Hopes for secure and frictionless experiences with PSD3 - both are already possible with PSD2

Advanced fraud solutions powered by machine learning (ML) models maintain customer UX while preserving the effectiveness of anti-fraud measures for ecommerce merchants. Nethone’s CEO Hubert Rachwalski shares how.

For fraud-fighting companies, it can feel like Groundhog Day when discussions arise over the European Union’s (EU) revised payments services directive (PSD2) and its requirements for Strong Customer Authentication (SCA) for online payments. The aim has always been to reduce fraud rates and keep customers and businesses safe. However, repeated concerns appear over how to best implement anti-fraud measures without causing customer friction through invasive authentication measures. Without knowing about the efficiency of advanced fraud solutions, this choice may feel like a necessity. It doesn’t need to be.

A PSD2 public consultation and review led by the European Commission (May-Aug 2022) revealed ongoing online friction concerns among payment players across the EU. Businesses need to be aware that frictionless experiences are already possible without suffering a drop in anti-fraud security measures. This message needs to be loud and clear as potential amendments to PSD2 may lead to PSD3 being just around the corner.

Making reference to ‘old solutions’ may sound like the advice given by a wise old man, but in the face of fast-paced changes in online financial services, even a few years of experience can set fintech companies decades apart. This is particularly true when comparing companies offering effective solutions to the problems experienced by businesses dealing with online payments and transactions. Ecommerce merchants must be aware that ineffective rules-based fraud systems may not keep up with emerging fraud trends and will require invasive authentication measures for every transaction. Even these measures cannot ensure customer accounts and data remain secure. Thankfully, effective, non-invasive authentication measures afforded by advanced fraud solutions have proven track records.

Fraud-fighting companies that have developed the capabilities of machine learning (ML) models stand well ahead of the competition. ML fraud detection and prevention measures are far more effective than any rules-based system. They also provide non-invasive multi-factor authentication (MFA). This simple but powerful approach is a seamless solution to becoming PSD2 SCA compliant. It is a time-tested approach that has resulted in improved fraud prevention while helping ecommerce merchants ensure their customers benefit from a frictionless online experience. The perfect balance - and one that will apply just as much to PSD3.

First and foremost, potential amendments are required to cover the lack of regulation for emerging technologies and alternative payment methods. Buy Now, Pay Later (BNPL) schemes and cryptocurrencies have grown quickly over the past few years and were not initially covered under PSD2.

It is important to remember that Open Banking principles are the core of PSD2. A reduction in fraud rates, improved services, and innovation were always the intended outcomes. Open Banking has evolved and will lead to improved open finance initiatives, with customers being offered mortgages, savings, and pension and insurance services via third-party providers (TPPs).

As for SCA exemptions currently in place, some may be amended, some removed entirely and new ones may be added. If the concerns raised during PSD2 implementation are anything to go by, the prospect of a shake-up could lead to more confusion among ecommerce merchants.

This is why tried and tested, and proven fraud solutions are essential. Open Banking has nurtured fraud-fighting companies using advanced tech to resolve fraud and security issues - in turn, ensuring the future success of open data initiatives. The ongoing problem is that not everyone is aware that these solutions are already available. Open Banking is still misunderstood.

Despite the positive impact fintech companies have had on online financial services, it is down to these very companies to show that SCA measures can be easily achieved, easing the concerns of businesses and customers alike. This is possible thanks to Open Banking allowing TPPs to access account data - and help protect it.

SCA has been proven to aid the reduction of fraud across the EU. In this regard, PSD2 has been a success. And it must be stressed that although the perception among ecommerce merchants remains geared toward MFA causing checkout friction and deterring customers, the opposite is true. Customers appreciate additional security measures to keep their accounts and data secure. The trick is to implement non-invasive authentication to ensure frictionless experiences.

By analysing every single user’s service interaction, it is possible to understand their intentions, good or bad. Analysis of 5,000+ pieces of behavioural biometric and digital fingerprinting data can easily provide a full understanding of every user going beyond minimum MFA requirements.

Fraudsters can be sifted out from genuine customers, and bots can be prevented from causing damage. Crucially for ecommerce businesses, this all takes place automatically, in real-time, and passively - completely unnoticed by customers.

By using advanced fraud solutions today, every online business can be ready for PSD3 – years before it is implemented. Find out how you can offer a seamless and secure experience for your customers by future-proofing your PSD2 journey with us.

About Hubert Rachwalski

Hubert is responsible for creating and operationalising Nethone’s go-to-market strategy, coordinating key business development projects, and building relationships with all stakeholders. He is an experienced business executive with extensive professional experience earned in the world’s leading consulting firms (BCG and PwC) and has been advising the Board of Daftcode, one of the most prominent tech venture builders in Central and Eastern Europe since 2016. He wrote his first Master’s thesis on leveraging AI for stock portfolio optimisation problems.

About Nethone

Nethone is a machine learning-based fraud prevention Saas company that allows online merchants and financial institutions to holistically understand their end-users—also referred to as ‘Know Your Users (KYU)’ in industry parlance. With its proprietary online user profiling and ML technologies, Nethone is able to detect and prevent payment fraud, account takeovers with unrivalled effectiveness.