Written by Galit Michel, VP of Payments
Visa and Mastercard are discontinuing support for 3DS1, the legacy authentication protocol, and all related technology effective October 15, 2022.
Card issuers, acquirers and payment service providers are encouraged to move to the latest version 3DS2.x. Merchants in Europe have been leveraging EMV 3DS2 successfully for almost two years now, since the enforcement of the Revised Payment Services Directive (PSD2) in early 2020. It is now time for US merchants to start leveraging EMV 3DS2. However, taking advantage of the benefits of this technology is only possible when merchants understand the risks and leverage it in an optimized way.
This article explains why US merchants should take advantage of the EMV 3DS2 protocol. It also highlights why applying 3DS to transactions without also applying smart decisioning can potentially harm a merchant’s business. Smart decisioning helps you decide which transactions to route to 3DS.
Why should US merchants care about this change?
It’s a unique opportunity to increase conversions by approving more transactions and to reduce chargebacks by shifting the chargeback liability to the bank. Also, 3DS2 provides several benefits for merchants including the ability to offer customers a frictionless authentication process.
Frictionless 3DS, what does it mean?
Frictionless 3DS is where the bank authenticates the user by collecting data during the transaction flow — which means the user doesn’t have to complete any challenge.
Frictionless transactions are considered successful from a protocol standpoint, so the chargeback liability still shifts to the bank. The customer experience is not affected by the addition of the 3DS, and the merchant can still enjoy the liability shift.
The merchant decides whether to apply 3DS to a transaction. However, the issuer decides if 3DS will be frictionless or the user must complete a challenge (and which challenge).
Can a 3DS transaction succeed if authorization fails?
3DS and authorization are 2 different steps.
Usually when 3DS fails the transaction does not proceed to the authorization step. However, when 3DS is successful, the authorization step can still fail. Because 3DS shifts the chargeback liability from the merchant to the bank, banks have become more sensitive about authorizing 3DS transactions.
Is 3DS good for merchants?
When asking merchants about 3DS, we often get conflicted responses. On the one hand, earlier versions of 3DS cause friction, reduce conversions, and negatively impact the customer experience. On the other hand, 3DS2 allows for frictionless transactions in many cases. It also shifts chargeback liability back to the issuer, absolving merchants of chargeback risk. European merchants must also use 3DS due to PSD2.
So, is 3DS a friend or foe?
When used strategically, 3DS2 can become a business enabler, helping merchants lower risk, approve borderline transactions, shift liability, meet regulatory requirements, and increase authorization and conversions, all while creating the best possible experience for their customers.
These benefits are due to merchants today having the ability to use payment optimization partners that offer dynamic 3DS checkout options, which reduce risk and liability while increasing conversions.
The trick to properly leveraging 3DS2 is knowing when, and how, to use it in the right way.
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