Securing transactions remains a top priority for merchants in the constantly changing landscape of e-commerce payment solutions. One technology that has become integral to online payment security is 3D Secure (3DS). It provides an extra layer of authentication for credit and debit card transactions, but like any security solution, it has pros and cons. This blog will explain how 3D Secure works and its benefits and disadvantages.

How Online Merchants Use 3D Secure

Online merchants leverage 3D Secure to verify a customer’s identity before completing a transaction. This system, often called “payer authentication,” ensures that the individual making the purchase is the authorized cardholder. By incorporating 3DS, merchants aim to reduce fraudulent transactions and improve their overall merchant risk assessment.

The process is simple yet effective:

1. A customer initiates a purchase and enters their card details.
2. The 3DS protocol redirects them to their bank’s authentication page.
3. They confirm their identity via a one-time password (OTP), biometrics, or other methods.

For merchants, the appeal lies in preventing fraudulent activities without sacrificing the customer experience—though achieving this balance isn’t always straightforward.

A Look at the Main Elements of 3D Secure

3D Secure, introduced initially by Visa (as Verified by Visa), has since evolved into 3D Secure 2 (3DS2). The main elements include:

Authentication Request: The transaction is flagged for additional authentication if deemed risky.

Risk-Based Authentication: Advanced algorithms assess the risk level of the transaction in real-time, using data such as device information, purchase patterns, and location.

Frictionless Flow: When the transaction is considered low-risk, the customer can skip manual authentication.

Challenge Flow: For higher-risk transactions, customers are required to authenticate manually through OTPs, biometrics, or security questions.

What Is Frictionless Flow and How Is It Achieved?

One of 3DS2’s standout features is the frictionless flow. It enables low-risk transactions to occur smoothly, ensuring the user’s purchasing experience is uninterrupted. This is achieved through risk-based authentication, which evaluates various data points such as device ID, past behavior, and geolocation—in real time.

For merchants, frictionless flow provides a better customer experience, reduces abandonment rates, and maintains the integrity of their e-commerce payment solutions. However, when a transaction is flagged as risky, it transitions into a challenge flow, which can introduce friction.

What Is the Liability Shift Rule in 3D Secure 2.0?

The most crucial advantage of 3DS is the liability shift rule, which helps merchants deal with fraud cases. When a transaction is authenticated through 3DS, the liability for fraudulent chargebacks shifts from the merchant to the card issuer.

This rule incentivizes merchants to adopt 3DS, reducing their financial risk and improving their fraud prevention and risk management strategies.

3DS benefits

The main benefit of 3D Secure (3DS) is its ability to reduce fraud and minimize the risk of chargebacks for merchants. According to a analysis conducted by Visa, merchants experienced a significant drop in fraudulent transactions after implementing 3DS as part of their fraud protection strategy. This reduction in fraud helps safeguard merchants’ revenue and builds trust and confidence among consumers.

Additionally, 3DS includes a liability shift mechanism that offers financial relief to merchants who fall victim to fraud. This mechanism provides a level of security that leading, future-focused commerce protection providers consider essential.

How Does a Fraud Liability Shift Work?

The fraud liability shift in 3D Secure is a game-changer for merchants. If a consumer disputes a transaction that has been authenticated through 3DS, the chargeback responsibility is transferred to the card issuer instead of resting with the merchant. This creates a safer environment for merchants to operate and contributes to more effective fraud prevention and risk management.

3D Secure Potential Upsides Come with Downsides

While the benefits of 3DS are substantial, it’s not without its challenges. Here are some downsides to consider:

Increased Friction: Transactions flagged as high-risk may require additional authentication, potentially disrupting the customer experience.

Implementation Costs: Setting up and maintaining 3D Secure protocols can be expensive, especially for smaller merchants.

False Positives: Legitimate transactions may sometimes be flagged as risky, leading to unnecessary authentication requests or transaction declines.

Technical Limitations: Poor implementation or technical glitches can lead to failed transactions, frustrating customers and damaging a merchant’s reputation.

3D Secure Includes Other Authentication Flows

In addition to the challenge and frictionless flows, 3D Secure includes other authentication methods such as:

Biometric Authentication: Using fingerprints or facial recognition for added security. 

Push Notifications: Allowing users to approve transactions directly from their banking apps. 

Token-Based Authentication: Providing unique tokens for each transaction to enhance security.

These additional flows improve security but require careful implementation to avoid disrupting the e-commerce payment solutions experience.

Conclusion

3D Secure offers a robust solution for merchants looking to improve their fraud prevention and risk management efforts while reducing liability. However, its benefits come with trade-offs, including potential customer friction and higher implementation costs. By understanding the nuances of 3DS, including the liability shift, frictionless flow, and additional authentication options, merchants can make informed decisions about incorporating it into their e-commerce payment solutions.

To maximize the benefits and minimize the downsides, merchants should work with experienced payment providers who can tailor 3DS solutions to their unique needs. Ultimately, a well-executed 3DS strategy can lead to fewer chargebacks, better customer trust, and improved security in the digital payments ecosystem.