By Richard Mathias Senior Technology Architect at LiveArea
Panic everyone, we have another GDPR – well not quite. PSD2 (Revised Payment Service Directive) is coming into force on the 14th of September and aims to set a standard for fraud prevention and transparent online payments across the EU, much like the new data regulation that came into effect last year.
PSD2 will force two major changes, namely Surcharges and Strong Customer Authentication (SCA). Surcharging will be immediately banned, meaning no sneaky additional fees to customer paying my credit card. SCA meanwhile is enforcement of two-fact authentication. Practically this means asking customer for two of something they know (PIN, security question) or own (one-time password to registered device) or are (fingerprint, face or iris recognition).
What are the benefits of PSD2 for eCommerce merchants?
SCA is expected to add new layers to the front end of checkouts, which adds friction to customer journeys. This will have eCommerce managers worried about conversion rates. In addition, there may also be a plethora of new payment providers to integrate at checkout. However, there are some benefits.
Making online purchases more secure reduces potential chargebacks for businesses. These charges come when customers fall victim to fraudulent activity on retailers’ sites. Also, a reduction in fraud will help build trust and loyalty. Just think, even if a fraudulent transaction is carried out by a third party via a retailer’s site, it’s unlikely the customer will ever trust that site again.
PSD2 regulations force retailers and payment providers to innovate and cause significant disruption in other payment areas. Disruption always comes with opportunities, and new challenger companies looking to undermine the status quo and utilise technology in new ways. Think consumer credit, international payments, subscriptions, and speedy purchase. As we’ve seen with emergence of Monzo, Revolut, and Starling, disruption benefits those that are willing to push the boundaries.
There’s the opportunity for merchants and fintechs to become trusted payment providers. Alongside the usual players (cards, PayPal, Apple Pay etc.), the likes of Amazon Pay could take advantage of the opportunity to offer their payment service on other sites. If the customer is a regular Amazon user and sees the Amazon Pay option on another retailer’s site, it’s likely they will see this as a quick and secure option at checkout.
It might not be too long until we see ASOS, Tesco, or Carrefour payment options alongside Google, Apple, and Amazon buttons at checkout.
Likewise, companies are now able to apply for AISP status, giving them greater information on customers’ ability to pay, without needing to wait until authorisation.
How to prepare for PSD2?
While PSD2 will undoubtedly have a large impact on the way eCommerce companies operate, a flexible approach will help minimise impact on the buyer journey, whilst maintaining compliance in the process.
Removal of surcharges
Once businesses can no longer implement surcharges on certain transaction, they have two options: either swallow the cost or pass it on to customers in other ways, the most common will likely be raised prices. So, PSD2 in this context will likely have a short-term impact on the profit margins of businesses – particularly small businesses – in the longer term it may incentivise them to find cheaper ways for their customers to pay.
But these changes should drive innovation in payments that will eventually reduce costs. Some European banks have launched apps which allow payments to people and businesses directly from accounts, bypassing the credit card networks such as Visa and MasterCard and debit card systems. Barclays’ Pingit in the UK, DNB’s Vipps in Norway and ING’s Payconiq in Belgium are examples.
To mitigate the impact that SCA has on online sales, businesses should focus on an open strategy. The truth is that the implications of SCA are numerous and nuanced. Brands need to keep options open across all platforms until they have the data to show which is the most efficient and seamless, and consider the following along the way:
- Analytics – Retailers should be tagging all clicks and payment actions (where possible) to better understand user behaviour and optimise the payment process. Analytics should be used at every point of the customer journey to understand the impact of each decision and keep the focus on improving conversion and reducing dropout.
- Progressive rollout – The focus for eCommerce companies should always be to find ways of keeping the payment process smooth and minimising negative effects of change. Rather than rushing to introduce lots of measures at once, businesses should plan a progressive rollout of technologies to meet regulatory compliance, with an emphasis on keeping changes to the payment flow smooth and signposted to customers.
- Communicate – Copy, callouts, even emails can be used to let the customer know how, and when, important aspects of the flow will change, so that they’re not too jarring when they do arrive. Elsewhere, offering additional payment methods with two-factor authentication already built into the buyer journey, such as Apple Pay or PayPal, sooner rather than later, will allow for a seamless authentication process.
- Stay up-to-date – Businesses should check whether they are using the current version of a payment provider’s integration tooling, as this will invariably require an upgrade for PSD2. Those lagging behind on old versions of the tooling may find that the effort to upgrade will be greater than expected.
Which payment method should I choose?
To comply with PSD2 and accept payments after September 14, eCommerce merchants should ensure their online stores accept payments through updated technical solutions put in place by existing payment service providers. Expect all current payment service providers to develop new solutions in time for PSD2. Visa and Mastercard, for instance, are rolling out new security solutions for 3D secure payments in time for PSD2.
But there’s really no silver bullet in terms of exactly which additional payment options should be offered at checkout. Whilst retailers should obviously provide a choice for customers to make sure they convert, it’s possible that too many buttons and payment options may cause confusion at checkout. Merchants selling internationally also need to consider local payment methods – think iDEAL in the Netherlands, or PostFinance in Switzerland.
Merchants should look out for additional, innovative payment service providers that are likely to be launched before or around the deadline. This is an opportunity for fintechs, larger retailers and banks to think beyond compliance, embrace new business models, and provide new services. Merchants should be agile in adapting to changes in the space.
If retailers can differentiate themselves from competition, this could be a way of fostering customer loyalty. Offering a different payment option – for example, Klarna’s ‘pay later’ option for online payments – could set retailers ahead of competition if they are first movers. Merchants should be open to partnering with new, disruptive payment providers such as Klarna, Adyen, and Stripe.