It’s no secret that PSD2 is going to affect merchants when it goes into effect this September, and at Whitepages Pro we’re spending a lot of time thinking about how we can help our customers meet requirements while still providing a fantastic experience for their customers.
One of the big aspects merchants need to be thinking about is at what point in their transaction they need to make a fraud decision. Why?
First is the PSD2 ban on surcharges. In many industries, surcharges are a time-honored way of passing on interchange fees to consumers (this is particularly true in the travel industry). But under PSD2, acquirers will no longer be able to pass those fees on, which means they need to be smarter about incurring them.
Additionally, once PSD2 goes into effect companies will be paying much more attention to their fraud rates in order to qualify for the regulation’s strong customer authentication (SCA) exemptions. Passing fraudulent transactions through to their payment service provider (PSP) will count against that rate.
The likely result of both of these factors is there will be a shift in how many authorizations e-commerce companies actually passed through to PSPs, Whitepages Pro’s CEO Rob Eleveld told PMNSTS’ Karen Webster. (Listen to their entire conversation here.)
The push to pre-authorization decisioning
Right now, most fraud decisions happen after the authorization, with merchants hedging their bets and not wanting to decline a good customer. When shipping physical goods, a merchant has hours to make a decision — and even with digital goods, there’s generally a few minutes before the goods are delivered. If the payment doesn’t go through, the merchant can always cancel the transaction.
However, under PSD2, merchants will need to think twice about taking risks on transactions that might get declined.
First, they won’t be able to pass the interchange fee onto the customer, meaning they will have to swallow fees for fraudulent transactions themselves.
Second, those potential fraudulent transactions also contribute to their fraud rates — and the fraud rates of the PSP they are using. Every time an issuer declines a transaction that’s already in the authorization loop, it makes their exemption thresholds that much harder to meet.
The challenge is that making a pre-auth decision is immensely harder than sending a risky-seeming transaction to your manual review team after the fact. What’s a merchant to do?
Meeting the challenge of preauthorization decisioning
When it comes to approving a transaction before the authorization, speed is of the essence. In fact, merchants have around 150 milliseconds to decide whether or not to send the transaction into the authorization loop.
Merchants need to be able to make automated reject decisions without pushing out good customers, and they need to do it fast.
Machine learning models are going to be a huge part of this, as is feeding those models good, clean data. This is all part of a trend that we’ve been seeing for a couple years, where more companies are building machine learning decisioning models in-house, or relying on third-party fraud platforms that have tight, sophisticated models already.
Merchants will also need to focus more on vetting customers at the account creation stage, before the authorization even takes place. We’re likely to see merchants offering incentives for consumers to whitelist companies or sign up for an account rather than just checking out. But even then, the pre-auth fraud decisioning process will need to happen fast.
Are you ahead of the 150 millisecond learning curve?
PSD2 requirements are taking effect in September, meaning now is the time to dial in your preauthorization decisioning process in order to reduce fraud percentages and meet new regulations against surcharges.
At Whitepages Pro, we’ve been working hard to speed up our delivery times of good, clean data to help merchants and PSPs make authorization decisions as quickly as possible. We put the focus on low latency both in our product design, and in our delivery system by moving endpoints around the world so that there is even less wire travel time to our customers. The result is that 99 percent of Whitepages Pro queries are served in under 100 milliseconds.