What is PSD2?
PSD2 (Payment Services Directive 2) is the binding directive of the European Union that enables consumers to let third parties, in addition to banks, provide services that require access to their financial and banking information.
The money is still kept in one place, namely the bank account, but once a third party gets permission, they can access the bank details. Providing access to the bank details is called “Access to the Account” (XS2A). The consumer can use different providers. These providers are called Account Information Service Providers (AISP). The AISP can (subject to consumer approval) access to consumer banking information and can display spending strategies and collect banking information from multiple banks, in case the consumer has more than one.
Thanks to PSD2, it will soon be possible for a consumer to have a provider initiate payments. Such a provider is called a Payment Initiation Service Provider (PISP). A license from De Nederlandsche Bank (DNB) is required for both the AISP and the PISP before services can be offered.
What is the impact of PSD2 to me as an online retailer?
It is important to know which aspects of PSD2 are relevant to you as an online retailer. PSD2 has been applicable since February this year, but from 14 September the directive will have an impact on the existing handling of online transactions. PSD2 is more comprehensive, but I’ll describe the implications here as it relates to online merchants’ transaction traffic.
Strong Customer Authentication (SCA): safer payments
To make consumers feel more secure, PSD2 asks them for two different verification factors to prove they are who they say they are. We call this “Strong Customer Authentication” (SCA). During the checkout process, you can choose from three factors with which customers can identify themselves, two of which must therefore be applied. The verification process may include the following:
- Knowledge: A password or security question that only the user knows
- Property: something that only the user owns, such as a laptop or cell phone
- Inherence: something the user “is”, such as a fingerprint or facial recognition
While PSD2 aims to make online payments safer for consumers, there are also aspects that can cause you to lose sales.
What are the implications of PSD2 for online retailers?
As Forter.com notes, “Twenty-six percent of customers will abandon their purchase if the checkout process is too long or complicated.” So this new verification process will probably cost a lot of conversion.
There are payment providers that are already coming up with smart ways and are dealing with this conversion-oriented. They offer the option of making the payment without additional friction without increasing the risk for the online retailer. The good news is that transactions below EUR 30 will not be impacted.
Payment provider transaction fees
MasterCard expects that once PSD2 is implemented, 20-25% of transactions will be aborted due to authentication issues. That is 5 times as much as currently. Payment providers still charge costs for transactions that are not successfully completed. This is remarkable because the online retailer does not realize any turnover on those transactions. It can’t hurt to check this because it can save a lot of money.
Another potential drawback of PSD2 is the phasing out of transaction fees. The so-called “surcharges”. This can have a significant impact on the margin for a retailer. It may mean taking a loss, refining price points, or finding other creative ways to recoup the loss. Here too, there are ways to deal with this in a smarter way, while protecting the consumer and limiting the margin impact.
In 2007, when PSD was introduced, it became possible for non-banks to obtain a license as a payment institution. Many companies that we know today as “payment service providers” have used this successfully since then. Compared to traditional banks, they have developed innovative propositions and gained market share.
We will have to give PSD2 time to welcome new services from new providers. Hopefully, these will develop successfully and show their added value to companies and consumers.