By alphacardprocess July 13, 2025
PSD2’s Strong Customer Authentication (SCA) requirements are designed to increase European online payments’ security through mandatory multi‑factor authentication. For EU merchants, compliance and implementation, as well as interpreting such mandates, aren’t just about compliance—it’s a means of preventing online fraud and ensuring customer confidence in a transforming digital payments environment.
When Does Strong Customer Authentication Apply?
Strong Customer Authentication (SCA) is applicable to “customer-initiated” electronic payments within the UK or the European Economic Area (EEA), such as online card payments and contactless transactions. SCA is applicable unless an exemption is available, such as merchant-initiated payments or direct debits. In particular, SCA is applicable where both the business and cardholder’s bank are within the EEA, thereby providing an extra layer of protection for the majority of electronic transactions.
How Exactly Does Strong Customer Authentication Work?
Strong Customer Authentication (SCA) protects online payments with an additional verification procedure other than card information. In practice, the method differs according to the nature of the payment. For credit and debit cards, SCA is commonly practiced through 3D Secure, which includes an additional identity verification during checkout. It enhances security as well as transferring liability for phishing-elicited chargebacks to the issuing bank.
Alternative payment methods, both local and e-wallets, also meet SCA standards while optimizing conversion in certain markets. They are iDEAL in the Netherlands, Bancontact in Belgium, and Blik in Poland. Google Pay and Apple Pay e-wallets also make authentication easier with biometric or device-based authentication, offer a seamless checkout, and remain SCA-compliant in the process. All these measures collectively balance security and experience in various markets.
SCA Exemptions
Strong Customer Authentication (SCA) regulations provisions have made the law to enable frictionless checkout to persist and remain safe. Transaction Risk Analysis (TRA) for low-risk transactions is one such, where lower-threshold fraud acquirers may opt to be exempted from SCA, but at the issuer’s discretion. Transactions below €30 EUR are exempt from SCA until the total spend has crossed €100 EUR. Repeat merchants can be whitelisted by the customers, and SCA is exempted from repeat buys. Same-value subscription payments require SCA only in the first payment; the subsequent ones are exempt as long as the payment amount is the same. Finally, payments involving dedicated corporate tools for B2B transactions can also be exempted.
SCA Out-of-Scope Transactions
Certain transactions are by their nature exempted from PSD2 SCA requirements and “out of scope.” MOTO transactions, for example, are always out of scope because they are not being processed as electronic payments. Merchant Initiated Transactions (MITs) also fit in, as they are initiated by the merchant at the instigation of the merchant after initial customer consent, e.g., usage billing. Finally, cross-border transactions—in which the issuer or acquirer of the card is outside the EEA, UK, or Monaco—are out of scope. These regulations allow businesses to accept some payments without triggering additional SCA steps, making the checkout experience for consumers smoother.
What Happens If Your Business Isn't SCA Compliant
If your company is not SCA compliant, the direct risk is not fines but lost business. Issuing banks have an obligation to decline non-compliant SCA transactions under law. It results in declined payments, lower approval rates, and annoyed customers who may abandon ongoing transactions. In the end, non-compliance can harm sales and lead to a loss of trust.
How to Authenticate a Card Payment
Card payment verification generally offers an additional level of verification to validate the payer. Online, this is most frequently implemented through 3D Secure 2, which requests customers to verify themselves with a one-time code, fingerprint, or face ID via their banking app. Offline, cardholders typically verify themselves by entering their PIN. Payment methods such as Apple Pay and Google Pay are also generally SCA compliant using embedded biometric or password authentication, which comes with security and a seamless checkout experience.
Old and New Rules
There used to be the Payment Services Directive (PSD) that existed since 2005. It was completely revamped in 2018 when PSD2 replaced it. PSD2 made security stricter for payment transactions, compelling every e-commerce business in Europe to redesign payment systems. In parallel, credit card networks such as Visa and Mastercard imposed 3D Secure 2 (3DS2) terms on security and compliance.
Closer Look at the Regulations
The European Union’s PSD2 (Payment Services Directive 2), which took effect from December 31, 2020, aimed at establishing a Single Euro Payments Area (SEPA), promoting competition between banks and non-banks, and improving consumer protection and confidence in electronic payments. Strong Customer Authentication (SCA) that requires customers to authenticate themselves by employing a minimum of two out of three factors is one of the pillar mandates under PSD2:
- Knowledge (something they know)
- Possession (something they possess)
- Inherence (something they are)
To make these obligations easier with fewer headaches, the new 3D Secure 2 (3DS2) standard was created to replace the initial 3DS protocol. Developed by EMVCo and implemented under brand names such as Verified by Visa and Mastercard SecureCode, 3DS2 enhances customer experience by revealing more information to banks to facilitate “frictionless” authorization and decrease cart abandonment. Where further verification is needed, 3DS2 facilitates in-app or mobile checking instead of intrusive redirects, keeping secure payments in line with PSD2’s goal of finding a balance between security and convenience.
Knowing the Impact of PSD2 SCA on Digital Payments
The PSD2 SCA directive has transformed European online payments with multi-factor authentication on most web transactions, moving from static data such as passwords to minimize fraud and raise customer confidence. Though its purpose is to secure transactions without disrupting the customer experience, SCA implementation brought added complexity, particularly for merchants handling browser and mobile app flows.
This transformation has compelled the payment vendors to move toward more contemporary solutions such as 3DS2, although the legacy software remains one area where it grates. Maybe most importantly of all, PSD2 SCA isn’t a fixed entity; regulators continue to fine-tune rules, so companies need to regard compliance as a continuous process, tweaking systems and collaborations to stay ahead of impending threats and innovation.
How are PSD2, SCA, & 3DS2 Changing?
The development of PSD2, SCA, and 3DS2 is more focused on facilitating instant secure payments throughout the EU. With 3DS2 assisting organizations in becoming SCA compliant, changes to PSD2 will necessarily impact 3DS2 adoption. These have included some of the latest updates, such as 2022 European Commission consultations, a legislative proposal for widening access to instant payments and keeping it low-cost.
Anticipated developments will render instant payments, stop additional charges, increase fraud protection, and harmonize adoption. Overall, the following wave of regulations—presumably PSD3—will focus on affordability, security, and increased access to instant payments.
Achieving PSD2 Compliance In 2025
PSD2 readiness by 2025 will rest upon continued technological advancements and future regulatory developments, such as the prospective rollout of PSD3. Forward-thinking merchants and payment services providers must manage current PSD2 requirements alongside future-proofing for more intense regulation of instant payments and closer coupling of secure authentication routes.
One particular significance is that the revised Instant Payments Regulation of January 2025 already mandates Euro area providers to maintain instant payment charges at or below standard transfer charges, demonstrating a wider regulatory effort for transparent pricing. Genuine success will stem from compliant-by-design methods such as training personnel, adjusting processes, working with partners, and ongoing checking of SCA needs.
The Role of Strong Customer Authentication in Financial Services
Strong Customer Authentication (SCA) allows payment institutions and banks to comply with PSD2 while maintaining online payments as securely as possible from fraud. By utilizing multi-factor authentication, SCA reduces fraud risk, as well as related costs for both consumers and institutions, ultimately driving greater confidence in online financial services.
However, the increased security concerns processes, such as online checkout, are a disruption to the user experience. Further, the numerous exemptions in SCA’s design require advanced systems to make them apply the correct rules and make instant decisions to maintain payments secure without disruption.
Strong Customer Authentication (SCA) Method Examples
According to SCA regulation, username and password alone are not sufficient; two distinct factors must be combined for a company in order to authenticate transactions and become compliant. Examples include SMS OTPs, which act as “something the customer has” through the delivery of a code to their phone; fingerprint recognition, a biometric “something the customer is” offering that offers fast verification but is not supported on all devices; and facial recognition, another biometric offering that securely compares a live scan with deposited data, though it is privacy-invasive. All these approaches combined enable payment providers to enhance security and minimize the risk of fraud without becoming PSD2 non-compliant.
Learning about the Dynamic Linking Requirement in PSD2
As part of anti-attacks, PSD2 embraced the dynamic linking requirement to ensure that authentication codes are linked to both the amount paid and the payee. This implies that the amount and payee should be easily understandable when verified, and the code generated will only approve that particular transaction. When the scammer steals and attempts to alter the payee or amount, the code becomes ineffective. Banks and other ASPSPs must also be capable of assuring the confidentiality and integrity of such information at every step so that it will not be easy to reuse the code for conducting illicit transactions.
Strong Customer Authentication Compliance Best Practices
To successfully respond to PSD2’s SCA rules, financial institutions and payment providers need strong governance, sophisticated technology, and flexible procedures. The SCA processes, exemptions, and credential security need to be supported through regular audits and third-party testing on a three-year basis. Periodic monitoring also needs to track fraud trends, breached devices, malware, and risk scores supported by detailed records of fraud volumes and fraud rates.
Instead of relying on legacy MFA, like SMS passcodes in isolation, use secure, modern MFA that is natively built into apps to resist potential threats. Finally, a standards-based authentication platform helps to apply the right level of authentication dynamically across all customer interactions for compliance and to improve user experience.
The Fundamentals of Strong Customer Authentication (SCA)
Under PSD2 and from the 14th of September 2019, Strong Customer Authentication or SCA works to minimize fraud and strengthen the security of contactless and online payments across Europe by means of multi-factor authentication. In order to be compliant, merchants would need at least two of the three elements at the point of payment: something the consumer knows (a PIN or password), something the consumer has (an item like a phone or token), and something the consumer is (something like biometric data such as fingerprints or facial recognition). Those transactions that do not involve these need to be denied by banks, ensuring identity authentication through dynamic, multi-layered security.
Global Strong Customer Authentication Views
In the rest of the world beyond the EU and UK, other nations are also adopting greater online payment security. The Reserve Bank of India, for instance, requires an additional authentication process to make online payments with cards, while Australia’s ACCC did not make 3D Secure mandatory in order not to harm the user experience. As online business continues to expand and fraud risk rises, more countries will follow suit in imposing SCA-like regulations in a bid to further secure consumers and safeguard transactions.
Future Updates to SCA
The UK and EU regulators are also revising the standards establishing Strong Customer Authentication. The European Commission has released Payment Services Directive 3 (PSD3) and a revised Payment Services Regulation to further fine-tune and improve PSD2 regulation. These same updates are being legislated in the UK, and the industry is keenly interested in seeing how these new regulations could impact future compliance and payment operations.
Conclusion
Compliance with PSD2 and SCA is not a one-time task—it’s an ongoing promise to secure, frictionless, and compliant payments. By combining strict authentication with a considerate customer experience model, EU businesses can safeguard transactions, lower fraud, and drive digital payment innovation.
FAQs
What is Strong Customer Authentication (SCA)?
It’s a PSD2 mandate that adds an additional layer of security by authenticating a customer’s identity using at least two independent factors.
When is SCA applied?
It will apply to most online and contactless customer-initiated transactions in the EEA and UK unless there is an exception or out-of-scope situation.
What are SCA-compliant components?
Something that you know (such as a password), something that you possess (such as a phone), and something that you are (such as a fingerprint or facial scan).
Does SCA hinder checkout?
It is able to, but advanced tools such as 3DS2 and sign‑in biometrics maintain it progressing along while remaining in compliance.
Who ensures SCA compliance?
Issuing banks need to reject non‑compliant transactions, and thus, merchants are likely to see increased decline rates if they fail to implement SCA properly.