In the third and final episodeof our series on Embracing Changing Trends in Connected Payments: Thriving in the Post-Pandemic Ecosystem, host Dan Simon explored the impact of the EU’s second Payments Service Directive, better known as PSD2.
The complexity of PSD2 meant that collaboration was key to its successful implementation. Andreas Schmidt, Head of API and Product Owner of Payments at Zalando, criticised regulators for combining feedback from too many stakeholders. To complicate matters further, designing regulation to be tech neutral leaves room for interpretation. This complexity presented challenges for the various parties involved in a transaction, especially merchants trying to reduce friction from the customer experience.
While reaching out to payment providers was the first step in addressing these challenges, Dean Jordaan, Director of Ecommerce and Payments at Microsoft, found fellow merchants also provided valuable support. The industry rallied together, creating a sense of community which Milena Shishkova, Senior Product Lead at Checkout, hadn’t witnessed before.
A burden or an opportunity?
Wise, the money transfer platform formerly known as Transferwise, recognised that PSD2 could potentially impact acceptance and conversion rates, so in early 2019 Software Engineer Lead Dare Fatimehin created a sub team to investigate the implications. Starting well in advance of the deadline, which the authorities extended to the end of 2020 (or September 2021 in the UK), paid off as the team had a chance to experiment and explore how partners were managing the changes.
Schmidt sees PSD2 as an opportunity, not just a threat. Many companies struggle to allocate resources to develop new products or features. Regulatory changes force them to pause, providing the time and space to work on these updates. Schmidt was uncertain whether Zalando’s credit product would comply with the new regulation, so his team looked at alternatives. The company also upgraded some of its existing payment architecture that wouldn’t support PSD2.
Merchants have to educate customers about regulatory changes, but they don’t control the entire payment experience, which frustrates Jordaan. Banks are responsible for the authentication stage, which involves confirming a customer’s identity, so merchants can only provide limited support if they get stuck. To make things worse, banks take different approaches to updating customers and implementing changes. Shishkova predicted that overcoming issues like this will require patience as the various stakeholders get to grips with the regulation.
In terms of solutions, Jordaan suggested merchants could eventually take over the verification of a customer’s identity, a process referred to as delegated authentication. Shishkova also argued in favour of bringing authentication closer to merchants- after all, they know their customers best. Meanwhile, Fatimehin’s team is exploring how they can use data to help Wise’s most trusted customers skip the authentication step. That means testing the boundaries of PSD2, for example with exemptions for low-value payments, without increasing the risk of fraud.
A storm on the horizon
While everybody at Wise knew about PDS2, they didn’t need to understand the finer details, so Fatimehin and his team provided quarterly updates about the integration process. By the end of 2021, he hopes to have collected enough data to provide a clear picture of the regulation’s impact on Wise’s day to day operations.
Shishkova described how Checkout took both a short and long-term approach to make sure merchants were aware of the resources required to implement PSD2. The short-term priority was to prepare small businesses for a seamless integration. Looking further ahead, Checkout wanted to help merchants figure out how PSD2 could stimulate innovation, such as introducing new features or integrations and opening additional acceptance channels.
The end of the beginning
As the conversation came to a close, the experts shared some of their learnings from the implementation phase and predictions for the future.
Schmidt believes the payments industry is still at a relatively early stage of the PSD2 journey, which could ultimately last years, because the regulator’s good intentions were undone by poor execution. Nonetheless, innovative solutions may emerge that remove friction from the customer experience such as delegated authentication, although issuers also have an opportunity to become more focused on the end user.
Schmidt learned three important lessons. Firstly, the importance of engaging with industry partners when new regulation is introduced. Secondly, setting parallel quality and compliance targets minimises the impact on the customer. Finally, merchants must start early so they can iterate and involve customers if they want to make the most of the opportunities presented by regulatory change.
Jordaan agreed that implementing new regulations in the payments sector takes time. He felt the authorities could have eased the burden on merchants by phasing the introduction of PSD2.
Shishkova acknowledged that regulators had achieved their goal, and they also brought together the different stakeholders in the payments industry, even if that was unintended. Fatimehin expanded on this conclusion, suggesting regulators should hold more frequent forums in future.
Watch the on-demand webinar to learn more about how COVID-19 is creating opportunities for innovative merchants to transform and grow their businesses.