What is PSD2?
PSD2 (Payment Services Directive 2) is the European Union’s binding directive that allows consumers to have third parties, in addition to banks, provide services that require access to their financial and banking data.
The money is still kept in one place, namely the bank account, but once a third party gets permission, they have access to the bank data. Providing access to bank information is called “Access to the Account” (XS2A). Consumers can use different providers. These providers are called Account Information Service Providers (AISP). AISP has access (upon consumer approval) to consumer bank data and can display spending strategies and collect bank data from multiple banks, in case the consumer has more than one.
Thanks to PSD2, it will soon also be possible for a consumer to have a provider initiate payments. Such a provider is called a Payment Initiation Service Provider (PISP). Both AISP and PISP require a license from De Nederlandsche Bank (DNB) before services can be offered.
As an online retailer, what will I notice about PSD2?
It is important to know which aspects of PSD2 are relevant to you as an online retailer. PSD2 has been in effect since February this year but from Sept. 14, the directive is going to impact the existing handling of online transactions. PSD2 is more comprehensive, but here I describe the implications that pertain to the transaction traffic of online retailers.
Strong Customer Authentication (SCA): more secure payments.
To ensure 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, customers can choose from three factors with which to identify themselves, two of which must therefore be applied. The verification process may include the following:
- Knowledge: a password or security question known only to the user
- Possession: something that only the user owns, such as a laptop or cell phone
- Inheritance: 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 could cause you to lose revenue.
What are the implications of PSD2 for online retailers?
Like 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 probably costs mostly conversion.
There are payment providers who are already coming up with clever ways and are conversion-oriented about this. They offer the ability to make payments without additional friction with no increase in risk for the online retailer. By the way, the good news is that transactions below EUR 30 will not be impacted.
Transaction fees from payment provider
MasterCard expects that once PSD2 is effective, 20-25% of transactions will be aborted due to authentication issues. That is 5x as much as currently. For transactions that are not completed successfully, it is common for payment providers to charge for them anyway. This is striking because no revenue is realized by the online retailer on those transactions. It doesn’t hurt to check this out because it can save a lot of money.
Surcharges
Another potential drawback of PSD2 is the phasing out of surcharges on transactions. The so-called “surcharges.” This can have quite an impact on margin for a retailer. It may mean taking a loss, redetermining price points or finding other creative ways to recoup the loss. Again, there are ways to be smarter about this where the consumer is spared and the margin impact is limited.
Preliminary conclusion
In 2007, with the advent of PSD, it became possible for non-banks to obtain a license as a payment institution. Many companies we know today as “payment service providers” have since successfully used it. Relative 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. These will hopefully begin to develop successfully and demonstrate their added value to businesses and consumers.
