with a partnership. It will be the construction of a collaborative and creative culture from which innovative ideas can grow – without being choked by unavailable data, the fear of upsetting day-to-day operations, or restrictive team structures. Innovation is what will pick today’s struggling financial services providers up and get them out of danger.

 

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