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Hopes were high when the revised Payment Services Directive (PSD2) came into force in the EU and UK, but has the new legislation lived up to expectations?
A new study has found that UK and EU merchants are suffering from PSD2 switching pains, as fraud, customer experience and data transparency issues continue to frustrate.
In a study commissioned by anti-fraud software maker Riskified, Forrester Consulting surveyed 207 decision-makers from e-commerce companies across the EU and the UK on issues related to PSD2.
Respondents were asked whether PSD2 has so far lived up to their expectations, and whether, if properly managed, they believe it can help merchants transition to smoother and more secure payments.
According to the survey, almost half (45 percent) of respondents said they are still resolving technical issues en route to complying with PSD2, or have only complied with the minimum requirements of PSD2.
This shows that it is still not business as usual for parts of the payments ecosystem, even as the EU sets about developing a so-called PSD3.
Specifically, 26 percent of respondents were described as minimally “complying”, and 19 percent were described to be “troubleshooting”.
Those in the complying group said they have implemented changes such as adding 3D Secure (3DS) to their payment flow, while those in the troubleshooting group said they were facing issues in the data exchange process between parties.
For example, the correct use of flagging in the 3DS process was raised as one such issue.
The remaining half of respondents said they are currently moving toward optimising their payment flows to be fully compliant with PSD2.
Fighting fraud with PSD2
More than 90 percent of respondents said that keeping fraud rates “as low as possible” is “important” or “very important” in their PSD2 strategy.
To help reduce fraud rates, 90 percent of respondents also said that investing in new fraud prevention solutions is “important” or “very important” to their PSD2 strategy.
Despite these aims, however, the study found that fraud continues to be a significant issue among respondents.
A third of respondents said that overall fraud rates have “significantly increased” or “slightly increased” due to PSD2 compliance.
More than 40 percent said that costs related to fraud prevention (excluding 3DS costs) have “significantly” or “slightly increased”, while 39 percent said that fraudulent chargebacks (post-3DS) have “significantly” or “slightly increased”.
Some 57 percent of merchants who increased their fraud prevention costs had also spent at least 25 percent more than they did on fraud prevention prior to PSD2.
“Despite expectations that PSD2 would reduce fraud on its own, payment decision-makers are experiencing a different reality,” the study notes.
For example, more than a third of respondents said that they are receiving more chargebacks on 3DS-authenticated transactions, alongside high friction and cart abandonment levels.
“Without a comprehensive strategy in place, it appears that 3DS alone is not enough to deliver on the promise of adequately reducing e-commerce fraud in Europe and the UK,” the study suggests.
This contrasts with other data that has been made available where card fraud, at least, is believed to have been reduced by the introduction of PSD2’s strong customer authentication (SCA) rules.
In May, for example, Nationwide, the UK’s largest building society, said it was seeing about 2,000 fewer cases of fraud per month as a result of SCA.
And last month, France’s Observatory for the Security of Payment Means (OSMP), which was established by the Banque de France, reported that fraud has been reduced by 4.2 percent compared with 2021 — a move which it attributed, in part, to the new security measures.
Is the best of PSD2 still ahead?
Despite the challenges merchants have faced under PSD2 so far, they remain broadly optimistic that the new legislation will unlock greater opportunities in future.
When asked what their organisation is hoping to gain from implementing an optimisation strategy around PSD2 compliance, a slight majority (53 percent) said they expect to gain a competitive advantage and an improved customer experience.
Exactly half of respondents said they expect to see higher conversion rates and increased customer retention.
Among the pain points that, if resolved, could help merchants advance their PSD2 strategy, the most common answer (65 percent) was transparency in payment processing fees.
This was followed by regular updates on market performance (61 percent) and a review of solutions available on the market helping to optimise PSD2 compliance (59 percent).
