What PSD2 is and How It Affects Your SaaS Product

The European SaaS Industry is estimated to reach US$69.82 billion in 2024 with an annual growth rate (CAGR 2024-2028) of 8.03%. 

Why does this matter? 

Because growing markets need to be regulated to ensure consumer protection and long-term sustainability. 

As the society, the SaaS industry, and, most importantly, technology progress - new regulations and laws must go into effect to protect consumers while ensuring balance and fairness in how business is performed. 

The SaaS and software markets are increasingly competitive, which, theoretically, is a good thing. Practically, however, if that competition is unfair or unregulated, it can do more harm than good. 

That is why having compliance frameworks in place governing electronic payment services is necessary in order to have a healthy business environment.

But how difficult is it to comply with these regulations? And how can a Merchant of Record simplify the process? To fully understand these issues,  read more about: 

What is PSD2?
4 Ways PSD2 Impacts Your SaaS
Why is the Merchant of Record The Solution?
How Can PayPro Global Help? 

What is the Payment Service Directive (PSD2)?

In 2007, focused on creating a single simplified market for payments and improving efficiency while encouraging fair competition, the EU rolled out the so-called Payment Services Directive. 

However, after almost a decade and some rather impressive technological advancements, the European Union decided it was time for some key compliance changes, and along came the revised payment services directive.

4 Ways PSD2 Impacts Your SaaS

We know what you are going to say. 

PSD2 is a set of regulations that only payment providers (PSPs), financial institutions, and banks have a legal obligation to comply with. 

Know that merchants who are not proactive in applying the PSD2 provisions, specifically the SCA regulations, are probably going to experience a world of trouble. 

How come? Glad you asked - We’d love to tell you! 

SCA Complications 

Yes, PSPs are more obligated than others to enforce SCA technology, but that is not to say that SaaS businesses do not have their own share of responsibilities in the matter. 

Sadly, the 3DS 1.0 framework (introduced in 2000) had a long history of adding a great deal of friction at the checkout, leading to low authorization rates due to very bad user experience and implementation. 

In the PSD2 context, as it became mandatory for customers in the EU, the 3DS 2.0 technology came to improve this issue. While being much more user-friendly, more dynamic, and richer in information than 3DS 1.0, it still has its share of complexities. 

Ultimately, the industry has been experiencing not only frustration from shoppers but increasing payment failure rates, leaving both merchants and customers unhappy with the whole process. 

Not only is this a real problem in terms of SaaS business revenue, but it also affects customer trust. 

Declining valid transactions is widely regarded as a valid reason for shoppers not to return to your online business, especially if they can complete their transaction elsewhere without any hurdles. 

Increased Compliance Costs 

Adhering to PSD2 and other compliance frameworks takes a financial toll. 

SaaS companies must invest heavily in beefing up customer authentication and data security.

Plus, let’s not forget the expenses they must endure when it comes to compliance audits, enhancing data protection, and improving fraud prevention systems.

Keeping your documentation in order, as well as handling different reporting processes to demonstrate and maintain compliance, probably require further investments in both software and administrative resources. 

Furthermore, establishing a specialized department to track and implement regulatory changes is an additional cost that can be significant.

Customer Experience 

PSD2 places SaaS businesses in a rather complicated position. 

On the one hand, they need to follow the increased security guidelines established by PSD2, and by doing so, they are prone to creating a lot more friction in the payment flow. 

On the other hand, they are well aware that while shoppers value data security and SCA protocols are a good step in this direction, they also expect to have a frictionless payment experience and a smooth delivery of service. 

The result? 

A falling conversion rate and increased cart abandonment. 

And worse yet, the combination of these two factors can only lead to one thing: business disaster. 

Financial and Legal Consequences

Failing to comply with aPSD2 regulations can have a number of legal and financial complications. It’s not only important, but your responsibility to be well aware of them and take all the necessary measures to avoid them. 

Because not being able to adhere to compliance regulations adequately will lead to significant fines, which vary depending on the severity of the violation. Operational disruptions can occur if restrictions are imposed, which will obviously lead to revenue losses. 

Worse yet, things can escalate, and businesses may face legal action from either regulatory bodies or individuals affected by security breaches or fraudulent activities as a result of non-compliance.

We’ve mentioned this before, and with good reason: A faulty SCA implementation can lead to the loss of customer trust and brand reputation, which, as you can imagine, means significant revenue leakage. 

Why is the Merchant of Record The Solution?

As a SaaS developer gaining traction, you’re most likely eyeing the next growth milestone. And that’s exactly what you should be doing. 

Instead, you need to figure out how to juggle administrative workload effectively and comply with the PSD2 regulations in a way that does not destabilize your operations. 

Luckily, there is a way you can offload the mechanics behind online sales, and it’s called the Merchant of Record. 

So, let’s see how exactly a trusted Merchant of Record partner can simplify PSD2 compliance. 

Reduced complexity and costs

By joining forces with a reputable and fully compliant Merchant of Record, you can put aside the complexities of adhering to PSD2 standards and trust an experienced and knowledgeable partner to handle them. This means you’re able to free up internal resources and put them to work on other core business activities.

Improved customer experience 

Given the level of experience and expertise, coupled with its innovative technology, the Merchant of Record manages the authentication and authorization process of payments. Carefully implemented, it can reduce friction for customers and actually increase conversion rates.

Ongoing compliance management 

With an in-house team of experts, your Merchant of Record adheres to the latest PSD2 regulations and promptly implements any updates or changes. Having this level of support is necessary to maintain your business on a fast track to success and quickly tap into growth opportunities. 

Improved fraud protection mechanisms

Supporting SaaS businesses on the road to global expansion, Merchants of Record have innovative risk management, security measures, and fraud prevention mechanisms in place that can face different cyber threats. 

At PayPro Global, for instance, we employ a comprehensive fraud protection plan that revolves around the specifics of your business. By doing so, we are fully complying with PSD2 regulatory technical standards concerning fraud protection. 

How Can PayPro Global Help?

As a respected company in the payments industry for over 15 years, PayPro Global’s unique Merchant of Record solution helps SaaS, software, and video game developers scale their businesses anywhere in the world. 

Our Merchant of Record offers end-to-end compliance management, taking operational frustration off your list of responsibilities and allowing you to focus on what matters most: your product.

Offering an effective SCA implementation that ensures a frictionless purchase path and avoids revenue losses due to 3DS downturns, PayPro Global’s MOR ensures that all your operations run smoothly. 

Through multi-level internal systems that merge advanced fraud monitoring tools, automated alerting systems, and machine learning algorithms with regular audits and manual verifications, PayPro Global can proactively detect and rapidly address any anomalies or performance barriers.

As a PCI-DSS Level One Certified partner, we ensure the highest payment security standards are upheld. 

Find out more about our all-inclusive payment infrastructure and how you can gain access to a platform that can strategically scale your business in global markets.