TheRetailer_Summer_19

Competition for Cards: Why SCA Could Open the Door Online

ROBBIE MACDIARMID SENIOR ECONOMIST CMSPI

WITH STRONG CUSTOMER AUTHENTICATION THREATENING TO DISRUPT THE ENTIRE INDUSTRY, A SMOOTH IMPLEMENTATION COULD MEAN GENUINE COMPETITION FOR PAYMENT ACCEPTANCE Is Strong Customer Authentication (SCA) the Y2K of this decade? When merchants, merchant acquirers, gateways, card schemes, issuing banks, and regulators are all saying the same thing – that the industry is not ready – it seems highly unlikely that this issue will pass by without consequence. CMSPI, an independent payments consultancy, estimates that merchants across Europe could lose €68 billion in revenue in the year following a Europe-wide 14th September deadline. The European Banking Authority (EBA) has provided merchants with some hope following its announcement of support for delays to the deadline in exceptional circumstances, and there may still be a possibility of a pan-European delay if National Competent Authorities can agree on a plan of action. Ultimately, however, SCA will be mandated at some point in the future and will make it more difficult for consumers to make payments online, potentially costing merchants sales in the process. The negative impact of SCA, in its current form, cannot be trivialised: smaller ecommerce businesses could see their margins wiped out in the short term and may even go bust as a result. However, if SCA can be implemented smoothly and with full operational readiness across the supply chain, i.e. via a delay and phased rollout, then not only could this disastrous scenario be avoided, it could actually be the catalyst to a more fair and competitive market. As merchants and consumers demand streamlined payment experiences, additional friction in card payments could open the door for new firms to enter the market with seamless offerings not based on a traditional card transaction process. As well as this, existing methods that may previously have been overlooked due to a perception of high friction may become more attractive.

In pole position to grasp this opportunity are Payment Initiation Service Providers (PISPs), using the open banking framework introduced by PSD2. Merchants may currently see PISP payments as frictionful with the authentication process always taking place within the issuing bank’s domain, but this becomes a smaller consideration if an estimated 40-60% of card payments will require similar treatment under SCA. As the customer journey will now be comparable to that of card payments, the value proposition of PISPs is significantly boosted. While open banking and PISPs may not currently be at the top of merchants’ priority lists, with SCA looming, the potential benefits are too great to ignore. There are three main ways that merchants could benefit: 1. Cost Savings PISP payments are facilitated like a bank transfer, meaning the cost of the payment does not vary with the transaction amount. Additionally, banks will not be able to charge PISPs more for initiating the payment than they would for a consumer to initiate it themselves – which often involves no fee at all. These two factors combine to produce a business model with relatively low, constant costs per transaction, in a market where competition is likely to drive fees down over the coming years. For merchants – particularly those with high average transaction values – these fixed transaction costs of e.g. 10p per transaction could significantly reduce overall fees for payment acceptance. Further, as the customer is making a push payment and authenticating the transaction with their issuing bank, the scope for fraud is reduced, as well as the ability to raise chargebacks. Merchants will be able to design their own infrastructure or rulebook with PISPs and avoid the inflated fees associated with chargebacks on card payments. 2. Customer Data As the market is still in its infancy, the power of customer data captured via PISPs is yet to be fully explored. While PISPs may not use customers’ bank details for any purpose other than the transaction, there is an opportunity for merchants to assess spending patterns and offer targeted discounts and rewards like never before. The possibilities with open banking are vast and new services are being developed constantly. For example, a point-of-sale experience where a customer can view their current account balance within the merchant payment page will be possible with open banking, and the benefits these services could provide merchants and consumers are staggering. 3. POS Competition Merchants have been operating without a ubiquitous competitor to card in the online space, providing no incentive for the global card schemes to innovate or make fees more competitive. In fact, the card schemes continue to introduce new and increased fees with a recent focus on Card Not Present transactions. Visa have announced a new fee for every transaction sent via 3D-Secure version 1 or 2 (the industry’s primary tool for SCA compliance) in Europe, coming into effect from 17th August – just under a month before the SCA deadline. If PISPs can see successful consumer uptake, then merchants may be in a stronger position to fight back against these fee increases.

Fewer mouths to feed: PISPs cut the card networks and merchant acquirers out of transactions

Dotted line = Previous Interaction, Red line = New Interaction

30 | summer 2019 | the retailer