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SCA EXEMPTIONS ARE A MERCHANT’S BEST FRIEND, BUT THEY DON’T COME WITHOUT COMPLICATIONS

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Shagun Varshney, Product Manager at Signifyd

 

When it comes to online commerce, much of Europe is living in a new payment regulation era — and the UK will soon follow.

It’s an era of two-factor authentication, exemptions, step-ups, transaction legs that are either in or out — and a more secure ecommerce shopping experience for consumers. Polling and industry anecdotes indicate that for many, SCA, which stands for Strong Customer Authentication, might as well mean Something Causing Anxiety. Merchants and consumers know something is changing, but exactly what, for whom and when, well, that’s a little unclear.

But there are ways that UK merchants and brands can embrace SCA by 14 September, the date on which the regulation will be fully enforced.

A quick refresher: SCA is required under the sweeping digital payment regulation known as PSD2. It is already being enforced through much of Europe. It is meant to better secure online checkout by requiring that shoppers be authenticated by two of three methods: something the user knows (such as a one-time passcode), something the user has (such as a mobile device) and something the user is (such as a fingerprint, facial recognition, typing behaviour).

The key to getting SCA right is to conduct the required two-factor identification without adding inconvenience to the checkout process. And that starts with understanding the exemptions and exclusions contained in the requirement and how those elements best apply to your particular business. Wisely deploying exemptions will allow a significant percentage of transactions to be exempted from the regulation — under the right conditions.

As you’ve probably guessed, establishing those conditions has become more important than ever. It’s also important to note that while exemptions and exclusions, which we’ll get to shortly, benefit merchants and their customers, control over whether they are available to a merchant is largely in the hands of a merchant’s payment service provider or a cardholder’s issuing bank.

 

In general exemptions — and their close cousins, exclusions — are available when an order meets certain conditions:

  • The order is low risk and low value.
  • The merchant and its bank have maintained a low fraud rate and the transaction meets certain value limits.
  • The transaction is considered “out of scope.” The list for these exclusions includes phone or email orders, prepaid card transactions and transactions when the acquiring bank or the issuing bank are outside the European Economic Area — or “one leg out transactions.

 

One other exemption is available, but a consumer’s bank must agree to allow it in order for it to be applied. It’s called the “Trusted Beneficiary” exemption. It can be applied when a consumer expressly tells the bank that issued their credit card that they don’t want extra scrutiny applied when they are buying from specific merchants. Again, the issuing bank can refuse to allow the exemption.

Similar to exemptions, “out of scope” transactions can also be processed without SCA. In some instances SCA simply does not apply. Think phone or email orders, prepaid card transactions and transactions when the acquiring bank or the issuing bank are outside the European Economic Area (this is where the “one leg out” phase is used). In the case of a merchant-initiated transaction, a subscription for instance, SCA needs to be performed only once to authenticate the buyer.

Visa, among others, has provided a specific list of exemptions and exclusions.

It becomes evident, scouring the Visa list, that while helpful, exemptions are also limited. Consider low-value transactions for instance. It’s great that transactions below  €30 can bypass SCA. But what if you sell jewellery, luxury watches, electronics, high fashion, home goods, sporting goods, groceries, auto parts or sell in any of the nearly limitless verticals that offer products or groups of products upon which consumers typically spend more than €30 on?

Oh and there is a catch: Even low value transactions need to undergo SCA periodically — every five transactions under €30 must undergo SCA, as must an order once the cumulative value of low-value transaction reaches €100.

Or consider allow-listing. First off, a consumer needs to be aware there is such a thing. A merchant might add a notice at checkout suggesting, “If you like shopping with us, ask your issuing bank to allow-list our store.” All of which leaves a consumer saying, “Ask my what to do what now?”

And even if consumer consciousness-raising is a success, think about the bank that issued the consumer’s credit card. By agreeing to allow-list a merchant, the bank takes on liability for any fraudulent orders. So in one stroke, the bank allows the order to bypass increased scrutiny and agrees to be on the hook for orders that are not legitimate. That’s not a lot of incentive, to put it mildly.

None of which is to say that exemptions should be ignored. Exemptions are a powerful way to provide a seamless experience for customers. When an exemption is approved, the customer doesn’t have to worry about the transaction being stepped up by requiring two of the three SCA authentication methods. And so, retailers want to be in a position to take advantage of exemptions.

One thing that quickly becomes obvious when planning a robust exemption and exclusion strategy is that the starting point for taking advantage of SCA exemptions is to ensure that your enterprise is a solid citizen when it comes to preventing fraudulent sales. Take the most obvious case: In order to take full advantage of the low-risk transaction exemption, a merchant needs to keep its fraud rate below an exceedingly low .01%. That clears the way for purchases under €500. Exemptions for purchases under €250 and under €100 are also available for merchants with fraud rates of .06% and .13% respectively.

It’s important, then, to include a powerful fraud protection solution in your overall SCA strategy. A low fraud rate is vital to securing exemptions and exemptions are vital to producing a top-flight customer experience.

Embracing a modern machine-learning fraud solution that sifts fraudulent from legitimate orders in an instant while seamlessly scaling does far more for a merchant than simply ensuring it can use exemptions. Yes, doing away with SCA is one of the best things about exemptions, but it is also one of the worst things about exemptions. Sure, an exemption eliminates the potential friction added to the buying journey by two-factor authentication, but an exemption also sidelines the extra protection that step-ups provide an online seller.

A constantly learning automated fraud solution with a financial guarantee provides the protection needed to ensure good orders are shipped and fraudulent orders are declined.

Merchants and brands will want to be able to confidently pursue an aggressive exemption strategy without worrying about new vulnerabilities that fraud rings will look to exploit. Consider the irony of working so hard to maintain a low fraud rate in order to take advantage of exemptions, only to have those exemptions ultimately lead to a higher fraud rate.

As with many things in commerce, it’s best to take a holistic view when you’re considering how SCA and its exemptions fit into your entire risk management plan.

 

Business

THE ACCELERATION TOWARDS A MOBILE FIRST ECONOMY

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By Brad Hyett, CEO at phos

 

Over the last year, we have seen a big shift towards contactless payments. Fuelling this has of course been the coronavirus pandemic, which has made the public hesitant to handle cash due to the health concerns.

As multiple national lockdowns forced physical stores to close, and customers demanded easy, cash-free payment options, merchants had to quickly adapt. The result? An increased provision of pay and collect services.

In the UK alone, 83% of people use contactless payments according to data from the Office of National Statistics.

So it’s vital that merchants are equipped with the most efficient payment solutions, as the UK heads towards a mobile-first economy.

 

Proliferation of contactless payments

In 2020, 90% of UK card payments were contactless. This equates to an increase of 12% on the year prior, despite the total number of payments made falling by 11% from 2019 to 2020. Moreover, the affordability of smartphones has increased significantly over the last decade. And it’s estimated that 84% of UK adults now own one.

We’re Seeing merchants embrace more efficient and cost effective payment methods in response. While physical payment terminals are often too expensive for many small businesses, software point of sale, or SoftPoS, enables merchants to turn hardware that they already own – i.e. their mobile device – into a point of sale terminal.

With merchants increasingly adopting these innovative technologies, contactless payments will continue to gain popularity among the general public. In 2020, 13.7 million people in the UK either didn’t use cash at all or only used it to make a single purchase. That’s double the same figure from the previous year.

 

Changing consumer demand

Now more than ever, consumers are aware of how innovative payment solutions can add efficiency to their daily lives. As such, consumers now demand better payment services, including reduced queuing times, checkoutless stores, and bespoke loyalty schemes.

Businesses such as Mercedes offer an end-to-end digital car purchasing service, so customers can go through the whole car purchasing journey from the comfort of their own home. This includes car deliveries, financing, insurance and more.

Meanwhile, eCommerce giant Amazon has started trialling checkoutless ‘Go’ stores, speeding up the shopping experience by eliminating the queuing process altogether. The days of waiting for a table at a restaurant are also over, as more people have grown used to booking in advance.

Hence, it’s important that we empower small businesses to remain competitive and provide them with the payment solutions to meet customer demand.

 

Global transformations

The digital payments revolution isn’t slowing down anytime soon. By 2026, only 21 percent of transactions will be made using cash.

The US might have been slow out of the gate, but it’s starting to see increased adoption of mobile payments. In-store mobile payments grew by 29% in the States last year alone.

This growth was primarily fuelled by Gen Z-ers and millennials. Latest projections show that there will be 6 million new mobile wallet users by 2025, with millennials accounting for 4 million of this figure. These two generations, the former in particular, have grown up with mobile banking.

For most Gen Z-ers, their first foray into financial services was with a challenger bank like Starling or Monzo. These banks are able to offer online features such as ‘split the bill’, fee-free withdrawals abroad and much more to cater to the modern financial needs of the younger generation.

The Middle East experienced similarly sharp increases in contactless payments. From 2019 to 2020, there was a 200% growth in contactless transactions. This shift towards a mobile-first economy in the region was inevitable; the pandemic merely accelerated this shift. A recent study showed that 80% of people living in the Middle East planned to continue using contactless payments post-pandemic, with speed and security being the main draw.

 

The future is mobile

As parts of the world now start to come out of lockdown, there’s an openness to new solutions and a widespread acceptance of new technologies.

It is now a case of when, rather than if, we’ll see a permanent shift to cashless in the future. For businesses, embracing digital innovation will be key to remaining competitive and keeping pace with consumer demand in this fast-changing payments landscape.

 

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HOW MERCHANTS CAN IMPROVE THE ONLINE PAYMENTS EXPERIENCE

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By Alan Irwin, Senior Director of Product at Global Payments UK

 

The dramatic increase in online shopping over the past 18 months has encouraged many businesses to invest in developing their omnichannel shopping experiences. The reasons vary – some are keen to capitalise on the trend of older shoppers migrating towards ecommerce and some are trying to make up for loss of sales in brick-and-mortar stores during the pandemic. It is also true that many businesses are shifting their models to sell direct to consumers to avoid high marketplace fees and are therefore building their ecommerce channels for the first time.

The checkout experience is arguably the most important and delicate part of the ecommerce transaction, as it can make the difference between a happy customer likely to return, and a shopping cart abandoned out of frustration and confusion. A survey from March 2020 suggested that 88% of online shopping orders were abandoned, i.e. not converted into a purchase. A seamless, customer-centric online payment experience is therefore critically important in ensuring completed transactions. But with so many payment providers available, what should businesses be looking for when trying to keep friction to a minimum?

 

Keep clicks to a minimum

Less touchscreen interaction equals less abandonment. Adapting the payment page to fit any device and supporting popular mobile digital wallets like Google Pay ensures a seamless, stress- and hassle-free checkout experience for the customer and keeps clicks to a minimum. Friction can present itself in the most minor features – for example, when the customer is navigating the payment form, the appropriate keypad should be shown to the customer when required. It’s much easier to enter a card number using the dial pad instead of switching between QWERTY keypad layouts.

Simplifying online forms with autofill and tokenisation also significantly reduces friction at checkout and shortens necessary time taken. Ensuring checkout forms are tagged correctly for “autofill” is a great way to offer customers a single-click to input the payment, shipping, and billing data that they have stored in their browser profile. Similarly offering a guest checkout option will help convert customers who are in a hurry or looking for a one-off purchase. This can also be achieved by offering to store the payment details (called ‘tokenisation’) for express repeat and one-click purchases.

 

Make it easy to understand

A tailored payments approach can increase both domestic and international global sales. By offering a checkout experience in the customer’s language, the option to pay in their currency of choice, and use their preferred method of payment (whether it’s PayPal, Alipay or card), businesses can build loyalty quickly and put customers at ease. It is equally important for merchants to ensure they always display simple direction and information about next steps to instil confidence and prevent customer drop-off. The customer should be informed of what is happening at every stage in the process, for example, whether they will proceed to SCA (Secure Customer Authentication) next or go straight through to completion.

In addition, validating forms in real-time means merchants can highlight potential errors to the customer early on, and payment providers should provide this functionality. This could be an invalid expiry date, an incorrect digit in the card number or incorrect CVV number based on card type. When issues are only flagged at the end of the process, this forces the customer to go back through the steps to figure out the error. Real-time signposting of problems removes this potential friction and reduces the potential for a declined transaction.

 

Ensure seamless security

Merchants should work with a payment partner who offers the right blend of security and compliance management without it coming at a cost to the end-to-end checkout experience for the user. Instilling trust and security in your checkout flow while utilising the right solutions to drive seamless authentication flows will increase customer confidence and help prevent drop-off.

The greatest level of security and control comes from either utilising hosted payment fields that the
merchant can natively integrate into their checkout flow, or a hosted payment page where they can
manage the look and feel. Showcasing your brand on the checkout page with trust signals and logos also adds to building trust with the customer.

Staying ahead of regulations is also important. Secure Customer Authentication (SCA) will soon be mandatory in the UK for all eligible digital transactions, and this doesn’t have to be a friction-full process. Tools like Transaction Risk Analysis (TRA) and Exemption Optimisation Service (EOS) can quickly score transactions and drive exemptions where there is the right blend of transaction risk.

 

The devil is in the details

These three rules for successful ecommerce checkout experiences may seem straightforward, but it is important to apply them at a micro level. It can take only one minor point of friction to cause a customer to abandon their cart, and this will inevitably be replicated across other similar customers. It is critical to identify friction points early on and anticipate customer needs throughout the process. Discussing these points and any opportunities to improve customer checkout experience with your ecommerce team and payment provider is an important first step towards ensuring your entire shopping experience remains competitively seamless and loyalty is won. It may be that your payment provider cannot address them, in which case it could be time to move on in order to stay competitive.

 

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