Ai Editorial: Assessing the impact of PSD2 legislation on payments

First Published on 2^nd March, 2019

Ai Editorial: The final stretch of the PSD2 timeline is few months away. Various stakeholders in the payment ecosystem have to advance their respective payments security systems so that they meet the regulatory technical standards’ requirement, writes Ai’s Ritesh Gupta.

The payment ecosystem continues to evolve, and one of the driving factors behind the same are the regulatory moves focused on streamlining digital payments.

A development that is being closely followed is the PSD2 in Europe. This payment services directive is being associated with a major change in payments and data protection. The PSD2 legislation came into effect last year, with full operational compliance to technical standards required by August this year.

It is a vital step in the direction of complete Open Banking. This legislation has paved way for new payment options for shoppers. It extends the digital single market for payments going in and out of the European Economic Area (EEA).

The PSD2 requires banks to expose payments data and to provide the ability to transact (known as “read” and “write” privileges) to 3rd parties. The PSD2 introduces strict security requirements for the initiation and processing of electronic payments, which apply to all payment service providers, including newly regulated payment service providers. Payment service providers will be obliged to apply so-called strong customer authentication (SCA) when a payer initiates an electronic payment transaction. According to the European Commission, “exemptions include low value payments at the point of sale (to facilitate the use of mobile and contactless payments) and also for remote (online) transactions”. The use of SCA is to become mandatory 18 months after the entry into force of the RTS or regulatory technical standards, which also caters for the security of payments that are carried out in batches.

SCA is focused on ensuring attempted fraud goes down and merchants and issuers in the EEA are validating the consumer for all electronic payments.

Important facets of PSD2 are:

• Stepping up the rights of the consumer and more confidence as they shop online. According to the European Commission, customers will have to give their consent to the access, use and processing of their data. 3rd parties providing payments-related services or TPPs will not be able to access any other data from the payment account beyond those explicitly authorised by the customer. Other areas - better management of complaints, implications on surcharging and currency conversion.
• Improved security through the SCA criteria.
• 3rd party access to account details.

One of the major implications of this directive is that it will cut down on transaction costs. As Anthony Hynes, CEO and MD of eNett International, also pointed out in a company’s blog post, the introduction of this directive means companies have had to “absorb the additional cost from transactions or redirect the cost back to the consumer”. Also, from the travel industry’s perspective, Hynes mentioned that apprehensions were raised considering the fact that players were relying on surcharges, “particularly travel agents with big-ticket items and already slender margins”. As for the bearing on the transactions by travel shoppers, Hynes recommends that travel intermediaries must adhere to two-factor authentication (2FA), and at the same time make it a frictionless experience to encourage repeat purchases from shoppers.

Transition

The industry is currently preparing for the same. Various stakeholders in the payment chain have to advance their respective payments security systems so that they meet the RTS requirements. Talking of open banking, as defined by the RTS, there is a need to facilitate a sandbox setting by 14^th March to onboard 3^rd parties where testing can be done without exposing any sensitive information.

Other areas include customer experience (CX) and fraud management. Worldpay’s VP Global Retail, Maria Prados, recently underlined that the main consequence for retailers would be around the regulatory changes to reduce fraud that will have a direct impact to the CX. Where SCA is required, biometrics is expected to play a big role, considering availability of features such as fingerprint sensors, voice or facial recognition on smartphones. It is important for merchants to embrace a system that makes sure SCA is exempted in low-risk scenarios. Merchants have already starting working on systems that rely on machine learning for astute decision-making. Rather than using a blanket rule that forces every user to login with 2FA, real-time surveillance can be used to assess logins in the background, and only logins with borderline risks expected to go through 2FA. This would greatly improve the user experience on the whole, while ensuring that security for accounts is not taken for granted.

The directive mandates changes in how fraud review must be done on intra-EU transactions, pointed out Riskified. A majority of transactions will be reviewed by SCA. This is likely to be 3D Secure 2.0. One of the strengths of EMV 3DS is sharing refined data about the shopper and the transaction so the issuer can validate transactions without affecting the consumer’s checkout experience. At the same time, it is being recommended that merchants should still develop their own fraud tools that are able to tap on their own sources of data for greater efficiency and more accurate detection of fraud.

Payment specialists also need to assess scenarios where exemption to SCA is permitted.

CardinalCommerce explains that the SCA requirement “is for transactions between cardholders whose payment cards have been issued in the EEA and merchants located in the EEA. To clarify, if a cardholder with a card issued in the U.S. buys from a merchant located in the EEA, SCA is not required (though an authentication solution is recommended). Conversely, if a cardholder’s payment card has been issued in the EEA and they make a purchase from a U.S. merchant, SCA is not required. These transactions are labeled “one-leg-out” and are out of scope for PSD2-SCA.” Another important aspect – the European Banking Authority “recommends exemptions for payment service providers (PSPs) that adopt risk-based requirements in lieu of strong customer authentication, which ensures the safety of the payment service user’s funds and personal data”.

Hear from senior executives about PSD2 at the upcoming ATPS (21st Century Customer Experience for Payments & Fraud - Airline & Travel Payments Summit) to be held in London (Brighton), UK  (7-9 May, 2019).

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