Stripe Delegated Authentication: Moving from Providing Payments to Banking Infrastructure

Stripe Delegated Authentication: Moving from Providing Payments to Banking Infrastructure

Davide Villa
June 27, 2022

Stripe has consistently demonstrated its desire and ability to bring payment innovation to the market. It should then not come as a surprise that earlier in June, Stripe announced the launch of a new solution in Europe, called delegated authentication, with the aim of improving payment conversion.

The new solution allows merchants using Stripe to have their customers authenticate their purchases inside the checkout flow. Stripe’s new solution works by taking responsibility for Strong Customer Authentication (SCA) over from the card issuer. This delegation of SCA responsibility by the issuer to Stripe is based on a bilateral agreement between Stripe and each issuer. Permission to delegate SCA is compliant with SCA rules.

The European Banking Authority (EBA) confirmed back in 2020 that PSD2 allows PSPs to outsource authentication to an entity to conduct SCA on their behalf: “…PSPs may outsource the execution of SCA to a third party. In that case, said PSPs should comply with the general requirements on outsourcing, including the requirements in the EBA Guidelines on Outsourcing”. Both Visa and Mastercard have programs in place to facilitate this, although agreements can also be negotiated bilaterally.

Stripe’s approach to delegation is based on leveraging biometric capabilities on shoppers’ smart devices. Stripe handles the biometric authentication process directly and eliminates the need for shoppers to be redirected to their issuer’s mobile app for biometric authentication. This removes a significant source of friction from the checkout flow, which research suggests can lead to cart abandonment and negatively impact payment conversion rates.

Stripe has announced that Wise, the UK fintech issuer, has partnered with Stripe to delegate authentication and take advantage of the new solution. Further adoption of Stripe’s solution and other delegated authentication solutions is hard to judge and depends on individual issuer appetite. It is worth noting that even if SCA is delegated, issuers remain legally responsible for SCA regulatory compliance, which the EBA has confirmed cannot itself be outsourced. Issuers remain on the hook for any potential non-compliance by the 3 party. Hence, as is common with payment innovations, Fintech issuers will likely lead the way, with incumbent issuers eventually following suit.

Martin Koderisch, Principal at Edgar, Dunn & Company (EDC), commented: “I think what’s interesting about this latest Stripe product launch is that it demonstrates Stripe’s growing strategic intention to go beyond exclusively providing payment solutions for online merchants. Delegated authentication is a banking infrastructure solution for issuers, and we can expect further such moves beyond payments to come”.

It will be interesting to see the outcome of Stripe’s strategic initiatives and how these will position Stripe in the ever-evolving payments and fintech landscape.

The content of this article does not reflect the official opinion of Edgar, Dunn & Company. The information and views expressed in this publication belong solely to the author(s).

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