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The impact of SCA: Europe’s online economy set to lose €57 billion

The mechanics of Europe’s online economy are about to change forever. While this may be beneficial in the long run, 451 Research estimates that European businesses stand to lose €57 billion in economic activity in the first 12 months after Strong Customer Authentication (SCA) takes effect due to a reduction in conversion rates.

This figure represents nearly 10% of the €592 billion in online sales we forecast in the European Union for 2019.

SCA is being introduced as part of the second Payment Services Directive (PSD2) with the intention of reducing fraud rates and enhancing the overall security of online payments. It will require online businesses in Europe to capture two mutually independent forms of authentication for most customer-initiated online payments starting on September 14.

While these objectives are laudable, SCA brings with it deep consequences for the customer experience and a far-reaching impact on Europe’s online economy. Online businesses that fail to abide by these requirements to build additional authentication into their checkout flow will see a dramatic drop in approvals as banks become obligated to decline their transactions outright.

SCA awareness and preparedness varies by company size

The report surveyed 500 payments decision-makers at European businesses with more than 50% of their annual revenue occurring online and 1,000 European consumers, and their responses underscore the extensive market impact that SCA will have:

European businesses underestimate the complexity and impact of SCA and are racing against the clock to become compliant in time.

  • SCA’s complexity will disproportionately impact small businesses. Three in five businesses with fewer than 100 employees are unfamiliar with SCA, don’t plan on being compliant before September, or are unsure when they will be ready.
  • While most payments leaders at online businesses are at least familiar with SCA, preparedness is remarkably low. Just two in five respondents aware of SCA said they feel prepared to address its requirements. Outside this sample of highly qualified payment professionals working for online businesses, awareness in the broader market is alarmingly low.
  • There’s a difference between being ready in terms of having a fully optimised checkout flow for SCA and exemptions and being ready in terms of meeting basic compliance. We’re concerned that many merchants are overlooking this and, therefore, are at risk of a material impact to conversion upon SCA enforcement. Only one in two anticipate being SCA-compliant prior to September. Another 44% plan to cut it close, anticipating they will be compliant only at the time SCA goes into effect.

Many authentication methods have a disconnect between user experience and perceived security

It’s an ‘all hands on deck’ effort to address the SCA compliance burden as businesses prepare for a major strain on customer experience with long-term implications.

  • Building authentication into the checkout flow and creating processes for managing transactions that are exempt from SCA will be an ‘all hands on deck’ effort for many IT teams that will last long after September.
  • IT integration complexity, implementation cost and customer experience impact are the top three concerns online businesses have about SCA, which shows the variety of challenges it will pose.

The customer experience is under siege – businesses should expect a material impact to their bottom line.

  • The low tolerance for checkout friction among online shoppers has serious consequences for businesses that fail to deliver. Just 47% of European consumers feel today’s online checkout process is ‘very easy.’
  • More troubling is that more than half of online shoppers (52%) that abandon a purchase end up completing the transaction with a different merchant. As a result, we expect SCA to drive a material spike in cart abandonments as consumers quickly eschew merchants with unoptimised authentication flows.
  • Still, it’s surprising that 60% of European consumers said they would prefer to be authenticated by every online business while just 17% say they’d prefer no authentication.

Many businesses running an outdated version of 3D Secure

Businesses wildly underestimate the criticality of sophisticated exemption engines and are running dangerously behind schedule in their efforts to implement 3D Secure 2.

  • Many merchants are underestimating the complexity and resource burden of managing exemptions, with 50% of respondents planning to handle management of exemptions completely in-house. These merchants are at high risk of conversion loss.
  • While 3D Secure 2 (3DS2) is emerging as the primary framework by which online businesses will address SCA’s requirement, 25% of online businesses are not yet familiar with it. Further, for those that are familiar, 24% believe they will be implementing after the September deadline, or not at all, while 45% will be cutting it close.
  • 3DS2 is not the panacea for SCA. Payment providers and merchants that plan to rely solely on 3DS2 to address SCA are putting themselves at risk, especially considering not all issuers will be in a position to support a fast and viable 3DS2 flow by September.

SCA reaffirms the increasing strategic importance of payments for online businesses

  • Well over three-quarters (87%) of online businesses in Europe agree that SCA will increase the importance of payments as a competitive differentiator, rising to 95% of those with more than 5,000 employees.
  • Providers with sophisticated exemption engines, 3DS2 expertise and an ability to minimise shopper friction will be best positioned to mitigate SCA’s complexity and convert it into an opportunity for competitive differentiation.

Merchants are underestimating SCA’s complexity and impact

Many businesses – especially smaller ones – have yet to fully grasp the disruptive impact SCA will have on Europe’s online economy. The survey with payments decision-makers indicate low levels of preparedness and, most troubling, a lack of appreciation for the consequences SCA presents to the customer experience.

Effectively addressing SCA will require deep payments expertise, especially as it relates to implementing 3DS2 and handling exemptions. Online businesses are underestimating the importance of these areas, putting themselves at risk of experiencing a dramatic drop in conversions as online shoppers confront enhanced friction. To avoid disruption and distraction, the report advises online businesses to align with payment partners that can enable them to offload the burden of SCA compliance.

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