E-Commerce In Europe Is About To Change Forever

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  • on April 18, 2019

Digital commerce and online shopping has successfully integrated itself into nearly every facet of modern life. Now, E-Commerce is about change how Europe will drive the digital economy in the years to come. In his recently released article on Forbes, Jordan McKee, Research Director at 451 Research details how new regulations in E-Commerce is rapidly changing the European digital commerce landscape this year. The Millennium Alliance is a proud partner of 451 Research.

According to 451 Research’s Global Unified Commerce Forecastdigital commerce sales in Western Europe will grow at a 17% CAGR between 2018 and 2022 , cresting to $1 trillion by the end of the forecast period. This rapid expansion of the market is bringing with it exciting opportunities but is not without consequences. Fraudsters are increasingly migrating into digital channels, sparking a growing need for improved risk management and robust customer authentication.

Regulators in Europe have chosen to address growing complexities in the digital commerce fraud landscape with Strong Customer Authentication (SCA), a fast-approaching regulation intended to mitigate fraud by mandating a more uniform and stringent approach to authentication. SCA has significant and far-reaching implications across the value chain and will have a direct and potentially unfavorable impact on merchants’ checkout flows.

What is SCA?

SCA is being introduced in the European Economic Area (EEA) as part of the Revised Payment Services Directive (PSD2) regulation. It applies to customer-initiated purchases that take place in Europe, so long as both the cardholder’s issuing bank and the merchant’s payment provider (e.g., acquirer) are located within the EEA.

Under SCA, digital commerce transactions in Europe must be verified by two mutually independent forms of authentication starting on September 14, 2019. EMV 3DS (3D-Secure 2) will be the primary vehicle for payment providers and card issuers to implement SCA.

It is the decision of the card issuer to settle on the authentication methods and factors it elects to leverage during a transaction. The three possible types of authentication issuers must choose from include:

  • Something you know, such as a password or PIN (note that this does not include payment card information).
  • Something you possess, such as a smartphone or wearable.
  • Something you are, such as a fingerprint biometric or facial scan.

Transactions that fail to meet these requirements will be declined unless they qualify for an exemption.

What’s Exempt?

Not all transactions are required to adhere to SCA. Key exemptions include:

  • Merchant-initiated transactions. This includes recurring purchases of the same amount made to the same merchant, such as gym memberships and digital services subscriptions. An important caveat is that SCA will be required for the initial payment to the merchant. At this time, metered billing subscriptions (e.g., subscriptions of varying monthly amounts, such as a utility bill) and various other types of ‘off-session’ payments (e.g., crowd funding) will not be included as part of this exemption.
  • Low-value transactions. Purchases under €30 are exempt from SCA. However, SCA will be required once five transactions below €30 have been made or the total value of those transactions reaches €100. At that time, SCA will be applied and then the ‘transaction count’ will be reset.
  • Trusted beneficiaries. Under this exemption, cardholders can request that their card issuer ‘white-list’ a merchant so that SCA need not be applied to future transactions. The onus is on the card issuer to manage white lists for each cardholder. This exemption is worthy of close consideration by merchants and their payments partners to ensure that frequent customers have the best possible checkout experience. Merchants (especially those reliant on card-on-file transactions) should work with their payments partners to streamline the process for customers to add them to a white list.
  • Transaction Risk Analysis (TRA). TRA is perhaps the most important exemption because it allows merchants to skirt SCA requirements if their payment provider’s aggregate fraud rate (e.g., across all the provider’s customers) is below certain thresholds. These fraud thresholds are .13% for transactions under €100, .06% for transactions between €100 and €250 and .01% for transactions between €250 and €500. Permitted the payment provider’s fraud rates stay beneath these thresholds, real-time risk analysis can be applied to the transaction to assess if SCA should be applied.
  • Secure corporate card payments. Transactions made with a corporate card will be exempt from SCA if the card is ‘lodged’ (e.g., stored with a travel agency that makes airline bookings on behalf of employees) or a virtual card number is used for the transaction.

It’s important to note that applying an exemption is optional. When an exemption is applied as part of EMV 3DS, the fraud liability will fall back on the payment provider (and often, ultimately the merchant) instead of the card issuer, which will own the fraud liability on all transactions where SCA is applied. Further, it is ultimately the decision of the card issuer to support and accept an exemption. We expect that it will be highly unlikely all issuers will be prepared to support every exemption by September 14.

What’s the Market Impact?

The onset of SCA has significant implications for merchants in Europe that sell in digital channels in addition to many of those selling cross-border into Europe. Among the most pertinent is the impact on the checkout experience, which stands to see added friction through the introduction of additional steps to complete a purchase. While cart abandonment and decreases in conversion rates are legitimate concerns, on the flipside is the prospect of improved authorization rates and a reduction in fraud losses should SCA play out as intended. Importantly, SCA also creates an opportunity for a competitive advantage. Those merchants best able to integrate SCA into their checkout flow and effectively apply exemptions will separate themselves from the pack by minimizing customer impact. To achieve this, it will be critical to align with payment providers that have a deep commitment to the customer experience and can deliver a comprehensive and streamlined response to SCA.

About  Jordan McKee, Research Director at 451 Research

I’m a Research Director at 451 Research, a leading IT research and advisory firm focused on innovation and emerging technologies. I direct 451’s global coverage of the payments ecosystem, with an emphasis on the major trends impacting payment networks, issuing and acquiring banks, payment processors and point-of-sale providers. Prior to 451 I was an analyst at mobility research firm Yankee Group covering mobile money strategies. I am listed on the Electronic Transactions Association’s Forty Under 40 list for 2018 and speak regularly at a variety client and industry events, including SXSW, Money20/20 and Interop. Additionally, I serve as a judge for the GSMA’s Global Mobile Awards. I hold a bachelor’s degree with a concentration in marketing from Bryant University.

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Jenny Schecher is a Client Services Director & Social Media Manager at The Millennium Alliance. Jenny is an avid contributor to our blog, Digital Diary, as well as all social media platforms. When she is not writing about digital transformation and technology, she is working with her team to make visions come to life at our events. (and eating all of NYC's best food.) Follow her on Instagram: @jennyschecs or find her on LinkedIn!

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