Online marketplaces and the challenges of SCA

23 July, 2019

With today’s time-poor, perpetually connected culture, the attraction of online marketplaces for one-stop shopping is strong. A convenient and fast solution for consumers and an ideal channel for retailers looking to ride the growing wave of ecommerce, marketplaces offer an efficient way to satisfy consumer needs. Online retailers can quickly capitalise on the reach of online marketplaces catering to smaller, niche markets or appealing to the masses, with volumes of online transactions rising steadily each year. However, in Europe the introduction of PSD2 and the resulting SCA (strong customer authentication) requirements have placed marketplace payment processes under increasing scrutiny, pressuring platforms to increase authentication standards while reducing payment process friction and maintaining a positive customer experience. Without careful management, the introduction of the extra authentication steps of SCA into the payments process can bring negative consequences for these huge volumes of payments, for the marketplaces themselves and for the overall customer experience, resulting in a far-reaching impact on the European online economy and the businesses that function within it.

PSD2 for ecommerce

Marketplaces have become significant drivers of ecommerce around the world. Consequently, they require strict scrutiny to ensure that regulations are keeping up with quickly adapting technology, and to safeguard customers, making sure they receive adequate protection when making payments. PSD2 seeks to enforce enhanced security and customer protection via SCA for this reason. SCA requires merchants to use 2FA (two factor authentication) to identify their customers and authenticate them – critical for establishing consumer trust and security. 2FA insists upon authentication using two of three mechanisms; inherence, possession or knowledge. While necessary for safeguarding purposes, this model is at odds with the constant drive for frictionless payments that marketplaces have developed and refined over the years. The additional SCA steps included in the payments experience create a more lengthy and complicated process, raising issues about barriers to purchase in the online marketplace sector. Also, alongside these worries, recent findings revealed that 25% of European merchants are unaware of the SCA process becoming compulsory, and additionally, of those that were aware, 24% had no plan in place to implement the requirement before the September deadline[1]. Similarly, there are fears that small businesses may struggle to afford the implementation cost of SCA into their checkout processes, with the lack of compliance likely resulting in fines. The seriousness of these concerns has led to the FCA delaying the introduction of SCA past the September deadline, in order to give businesses a better chance at success when incorporating the requirements into existing payment flows.

SCA as a barrier to transactions

Since online purchasing was established, retailers have worked hard to make the payment process as smooth and simple as possible, so much so that websites like Amazon developed a “one-click” model for instant payment of goods. The SCA requirements, despite a handful of exemptions, will undoubtedly change the payment process making it more complex and meaning frictionless models like “one-click”, virtually impossible to maintain. With today’s checkout processes defined as “very easy” by 47% of online shoppers[2] in a recent survey, and 52% claiming they would abandon their cart and complete the transaction with a different merchant if the payment flow isn’t smooth enough[3]it is apparent just how fickle online consumers can be, and how critical a seamless payment process is for superb customer experience. Post introduction of SCA, this fickle behaviour will quickly highlight which businesses haven’t adequately optimised their payment flows. Consumers have a low tolerance for checkout friction, and this will have serious consequences for businesses that fail to deliver, acknowledged clearly by the delay in introducing the requirements. Despite this and the added complexities to the payment process, consumers still claim an appetite for security, with 60% of European preferring authentication from every online business they make payments to,[4] this is in stark contrast to the 17% who claim they prefer no authentication at all,[5] but time will tell whether these figures remain accurate, post-SCA introduction.

The impact on marketplaces

While a minority of consumers prefer no authentication during their online purchase, the fact is that as the popularity of marketplaces rises and global payments continue to grow, the need for evolving regulation and security is paramount in order to protect consumers. This means that not only is the payments process under scrutiny but so is the way the marketplaces themselves operate. Typically, marketplaces are platforms that act as intermediaries between merchants and customers, but do not sell products or services themselves. However, if the marketplace accepts funds to transfer to recipients, then they are required to apply for a license to become a regulated payment service. Regulators are keen to ensure the growing marketplace economy is kept under a watchful eye, making sure that consumer protection, AML and competition rules are keeping up with the pace of technological innovation. Under this close watch, those online marketplaces that don’t comply with changing regulations and requirements, particularly SCA, will likely see a dramatic drop in approvals as banks will become obligated to decline transactions due to non-compliance.

Working together to meet SCA expectations

PSD2 and SCA are proving to have their fair share of implementation and compliance challenges, however, as with all change, so too comes the opportunity for innovation, and several businesses have created technology or developed partnerships in answer to the SCA requirements. One such technology that is emerging as the preferred solution is 3-D Secure 2.0 (3DS2). This secure standard enables a frictionless authentication experience and is expected to be a key method for businesses to meet SCA requirements and exemptions. Consumers are already used to 3DS 1.0 in the form of “verified by Visa” (or similar) pages during the payment process and the second iteration of the tool aims to provide an even better customer experience using less disruptive authentication methods. This frictionless experience is a fairly straightforward, existing solution for online marketplaces in response to SCA, however, currently 25% of businesses are not familiar with it – and a further 24% plan to implement only after the mid-September deadline.[6] Payments providers that service marketplaces are also looking to acquire or collaborate with tech companies to slot into existing propositions in order to meet the SCA requirements. One such acquisition recently was Stripe, who acquired Touchtech payments, a supplier who works with banks to help them manage and build SCA. These strategic acquisitions and partnerships will be key for payments providers who supply marketplaces and the online marketplaces themselves, in order to continue to provide payments processes that are as seamless as possible.

There is no doubt that the introduction of SCA will be a challenge for online marketplaces, illustrated by the delay to the introduction of the requirements. Maintaining the frictionless payment process that consumers are accustomed to will require careful consideration and strategic employment of technology and partnerships in order to succeed. The statistics around abandoned cart rates due to difficulties during payment processes are a real concern, particularly with the inclusion of the additional steps required by SCA. For marketplaces to best mitigate the complexities of these new requirements, those having expertise in 3DS2, sophisticated exemption procedures and strong technology partners will be best placed to turn this regulatory challenge into a potentially lucrative opportunity for competitive differentiation.


[2-6] The Impact of SCA: shaking up Europe’s online economy, May 2019

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