FCA Delays SCA... Again

The UK's Financial Conduct Authority has again delayed its deadline for enforcing the implementation of 'strong customer authentication' in e-commerce transactions, until 14 September 2021. 

The FCA had already turned a blind eye to the threshold for applying SCA to contactless card transactions, in light of the role that contactless cards play in social distancing.

The FCA still expects firms to follow the industry implementation plan agreed with UK Finance, though that can now be extended to the new deadline.

FCA Turns Blind Eye To SCA For Contactless Card Payments

The introduction of 'strong customer authentication' (SCA) - also known as 'two factor authentication' or 'multi-factor authentication' for remote and electronic payment transactions has had a checkered history. Payment service providers should have been challenging customers to provide extra authentication details from 14 September 2019. But lack of industry preparation led the FCA (in line with the European Banking Authority and other EU national regulators) to state that it will not enforce the requirement until 14 March 2021, so long as PSPs are following an agreed industry plan to introduce the checks. In light of the COVID19 crisis, the FCA has now added:

"...we are very unlikely to take enforcement action if a firm does not apply strong customer authentication when the cumulative amount of transaction values has exceeded EUR 150 or five contactless transactions in a row. But this is only as long as the firm sufficiently mitigates the risk of unauthorised transactions and fraud, by having the necessary fraud monitoring tools and systems in place and taking swift action where appropriate."

Further time may also be allowed for introducing SCA for e-commerce payments generally, beyond 14 March 2021.

Meanwhile, the date for applying regulatory standards to secure communications amongst PSPs was also deferred from 19 September 2019 to 14 March 2020, yet some PSPs have not complied. The FCA is also letting them off the hook, where they are "facing further delays due to coronavirus:

"...we will consider on a case-by-case basis the appropriate further measures. In doing so, we will in particular consider:

• firms’ security around authentication to access their online banking and when making payments;

• their controls and processes to reduce fraud;

• whether that impact is likely to be exacerbated given the current circumstances."

 

New To Payments? Try PSD2 Customer Authentication and Communication Standards!

If you are among the new entrants to the regulated payments space you should know that, in a bit to captivate and inspire a generation, the European Banking Authority has published the final 'regulatory technical standards' for payment user authentication and the secure communication of payments data. The standards should take effect in the second half of 2019, but the authorities are keen for regulated payment service providers (PSPs) to adopt them as soon as possible. They are written in legalese, but I've summarised them below in a bid to get them straight in my own head.  Grab a coffee before proceeding!

Strong customer authentication 

PSPs must know they are dealing with their own customer by applying strong customer authentication. This is subject to certain permitted exemptions outlined below. PSPs must also protect the confidentiality and the integrity of each customer's personalised security credentials. Their security measures must be documented, periodically tested, evaluated and audited by auditors with expertise in IT security and payments and operationally independent within or from the PSP.

 

Broadly, authentication must be based on two or more elements of 'knowledge' (password/PIN), 'possession' (card/device) and 'inherence' (fingerprint/iris scan). 

These elements must be subject to measures designed to prevent disclosure (in the case of knowledge) , replication (in the case of possession) and resistance against unauthorized use of device or software (in the case of inherence). 

The breach of one element must not compromise the reliability of the others. Certain measures must also mitigate the risk that a multi-purpose access device has itself been compromised. 

Credentials and Code

Authentication credentials must be masked when displayed and not fully readable as they are being entered; not stored in plaintext; and must be protected from unauthorized disclosure. 

PSPs must document how they encrypt credentials or render them unreadable. 

The creation, processing and routing of credentials must be done in secure environments that accord with industry standards. 

Specific requirements govern the process of associating the user with credentials; delivery; authentication of devices and software; and the renewal, destruction, deactivation and revocation of credentials.

Authentication must result in the generation of an authentication code that is only accepted once by the PSP when the payer uses it to: access the payer’s payment account online, initiate an electronic payment transaction or to carry out any action through 'a remote channel which may imply a risk of payment fraud or other abuse'. 

No information on any of the authentication elements can be derived from the disclosure of the authentication code; nor can it be possible to generate a new authentication code based on the knowledge of any previous code. The code must not be able to be forged. 

Where the authentication has failed to generate an authentication code, it must not be possible to identify which of the authentication elements was incorrect. 

No more than 5 failed authentication attempts can take place consecutively before the authentication tool is blocked, either temporarily (based on certain factors) or permanently (after a warning). The user has 5 minutes of inactivity after being authenticated before access must time-out. 

Dynamic linking!

The payer must be made aware of both the amount of the proposed payment transaction and of the proposed payee. The authentication code must also be ‘dynamically linked’ (specific to) the amount and the payee. Any change to the amount or the payee must result in the invalidation of the authentication code  that was generated. 

PSPs must ensure the confidentiality, authenticity and integrity of the amount of the transaction and the payee throughout all of the phases of the authentication; as well as the information displayed to the payer including the generation, transmission and use of the authentication code.

Transaction monitoring

PSPs must monitor interaction with their customers to detect unauthorised or fraudulent payment transactions, taking into account elements which are typical of the user when normally using the credentials and, at a minimum, the following risk-based factors: 

• lists of compromised or stolen authentication elements; 
• the amount of each payment transaction; 
• known fraud scenarios in the provision of payment services; 
• signs of malware infection in any sessions of the authentication procedure; and
• where the access device or software is provided by the PSP, a log of the use of the device or software and the abnormal use of the device or software. 

Exemptions from strong customer authentication

The permitted exemptions (subject to transaction monitoring, and quarterly assessments to be shared with the FCA on request) are: 

• checking the balance or the last 90 days of transactions without entering sensitive payment data; 
• a contactless payment of up to €50, a series of up to €150 or 5 consecutive contactless payments; 
• payment at an unattended parking or transport ticket terminal;
• the payee is included in a list of trusted payees (unless adding to or changing the list); 
• recurring payments (after authenticating for the first);
• transfers between the users’ own accounts with the same PSP; 
• a remote electronic payment of up to €30, consecutive payments of up to €100 or 5 consecutive remove electronic payments; 
• commercial payment processes or protocols where the FCA is satisfied they guarantee at least the same level of security as under PSD2; 
• low risk remote electronic payment transactions (based on certain risk factors) where: 

o the fraud rate is below the relevant reference rate; 

o the amount is below a specific threshold; and 

o the PSP’s real time risk analysis hasn’t identified certain specified problems. 

Secure communcations

A PSP's communication sessions must be protected against the capture of authentication data transmitted during authentication, and against manipulation by unauthorised parties based on certain communication standards. These include secure identification of payer’s and payee’s devices; traceability of both the transactions and the interaction with the user and other participants in transactions; and a secure access interface between payer and online payment accounts. 

The access interface must allow for access by the user’s chosen account information service providers (AISPs) and payment initiation service providers (PISPs), although access by AISPs and PISPs can be facilitated via a dedicated interface that meets certain requirements. 

Wakey-wakey!

The End.

Will Regulatory Technical Standards Slow The Pace Of Payments Innovation?

Under the new Payment Services Directive (PSD2), the European Banking Authority (EBA) is tasked with producing 'regulatory technical standards' to be followed by those with certain obligations, including how payment service providers (PSPs) must authenticate customers and communicate with each other. But it seems this process and the standards themselves are acting as a brake on innovation and related investment.

The EBA consulted on its proposed regulatory technical standards for authentication and communication between August and October, with a revised set due in the coming months.

PSD2 requires PSPs to apply "strong customer authentication" where "the payer... accesses its payment account online, initiates an electronic payment transaction or carries out any action through a remote channel which may imply a risk of payment fraud or other abuses."

But two big issues raised by PSD2 are (1) how each type of payment is initiated; and (2) who actually initiates it.

The EBA believes card payments are initiated by the cardholder as payer, but fudges the issue somewhat by requiring the card acquirers (i.e. the PSP of the merchants) to require their merchants to support strong authentication for all payment transactions. The added complication is where a payment transaction is initiated by the payee, but the payer's consent is given "through a remote channel which may imply a risk of payment fraud or other abuses".

There is a view, however, that card payments are among those that are in fact initiated by the payee (the merchant), who is not in fact the 'payee' of the cardholder at all but is paid by the card acquirer to which the merchant submits its transactions. The cardholder just pays the card issuer. This is all bound up in fundamental problems with the definitions of "payment transaction", "payer" and "payee" in both the PSD and PSD2; and the fact that card acquiring works through a series of back-to-back contracts that do not involve any direct contract between the buyer and the seller at all concerning payment processing. Indeed, a challenge for the UK's implementation plans is that there is a Court of Appeal decision which supports this view. 

In these respects, PSD2 appears to set up a 'legal fiction', which (despite taking a somewhat purposive approach in the 'fudge' explained above) the EBA appears to insist on in language at the end of its consultation paper: "all the requirements under consultation apply irrespective of the underlying obligations and organisational arrangements between" the various types of PSP, payers and payees. In other words, we have a weird situation where the law and related standards are to be applied regardless of how payment systems and processes really work.

Not only can this lead to situations where, for example, some banks insist that the PSD does not cover card acquiring, but it can also cause over-compliance to avoid doubt and other restraints on innovation.

While distinctions concerning how payments are inititiated and by whom might seem to matter less in the context of security measures to be adopted by PSPs - since everyone is interested in reducing financial crime - it is absolutely critical in the context of software and services that contribute in any way to payments being "initiated" and whether the suppliers or users of such software and services must be authorised as "payment initiation service providers" or perhaps even as the issuers of payment instruments. 

It will be very interesting to see how the Treasury proposes to address these problems in transposing PSD2 itself, although it's more likely the FCA will be left to explain how to comply, assuming the Treasury declines to take a purposive approach to EU law and simply copies the language of PSD2 into UK law (a process known as 'gold-plating').

There are numerous other glitches in the technical standards that have been identified by respondents, too numerous to mention here, but which it is hoped will be reconsidered in the next version - not that such standards should ever be considered as 'final' or set for all time. Indeed, an overarching problem seems to be that in the EBA's attempts to drag our legacy payments infrastructure into the 21st century, insufficient attention has been given to existing and potential alternative security technology - even in cases where incumbents are seeking to leapfrog the limitations of legacy systems.

Meanwhile, a year has slipped by since PSD2 was approved and the standards themselves are only due to take effect in October 2018 'at the very earliest', by which time they are likely to be thoroughly out of step with commercially available technology. 

While old systems may need to be accommodated to some degree, surely the pace of payments innovation should not be tied to the slowest animals in the herd?

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