Adapting to PSD2: A long road to optimization  

Roman Korobkov, PSD2 Domain Expert at Riskified

Despite significant efforts to maintain and safeguard Europe’s payment infrastructure, online retailers continue to battle with implementing the Second Payment Services Directive (PSD2), an industry-wide regulation for EU member states and the UK to make online transactions more secure.

A recent study conducted by Forrester Consulting and commissioned by Riskified, entitled E-Commerce Fraud Prevention: What Is The Post-PSD2 State of Play?, found that nearly half (45%) of online retailers are navigating issues related to the PSD2 rollout or have only managed to implement the minimum requirements.

While the benefits of implementing PSD2 are evident by the steady decrease of fraud rates across the EU and UK, the new PSD2 landscape has left many eCommerce merchants grappling with where to begin – or how to catch up – in order to adhere to the regulations.

Why are businesses struggling with PSD2? 

Many of the delays in implementing PSD2 can be attributed to the initial roll out. Its launch in late 2015 was followed by the long process of setting standards and requirements – meaning businesses did not have to consider ‘true’ compliance until December 2020 in EEA states and March 2022 in the UK. Despite extended time to prepare, many online merchants were not equipped to put the run-up period to good use.

As more time has passed, the study found that online merchants face limitations when attempting to optimise their payments strategies under PSD2. 31% of online retailers say they feel restricted to using the tools offered by their payment providers, either out of convenience or simply not knowing that there might be other options which can be better suited to their specific needs.

As stated in the study, some payment service providers (PSPs) present e-commerce merchants with 3DS solutions and exemption engines as part of a package offer. Although this can be helpful in narrowing down the available tools and solutions, it may lead merchants to believe that they are receiving everything they need, which sometimes is not the case.

Navigating fraud

Many online merchants still rely on 3DS as their sole solution for fraud, despite it being designed as an additional layer of security for Card-Not-Present (CNP) transactions. While it has indisputable value, 3DS is not a one-size-fits-all solution and it is not enough to ensure a complete fraud prevention strategy.

When 3DS was adopted as the industry standard for customer authentication, fraudsters immediately started searching for ways to bypass it. In the study, 39% of merchants admitted that fraudulent chargebacks have even increased on 3DS-authenticated transactions, negatively affecting their overall fraud rates.

In today’s payment landscape, fraudsters are increasingly sophisticated and targeted in their approach. The use of e-commerce patterns and the dark web has led to the prevalence of malware, bots, and other tactics to manipulate the authentication process. Navigating these issues whilst maintaining customer satisfaction is a common challenge. However, secure and frictionless payments are an achievable reality – e-commerce merchants just need to know the variety of options available to them.

The road ahead

PSD2 presents an opportunity for eCommerce merchants to explore new types of solutions and tools that will support them in the long-term. While it can be tempting to take an easier route, there are some crucial factors to keep in mind to ensure a proper strategy for efficient payments flows.

Firstly, online retailers should take the time to explore all their options before settling for a provider. To better optimise payments under PSD2, merchants should look at performance-based indicators, such as efficiency, effectiveness and productivity measures. This will require a full-scale holistic approach that looks to combine fraud prevention and payment optimisation strategies.

Secondly, improving data transparency is essential to building and implementing a successful payments strategy. The study showed that 65% of respondents need more data around payment processing fees, regular market performance updates and thorough reviews of available solutions in order to help their business advance its PSD2-related strategies. Having the same transparency with their provider can allow businesses to explore all of the options. Knowing why an authentication request or exemption has been declined will ultimately help the retailer get to the root of the issue, resulting in a more seamless transaction process in the future.

Thirdly, one of the biggest obstacles for e-commerce businesses is the dreaded abandoned shopping cart. According to a recent workshop conducted by the European Payment Institutional Federation (EPIF), some merchants in Italy have seen cart abandonments reach rates of 50%. Merchants should keep an eye out for an increase in shopping cart abandonments, working with their payment partner to ensure the solution they have in place is optimal. It is often worthwhile to integrate a Payments Orchestration Platform which allows the business to work with several PSPs to help reduce the shopping cart abandonment rate.

Finally, customer retention and improved customer experience is at the heart of all successful payment strategies. PSD2 optimisation helps online merchants stand out, giving them a competitive edge by building trust with their customers. Implementing a secure, safe and frictionless checkout process for the customers will not only help retain customers and reduce abandonment rates but also boost the overall visibility of the business online.

With increased transparency and the freedom to choose a partnership based on specific payment needs and wider access to data, businesses can look forward to making more informed decisions which will benefit them in the short and long-term. The fastest way to implement these changes is for online retailers to establish a more transparent relationship with their payments providers. It really can be as simple as being open, collaborative and sharing existing knowledge with others.