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In the fast-paced world of commerce, every transaction counts. Merchants, like tightrope walkers, strive to find the perfect balance: maximizing transaction acceptance while keeping costs and risks low. They aim for an ideal conversion rate, where a seamless, frictionless experience is the norm.
Yet, a significant hurdle remains in this pursuit. According to Oxford Economics x Checkout.com, about 25% of customers abandon their purchases due to friction. The payment process, often seen as too lengthy or complex, becomes a barrier to completing sales.
Worse still, payments can fail for various reasons—technical errors, strong authentication problems, or soft declines (issuer rejections due to insufficient authentication). In today’s inflationary economy, losing a customer due to payment friction is a double blow: it not only reduces revenue but also misses out on customer retention opportunities.
The pain points and challenges related to payments can differ greatly among merchants. Let’s explore some of the key concerns they face.
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Challenge 1: Strong Customer Authentication (SCA)
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According to a survey by Galitt of French merchants, over 80% identified 3D-Secure refusals as the main difficulty in card payments. 3D-Secure is a secure communication protocol compliant with the EMV standard that meets European payment service regulations for strong customer authentication (SCA) and tag management for exemptions to prevent fraud in online transactions. One of the merchants surveyed noted, “the primary reason for abandonment is strong customer authentication.” While crucial for ensuring transaction security, SCA can complicate the payment process for customers, leading to lower conversion rates and financial losses.
To optimize transaction acceptance rates, merchants now place great emphasis on effectively managing exemptions. European regulations (PSD2) allow for exemptions from the SCA requirement in specific cases:
– For all transactions below €30, limited to 5 successive operations or a total amount under €100.
– For recurring payments (except for the first payment).
– If the merchant has been added to the payer’s whitelist of trusted beneficiaries.
Another alternative is Transaction Risk Analysis (TRA), which can also provide an exemption from SCA.
– At the initiative of the payer’s issuing bank, based on its own fraud level calculations for past transactions, provided the amounts do not exceed threshold values defined by European regulations. The issuing bank makes the final decision to exempt from SCA using real-time analysis of the payer’s behavior (location, past habits), concluding that the risk is low.
– For card transactions, at the request of the merchant’s acquiring bank based on its own fraud level calculations. However, in this second case, the issuing bank can refuse to apply the SCA exemption because only the issuer is responsible for authorizing a transaction without SCA.
If the acquiring bank overrides the issuing bank’s refusal, the issuing bank assumes full financial responsibility for any payment default.
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Challenge 2: Fraud
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With the rise of e-commerce, fraud risks are evolving and becoming increasingly sophisticated, forcing merchants to balance transaction protection with a smooth customer experience. In this effort, many merchants naturally turn to their Payment Service Providers (PSPs) for dedicated solutions, knowing that optimal security is crucial for seamless payment processes. However, finding the right balance is essential because overly strict security measures can lead to false positives, where legitimate transactions are mistakenly identified as fraudulent. Globally, this resulted in a loss of $51 billion in 2022.
Managing fraud isn’t just about avoiding financial losses; it’s also about unlocking business opportunities. By ensuring secure transactions, merchants can offer frictionless processes and expand their options with payment solutions like ‘Buy Now, Pay Later’.
As part of proactive fraud management, many merchants are now incorporating network tokenization into their payment strategy. A key distinction lies in the difference between network tokenization and PCI DSS merchant tokenization. Unlike merchant tokenization, which aims to comply with PCI DSS security standards by replacing the PAN at a specific point, network tokenization involves the payment network (such as Visa, Mastercard) generating, distributing, and managing a token within its own secure environment. This distinction is significant because tokens issued by the network become interoperable across the entire payment ecosystem, providing increased flexibility for various use cases.
What is a token?
A “token” is a cryptographic digital value that replaces the card number in a specifically defined environment.
In the context of network tokenization, the exchange occurs directly between the payment scheme and the bank, enhancing the security of the process. The network manages the token, offering additional benefits such as lifecycle management. For instance, if a customer’s card is lost or expired, updating payment data is no longer necessary because the network automatically updates the token.
The rise of subscriptions and usage-based payments, which involve storing card information (card-on-file), further highlights the critical importance of tokenization for merchants. Additionally, major networks like Mastercard and Visa might consider imposing penalties for not using network tokenization. This trend underscores the evolving security requirements in the payment industry and encourages merchants to adopt solutions like network tokenization to enhance the protection of their transactions.
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Challenge 3: Proliferation of payment methods and players
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The rapid evolution of the payments landscape has brought forth a variety of payment methods and players, creating a major challenge for merchants. Alongside traditional payment methods like credit cards, new digital solutions (wallets, virtual cards, account-to-account payments, etc.) and new payment models (Buy Now Pay Later, recurring payments, subscriptions, etc.) have emerged.
The introduction of these new payment options has forced merchants to adapt quickly, necessitating the implementation of innovative solutions. However, managing the growing diversity of payment methods and players presents challenges. Acceptance solutions do not always ensure seamless flow, particularly when multiple parties are involved in a payment scenario, increasing the risks of errors and technical issues.
In this complex landscape, merchants must carefully select their partners for each domain, channel, or country, aiming to streamline costs and optimize processes. Payment orchestration simplifies this approach by centralizing the management of acquirers, payment methods, and banks through a single software layer. This approach aims to enhance the purchasing experience and payment data processing. By routing all payments through a central point, data centralization and routing rules direct flows to the most efficient service, thereby maximizing acceptance rates.
It is within this context that Payment Orchestration Platforms (POPs) are gaining popularity, offering an integrated solution to overcome the challenges of payment method diversity and players.
In the quest for solutions to merchants’ complex payment challenges, it is important to recognize that there is no one-size-fits-all perfect solution. Rather, it is an ongoing process of continuous improvement. Payment industry players are actively investing in addressing this challenge, bringing innovations to support merchants in their payment journey.
In this dynamic, Checkout.com introduces Intelligent Acceptance, a solution merging AI, international network data, and the latest payment advancements. This proposition aims to assist merchants in increasing conversion rates.
Let’s explore some of the features of Checkout.com’s Intelligent Acceptance, among others, which provide concrete answers to specific payment challenges faced by merchants.
1. SCA 3DS Optimization
Intelligent Acceptance offers a pragmatic solution to optimize Strong Customer Authentication (SCA 3DS2). The platform assesses the need for SCA, ensures the inclusion of required information, and selects the most effective protocol version. It also applies exemptions based on the merchant’s risk tolerance.
For example, when a merchant wants to leverage exemptions to reduce friction in Buy Now Pay Later (BNPL) transactions, Intelligent Acceptance carefully chooses the best option. It may opt for Transaction Risk Analysis (TRA) (subject to approval by the issuing bank) rather than a low-value exemption, providing a tailored response to the merchant’s preferences and the specific characteristics of the transaction.
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2. Dynamic routing
This feature enables dynamic routing of transactions, leveraging local or international payment networks. The choice of network is based on business objectives, aiming for the highest conversion rate, and the unique profile of each transaction.
Through dynamic routing, Intelligent Acceptance optimizes the journey of each payment by selecting the most suitable network, thereby contributing to maximizing acceptance rates.
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2. Retry logic
Intelligent Acceptance incorporates retry logic designed to address situations such as expired card information, insufficient funds, SCA soft declines, PAN or Network Token preferences, as well as technical errors.
For instance, if an issuer issues a Soft Decline for a transaction, Intelligent Acceptance responds proactively. Depending on the received response code, the solution automates a retry, suggesting through 3DS the proposition of a TRA according to their own calculation as an acquiring bank. This approach provides agile error management, aiming to maximize transaction success and minimize potential disruptions for merchants.
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In this dynamic era of online payments, the upcoming decade promises exceptional growth, with a forecasted global annual growth rate of 20%. These prospects, stemming from a Harvard Business Review study (2023), propel the payment industry to new heights, moving from $81 billion in 2022 to a remarkable projection of over $360 billion by 2030. These figures underscore the crucial role of innovative solutions in overcoming current challenges and anticipating future developments in the needs of merchants and consumers.
Explore new perspectives for your business:
Discover how Galitt can be your preferred partner in addressing your payment challenges. Contact us to learn more.
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This article has been written by Sofia EL MARZOUKI.
Senior Payments Consultant, at Galitt
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