Strong Customer Authentication

What internet businesses need to know about the new European regulation

Last updated on 18 October 2019

Introduction

On 14 September 2019, new requirements for authenticating online payments were introduced in Europe as part of the second Payment Services Directive (PSD2). We expect these requirements to be fully enforced by 31 December 2020.

In this guide we’ll take a closer look at these new requirements known as Strong Customer Authentication (SCA) and the kinds of payments they impact. We’ll also cover the exemptions that can be used for low-risk transactions to offer a frictionless checkout experience.

We’ve published a separate page with the latest information on the SCA enforcement timeline, as well as a guide to help you identify when to add authentication in your customer journey. Visit our site for more information on Stripe’s SCA-ready products.

What is Strong Customer Authentication?

Strong Customer Authentication (SCA) is a new European regulatory requirement to reduce fraud and make online payments more secure. To accept payments and meet SCA requirements, you need to build additional authentication into your checkout flow. SCA requires authentication to use at least two of the following three elements.

Something the customer KNOWS (e.g., password or PIN)
Something the customer HAS (e.g., phone or hardware token)
Something the customer IS (e.g., fingerprint or face recognition)

(If you would like to read the original SCA requirements, they are set out in the Regulatory Technical Standards or RTS.)

Banks will need to start declining payments that require SCA and don’t meet these criteria. Although the regulation was introduced on 14 September 2019, we expect these requirements to be fully enforced by regulators by 31 December 2020.

When is Strong Customer Authentication required?

Strong Customer Authentication applies to “customer-initiated” online payments within Europe. As a result, most card payments and all bank transfers require SCA. Recurring direct debits on the other hand are considered “merchant-initiated” and don’t require strong authentication. With the exception of contactless payments, in-person card payments are also not impacted by the new regulation.

For online card payments, these requirements apply to transactions where both the business and the cardholder’s bank are located in the European Economic Area (EEA). (We expect SCA regulation to be enforced in the UK, regardless of the outcome of Brexit.)

How to authenticate a payment

Currently, the most common way of authenticating an online card payment relies on 3D Secure—an authentication standard supported by the vast majority of European cards. Applying 3D Secure typically adds an extra step after the checkout where the cardholder is prompted by their bank to provide additional information to complete a payment (e.g., a one-time code sent to their phone or fingerprint authentication through their mobile banking app).

3D Secure 2—the new version of the authentication protocol rolling out in 2019—will be the main method for authenticating online card payments and meeting the new SCA requirements. This new version introduces a better user experience that will help minimise some of the friction that authentication adds into the checkout flow.

Other card-based payment methods such as Apple Pay or Google Pay already support payment flows with a built-in layer of authentication (biometric or password). These can be a great way for businesses to offer a frictionless checkout experience while meeting the new requirements.

We also expect many common European payment methods, such as iDEAL, Bancontact, or Multibanco, to follow the new SCA rules without any major changes to their user experience.

Exemptions to Strong Customer Authentication

Under this new regulation, specific types of low-risk payments may be exempted from Strong Customer Authentication. Payment providers like Stripe are able to request these exemptions when processing the payment. The cardholder’s bank will then receive the request, assess the risk level of the transaction, and ultimately decide whether to approve the exemption or whether authentication is still necessary.

Building authentication into your checkout flow introduces an extra step that can add friction and increase customer drop-off. Using exemptions for low-risk payments can reduce the number of times you will need to authenticate a customer and reduce friction. We have designed our new SCA-ready payments products to let you take advantage of exemptions when possible to help protect your conversion.

The most relevant exemptions for internet businesses are:

Low-risk transactions

A payment provider (like Stripe) is allowed to do a real-time risk analysis to determine whether to apply SCA to a transaction. This may only be possible if the payment provider’s or bank’s overall fraud rates for card payments do not exceed the following thresholds:

  • 0.13% to exempt transactions below €100
  • 0.06% to exempt transactions below €250
  • 0.01% to exempt transactions below €500

These thresholds will be converted to local equivalent amounts where relevant.

In cases, where only the payment provider’s fraud rate is below the threshold, but the cardholder’s bank is above it, we expect the bank to decline the exemption and require authentication.

Payments below €30

This is another exemption that can be used for payments of a low amount. Transactions below €30 are considered “low value” and may be exempted from SCA. Banks however need to request authentication if the exemption has been used five times since the cardholder’s last successful authentication or if the sum of previously exempted payments exceeds €100. The cardholder’s bank needs to track the number of times this exemption has been used and decide whether authentication is necessary.

Fixed-amount subscriptions

This exemption can apply when the customer makes a series of recurring payments for the same amount, to the same business. SCA is required for the customer’s first payment—subsequent charges however may be exempted from SCA.

Merchant-initiated transactions (including variable subscriptions)

Payments made with saved cards when the customer is not present in the checkout flow (sometimes called “off-session”) may qualify as merchant-initiated transactions. These payments technically fall outside the scope of SCA. In practice, marking a payment as a “merchant-initiated transaction” is be similar to requesting an exemption. And like any other exemption, it is still up to the bank to decide whether authentication is needed for the transaction.

To use merchant-initiated transactions, you need to authenticate the card either when it’s being saved or on the first payment. Finally, you need to get an agreement from the customer (also referred to as a “mandate”), in order to charge their card at a later point.

Trusted beneficiaries

When completing authentication for a payment, customers may have the option to whitelist a business they trust to avoid having to authenticate future purchases. These businesses are then included on a list of “trusted beneficiaries” maintained by the customer’s bank or payment service provider.

Phone sales

Card details collected over the phone fall outside the scope of SCA and do not require authentication. This type of payment is sometimes referred to as “Mail Order and Telephone Orders” (MOTO). Similar to exempted payments, MOTO transactions need to be flagged as such—with the cardholder’s bank making the final decision to accept or reject the transaction.

Corporate payments

This exemption may cover payments that are made with “lodged” cards (e.g., where a corporate card used for managing employee travel expenses is held directly with an online travel agent), as well as corporate payments made using virtual card numbers (which are also used in the travel sector).

What happens if an exemption fails?

While exemptions may be very useful, it’s important to remember that it’s ultimately the cardholder’s bank that decides whether or not to accept an exemption. Banks can return new decline codes for payments that failed due to missing authentication. These payments then have to be resubmitted to the customer with a request for Strong Customer Authentication. Stripe’s SCA-ready products automatically trigger this extra authentication when required by banks.

If your business is impacted by SCA, we recommend preparing for a fallback in case an exemption is rejected and your customer needs to authenticate. This is particularly important if you charge your customers when they’re not actively in your checkout flow (i.e., when they are off-session) and your customer needs to return to your website or app to authenticate. Read our guide on designing payment flows for SCA for more information.

How Stripe helps you meet for Strong Customer Authentication requirements

The changes introduced by this new regulation are set to deeply affect internet commerce in Europe. And although we expect these requirements to only be fully enforced by 31 December 2020, impacted businesses that don’t prepare for these new requirements could see their conversion rates significantly drop as SCA enforcement ramps across European banks.

In addition to supporting new authentication methods like 3D Secure 2, we believe successful handling of exemptions is a key component for building a first-class payments experience that minimises friction. Our new payments products optimise for different regulatory, bank, and card network rules and apply relevant exemptions for low-risk payments, so as to only trigger 3D Secure when required. And as these rules change, we’ll be able to maintain and update this SCA logic in real time—taking into account each country’s enforcement timeline.

We have released a new foundational payments API that uses Stripe’s SCA logic to apply the right exemption and trigger 3D Secure when necessary. Our new Checkout, as well as Stripe Billing are both built on top of this API and can dynamically apply 3D Secure when required.

Learn more about Stripe’s SCA-ready products. If you have any questions or feedback, please let us know!

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