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As of September 14th, Strong Customer Authentication (SCA) will come into force across the EU and the urgency to prepare for this cannot be overstated. Online businesses will be required to evolve their checkout systems to include an additional layer of authentication for transactions above €30 in value. Similar in scale to GDPR – SCA is the single most disruptive event to impact European digital commerce.
However, with under three months to go, preparedness remains remarkably low. A recent study conducted by 451 Research in partnership with Stripe found that only 44% of businesses aware of SCA expect to be compliant by the deadline. It forecasts that Europe’s online economy stands to lose as much as €57 billion in economic activity within the first 12 months of the regulation taking effect.
SCA will disproportionately impact small businesses
Small businesses face perhaps the greatest challenge: three in five businesses with under 100 employees remain unfamiliar with the new SCA rules. This significantly contrasts with larger merchants that have more than 5,000 employees, where only 1 in 25 payment professionals are unaware of the planned changes.
Too many businesses are also drastically underestimating the complexity of managing SCA exemptions and the impact it will have on their resources; 50% of the European merchants surveyed are planning to handle this in-house. The challenge is that exemptions are complicated to administer, particularly for SMEs, and require visibility on how card networks and banks will apply exemptions across Europe.
SCA will exacerbate low consumer tolerance for bad checkouts, causing a rise in cart abandonment
Just 47% of European consumers feel today’s online checkout process is ‘very easy’ and the most attractive customers for online businesses often abandon purchases when encountering a poor checkout experience. For example, 74% of Gen Z shoppers have abandoned an online purchase in the past six months due to a bad checkout experience. Over half (52%) of online shoppers who abandon a purchase end up completing the transaction with a competing merchant.
Alongside this backdrop of low consumer tolerance for poor checkout design, 73% of shoppers are unaware of the new authentication requirements. As such, SCA is likely to serve as an additional obstacle for consumers if merchants are unsuccessful in creating a smooth process for everyday online purchases.
The payments industry needs to act swiftly to ensure compliance and preserve fluidity
There’s no doubt that the industry shares the regulators’ commitment to a secure payments ecosystem, but we need to ensure that businesses are in a position to comply. SCA will essentially require European merchants to fundamentally restructure their checkout flow, with serious risks for sales conversion if fluidity is not maintained.
Three potential solutions for online merchants
- The systematic integration and application of 3D Secure 2 (3DS2), the solution to maximize transaction security and ensure a smooth payment process, including on mobile devices. This requires a technical partner. Chances of success: Doubtful, as not all banks will accept 3DS2 by the deadline. In those cases, merchants will have to rely on 3DS1, which, according to Visa, will result in an 11 percent drop in revenue. Feasibility: Medium.
- Develop their own payment infrastructure by connecting the merchant to the payment card network and all guideline-compatible payment methods such as Apple Pay and Google Pay. This solution is particularly complex because all regulations and exceptions of all potential payment flows to all countries of origin of the bank, customers and means of payment must be taken into account. Prospects for success: High. Feasibility: Difficult. Only very large merchants can meet such a legal, technical, personnel and especially financial challenge.
- Partnering with a Payment Service Provider who is familiar with the laws, exceptions and different interpretations. However, the number of payment service providers who provide comprehensive support to merchants during the transition to the use of SCA-compatible payment solutions is small. Prospects for success: Good – but here it depends on the choice of payment service provider, because even these are not yet well prepared in some cases. Feasibility: Simple.
At Stripe, we have always felt that it’s critical for payments infrastructure providers to take on an additional responsibility for insulating businesses against complexity. We do this firstly by investing in our product development teams, and trusting them to create new compliant iterations of our core products, but also by communicating clearly with merchants around common industry challenges.
In this way, payments infrastructure providers can play a critical role in securing the online economy. While simply offering solutions such as 3D Secure 2 can help to ensure that friction is kept to a minimum, the payments industry will need to move swiftly to educate merchants about the scale of the challenges that SCA poses and the effect on the economy if businesses are unable to comply.
Stock Photos from Phongphan/Shutterstock