PSD2: A Negative Impact on the Checkout Experience

Before PSD2 was put into effect over a year ago, merchants were unsure of how it would affect online conversions. It was generally felt that it would negatively impact conversion rates and the checkout experience, ultimately resulting in revenue decline.

Since PSD2 has now been fully implemented, merchants have started feeling the effects. But before we delve into PSD2’s negative impact on the checkout experience, let’s look at its purpose and requirements.

What Is PSD2?

PSD2 stands for Payment Service Providers Directive 2 and it is a set of rules that guides electronic payment services in Europe. It was introduced by the European Commission to increase financial security, foster innovation, and take banking services to a new level technologically. PSD2 proves that Application Program Interfaces (APIs) are becoming increasingly important. 

The payments industry has been changed by PSD2 in two major ways. Firstly, it makes multi-factor authentication (MFA) compulsory for online transactions to make them more secure. It also compels financial institutions to make the bank accounts of their customers accessible to third-party payment services providers, provided that the account holders approve it.

But how did it all start?

 The Payment Service Providers Directive (PSD) was first introduced in the EU in 2007 to aid the creation of a single payment market. However, some changes were made to the framework in 2013 to enhance consumer protection, innovation, and competition. This amendment became PSD2.

 The implementation of PSD2 began on September 14, 2019. However, more time was given to firms to fully implement Strong Customer Authentication (SCA) which is a major component of PSD2.

Compliance Requirements for PSD2

There are several boxes that a business must tick before meeting PSD2 requirements, they include:

Open APIs for Third-Party Access

Open APIs are vital to open banking as the technology enables third-party providers to obtain information on customers’ bank accounts. As long as a customer approves, the necessary information should be made available to account information service providers (AISPs) through API calls.

Strong Customer Authentication

Strong Customer Authentication (SCA) is essential for any firm that wants to be PSD2 compliant. It is a method of multi-factor authentication that connects each transaction to three things:

• A physical item owned by the customer. This can be a smartphone, hardware token, or bank card.
• Information that the customer possesses. This can be a password, pin, or passphrase.
• The customer’s biometrics. This can be a fingerprint, face ID, or voice pattern.

 Ecommerce firms have had to adopt 3D Secure 2.0 (3DS 2.0) in a bid to meet these requirements.

Increased Transparency

To be PSD2 compliant, firms must attain a higher level of transparency than ever. This means that they must be open about their terms and conditions, rates, and how their financial products work.

Speedy Complaint Resolution

The European Union requires payment service providers to respond to complaints without delay. It also requires firms to report all relevant events.

The Removal of Credit Card Surcharges

The European Union has made it illegal for B2C and B2B firms in industries such as food, travel, and deliveries to include additional charges when processing credit card transactions.

Declining Conversion Rates

As we mentioned earlier, e-commerce businesses rely on 3DS to achieve PSD2 eCommerce compliance due to the need for Strong Customer Authentication (SCA). This reliance has had negative effects on their operations. 

Due to how complicated the 3DS authentication process is, merchants now have higher chances of losing transactions. This ultimately results in reduced revenue. Let’s give you a breakdown of how PSD2 affects conversion rates.

The first issue that merchants face is increased 3DS triggered user abandonment. Several customers tend to abandon the authentication because they don’t understand how 3DS works. Also, the sheer amount of time it takes to complete the authentication process gives customers more time to change their minds about the purchase. 

Another reason why merchants are experiencing declining e-commerce conversion rates is the occurrence of customer-triggered issues. These issues occur when customers enter wrong verification codes or take too long to complete the process.

Even when customers complete the first stage successfully, they still must go through the authorization process. A transaction can be lost in this process if the issuer deems it to be high risk. Since the issuers become responsible for chargeback liability after the completion of 3DS, they try to avoid it by declining certain transactions. Some of these transactions are legitimate.

Hence, the issuing banks harm the revenue of e-commerce businesses by protecting themselves. The fact that lesser 3DS transactions have been authorized compared to non-3DS transactions is proof of the issuers behavior.

Conclusion

As more and more firms implement PSD2, more merchants are compelled to utilize 3DS. This will ultimately lead to a reduction in their conversion rates. Hence, European merchants must lean towards 3DS alternatives such as strong fraud prevention solutions and dynamic 3DS.