A guide to Strong Customer Authentication (SCA) under PSD2

Payment fraud losses have been steadily increasing for nearly a decade with little sign of easing. The European Commission has intervened by placing SCA requirements on participants to reduce fraud as one of the core components of PSD2. 

The original deadline for implementing SCA was 14 September 2019, by which point all ecommerce transactions were due to be processed via secured industry protocol such as 3D Secure. Online transactions would need additional authentication (with some exemptions).

The deadline was previously extended by 18 months. However, in May 2021 the FCA announced they have agreed to delay the enforcement of SCA further until 14 March 2022 in the UK to help provide support to merchants from the impact of Covid-19. The deadline for the rest of the European Economic Area (EEA) was 31 December 2020.

For more information, read our article on the new SCA deadline.

PSD2 requires the use of two independent sources of validation by selecting a combination of two out of the three categories (commonly known as the ‘two-factor authentication’):

Something you know (e.g. PIN)

Something you have (e.g. Card/phone)

Something you are (e.g. fingerprint)

This is applicable to transactions in the European Economic Area (EEA) only, where both payer and payee are in the region. However, there are a number of exemptions to two-factor authentication, which are described below. It’s worth noting that the issuers will be required to put in place the measures of authentication of their choice. It won’t be the merchants’ responsibility to incorporate this.

The payment journey may look a little different. Authentication used to be required on an exception basis, i.e. where the risk of the transaction was regarded as ‘high’, additional authentication might have been triggered via 3D Secure as the current protocol. This is commonly known as a "step-up". Since September 2019, additional authentication has become the default. All qualifying transactions are being “stepped up” unless an exemption applies.

In a ‘card present’ scenario, the convenience of contactless at point-of-sale would remain, however customers will be asked to complete a Chip and PIN transaction when they reach the maximum total contactless spend, or have exceeded the card issuer's limits for consecutive contactless transactions since they were last authenticated. However, for remote electronic payments (i.e. when online shopping) and credit transfers, additional authentications are now coming into play.

The application of 3D Secure (3DS) today is optional (3DS version 1). Merchants have the discretion to route a transaction through 3DS enabling a shift in liability where loss occurs. As the UK moves towards full compliance by March 2021, it is anticipated that a higher ratio (95%+) of transactions will require a step-up.  

Card Schemes are making changes to 3DS and driving adoption to meet the new SCA requirements. 3DS version 2.0 specifications have been released by EMVCo. Payment service providers (PSPs), namely issuers and acquirers, and their clients will be required to meet scheme mandates for 3DS 2.0 to be enabled.

In addition, we understand that card schemes are providing further enhancements in order to flow through exemption requests from the acquirer to the issuer. Please note that the exemptions are only applicable to PSPs and cannot be applied at merchant level.

Please see below for the latest EBA guidance (but be aware that this might change):

Summary table of who may apply an exemption:

Not all transactions will require additional authentication. PSD2 provides a number of exemptions to SCA, which could result in minimising friction and attrition in the customer payment journey. These are:

Low value exemption

Recurring payment exemption

Whitelisting (or Trusted beneficiary) exemption

Secured corporate payment exemption

Low risk transaction exemption (or Transaction Risk Assessment - TRA)

Low value exemption
Card transactions below €50 are considered low value and are generally exempt from authentication. However, if the customer initiates more than five consecutive low value payments or if the total payments value exceed €100, SCA will be required.

Recurring payment exemption – e.g. subscription
Series of payments of the same value to the same merchant (such as subscriptions and membership fees) are exempt after the initial set up. The initial set up of the recurring payment will still require authentication, but all following transactions will be exempt.

Payments that are made periodically to the same payee, but where the value changes each time (e.g. a utility bill), will not benefit from the exemption.

Whitelisting (or trusted beneficiary)
Customers will have the option to ‘whitelist’ a merchant they trust. They can request to have the trusted merchant be added to his/ her record with the issuers after the first authentication is completed. Subsequent transactions with the whitelisted merchants are likely to be exempt from future authentication.

However, it is worth noting that issuers can still reject this request if the customer is thought to be a high fraud risk. They will be able to ignore the whitelist (maintained by the issuer on the behalf of the customer) to challenge and request an authentication.

Secured corporate payment exemption
When the transaction is initiated by a legal person (e.g. a business) rather than a consumer, and it is processed through a secured dedicated payment protocol, the Commission is satisfied that it does not require separate authentication, provided alternative controls are sufficiently secure. This should include ‘secure virtual payments’, such as virtual cards or B2B cards.

Low risk transaction exemption (aka. TRA exemption)
This exemption has arguably the widest reach and usage. If a transaction, through a real-time risk assessment, is deemed to be low risk, an exemption could apply. However, it comes with the most complex set of conditions.

To make this work, merchants have to rely on a payment service provider (e.g. an acquirer) to act upon their request. In addition, the test to trigger the exemption rests with whether the PSP satisfies the prescribed conditions, not the merchants themselves. This means that, to an extent, a merchant’s ability to design and influence the payment experience is removed.  

While exemptions are acquirer performance based, the issuer retains the final authorisation decision as they do today.

From the announcement of PSD2 SCA in 2017, we have been actively involved with industry discussions and have been influencing the direction of travel as the debate has developed.

As the practical implications become clearer, we have taken the necessary steps to first ensure the 3DS 2.0 mandate is met, as well as exploring options to achieve the right balance between managing fraud risks and minimising disruption in the payment journey.

Barclaycard can offer insight on the support merchants may need. We can partner with merchants on the roll out of new industry protocols, as well as continuing to help with demystifying PSD2 SCA.

To find out more, read our article on the new timeline for compliance with SCA and our recommendations for merchants.