Understanding 3-D Secure

Payer authentication attempts to provide merchants with the electronic equivalent of a signed sales receipt. Under the umbrella of Visa's 3-Domain (“3-D Secure”) initiative, internet merchants can participate in payer authentication. Visa’s program is called Verified by Visa. MasterCard and Japanese Credit Bureau (JCB) also have 3-D Secure programs (licensed from Visa) called MasterCard SecureCode and J/Secure, respectively. All three programs operate in exactly the same way; they validate that a consumer shopping on a merchant’s Web site is the legitimate cardholder.


How 3-D Secure Programs Work...

This is pretty simple all in all. Each 3D-Secure program requires that the card holder enter a specific “secret” code or password to finalize the transaction. This is very similar to your PIN which you can use at the ATM or bank to withdraw funds or verify you are who you say you are. This code is set up when the card holder enrolls in the 3-D Secure card program and held encrypted as to remain secure.

Benefits to Using 3-D Secure Programs...


Guaranteed Payment for Authenticated Transactions:


The benefits for merchants using payer authentication are pretty substantial. First and foremost, the software guarantees merchants payment on any fully authenticated transaction, even if the transaction is later determined to be fraudulent. In fact, Visa and MasterCard actually block the submitting of chargebacks to a merchant's acquiring bank, so there is not even awareness at the merchant bank level that a chargeback occurred. This has the ability to result in a decrease in the number of chargebacks a merchant receives.


Transaction Liability Shift:

Even more important is the shift in transaction liability from the merchant to the card-issuing bank. Never before in the history of card-not-present (CNP) transactions, have the payment networks offered a way for merchants to avoid liability for CNP transactions that they accept. It has always been the merchant's liability.


Chargeback Blocking:


What is chargeback blocking? Just what it says. Visa and MasterCard step in between the issuing and acquiring banks and block the passing of chargebacks from the issuing bank. What this means is that the software blocks a chargeback from ever reaching the merchant's acquiring bank, thus reducing the number of chargebacks that show up on your statement. This results in reduced chargebacks costs and a lower overall chargeback ratio.


Reduce Overall Cost of Doing Business (Operational Overhead)


This benefit is probably the most difficult to put one's thumb on initially, but can be pretty substantial.
Ask merchants this question: How much manpower, resources and time does your business spend screening/filtering/manually reviewing transactions for fraud and then later dealing with chargebacks that slipped through these measures?


Whatever the answer is, cut that manpower, resource allocation and time by 60% - 70%, and that's what payer authentication has to offer merchants in terms of reducing their costs of doing business.


Now, how about a little lower margin for doing business more securely? Visa says "sure." For merchants who simply install Verified by Visa software on their sites, Visa will lower their interchange rates by five basis points. I know, basis points are confusing, so what does that really mean? It works out to $0.05 for every $100 processed. A nickel doesn't seem like a lot, but it adds up when you're talking $1 million a month or more in sales.

Common Misconceptions about 3-D Secure:


  • "Not enough cardholders are enrolled."
    • This statement is false because more than 300 million U.S. Visa cards are enrolled.
  • "Not enough banks offer the service."
    • The above statement is completely untrue. Forty-five of the top 50 U.S. issuing banks, and more than 10,000 issuing banks worldwide now have the software up and running and available to cardholders.
  • " Verified by Visa and MasterCard SecureCode cause higher 'abandonment' rates'"
    • This statement is true in some regards, but this can be said for anytime a merchant requests additional information from their customer. Whether information is requested when the check out process is in play or after (as with 3-D Secure) there is always the chance for a customer to abandon the purchase.


TIP: Whenever implementing a new addition to the purchase process make sure you inform and educate the customer as to the changes and walk them through step by step.

TIP: Monitor, monitor and monitor some more. By knowing when and where users fall off, you’re able to more effectively pinpoint the reason and fix the problem.


*Written in conjuncture with Rick Lynch, VP, Business Development of Verifi Inc.


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