What is the role of MFA and 2FA in payment security?

Authentication can play a vital role in payments, safeguarding consumers from criminal actors. It is the process of verifying the identity of an account holder in a transaction. In payments, authentication stands as a primary defence in safeguarding merchants against chargebacks, which can lead to revenue loss.

Across global markets, fraud is a critical issue and occurs in many forms. Statista estimates that eCommerce businesses lost an estimated USD 48 billion in 2023 to online payment fraud globally. This shows the need for robust payment security systems and their crucial role in protecting businesses and consumers.

In this article, we explore the roles of Multi-factor Authentication (MFA) and its counterpart, two-factor authentication (2FA), in ensuring payment security. Furthermore, we explore their differences and the benefits they provide for safeguarding financial transactions. Let's get into it.

What is multi-factor authentication (MFA)?

In payments, MFA is a security process that requires an account owner to provide multiple factors to verify their identity before authorising a payment transaction. Identity verification in this process requires at least two or more authentication factors for the user to approve a transaction.

Alternatively, a two-factor authentication (2FA) method is a security process that requires two different credentials for verification. For example, you might use a password and a fingerprint to authorise a payment.

With illegal actors always trying to break secure systems, payment providers use robust authentication systems to combat fraud. In Europe, one of those methods is the Strong Customer Authentication (SCA), part of the revised Payment Services Directive (PSD2) legislation by the European Commission. The SCA mandate required financial institutions to use at least two of the following authentication factors during user authentication. These factors are categorised as follows:

Knowledge factor

The knowledge factor authentication refers to security information only the user knows. It is also known as the something-you-know authentication factor. These include passwords, PINs or security questions. Though commonly used, knowledge factors are vulnerable to phishing attacks or data breaches, making it important to combine them with other factors for enhanced security.

Possession factor

Next is the something-you-have authentication factor. It refers to physical objects the user possesses, such as their smartphone, a security token or a smart card. Physical tokens or devices add an additional layer of security by ensuring the user must have a specific item in their possession during authentication.

Inherence factor

This inherence factor involves biometric characteristics like fingerprint, facial recognition (face ID) or voice recognition, which are unique to the individual. It is known as the something-you-are authentication factor. Because these traits are nearly impossible to replicate, inherence factors offer a higher level of security. However, they require advanced systems for storage and authentication, which can pose challenges for some businesses.

Although no security system or method is infallible, these factors combined can help financial institutions to significantly make it more difficult for unauthorised persons to gain access. For instance, if a user’s password is compromised but biometric authentication, such as a fingerprint, is required, the attacker would still be unable to access the account. This demonstrates how MFAs can protect consumers and merchants even when one factor is at risk.

What is the key difference between MFA and 2FA?

There’s a rising trend in the adoption of MFA for authentication globally. Recent reports by Statista show that the number of MFAs has nearly doubled since 2020. By 2022, approximately 13 billion MFAs were registered worldwide. The reason for this could be the key role they are playing in payments and across other industries in providing robust security for user verification in a digitalised world.

Additionally, in 2023, Germany saw the highest increase in multi-factor authentication (MFA) usage, with a growth of over 50%. Japan followed, with a 28% increase. While MFA and 2FA are often used interchangeably, there are some key differences between them. Let’s look at what they are below.

Number of factors involved

As the name suggests, 2FA relies solely on two forms of identification to verify a user’s identity, such as a password and a fingerprint. On the other hand, MFA can involve more factors, which provides added layers of security. The more factors involved, the more secure the authentication process becomes. The flexibility of MFA allows organisations to tailor authentication processes to meet their specific risk management needs.

Use cases in payments

Risk management tools of the Payment systems are designed to assess risk and determine the appropriate authentication level for transactions. For lower-risk transactions, such as those below a certain threshold, PSD2 exemptions may apply, meaning SCA might not even be required. However, for higher-risk or high-value financial operations, MFA provides a more robust security framework. Payment providers and merchants must work together to leverage exemptions where possible to minimise friction while ensuring compliance and security.

Security levels

By requiring additional layers beyond two factors, MFA typically offers a higher level of security than 2FA. Muti-factor authentication makes it harder for unauthorised user(s) or illegal actors to gain access to an account, especially in cases where sensitive information is involved.

What are the benefits of MFA in payments?

Using MFA in a payment system provides several important benefits to all stakeholders in the value chain. These benefits include:

Security and fraud prevention

MFA can significantly reduce the risk of unauthorised access and fraudulent transactions. Requiring multiple verifications can make it more difficult for bad actors to compromise accounts or initiate payments fraudulently. The multi-layered defence mechanisms it offers can reduce the risk of fraudulent transactions, protecting both merchants and customers from potential financial losses and chargebacks.

Compliance with legal requirements

Multi-factor authentication helps businesses comply with regulatory requirements, such as PSD2’s SCA mandate in Europe. This type of compliance is critical to operating in regulated markets and avoiding potential penalties. Compliance is not just about avoiding penalties; it also demonstrates a commitment to high standards of security.

Improves customer confidence and trust

The implementation of robust security measures like MFA by payment providers can help merchants build greater trust with their customers. Trust is crucial for the adoption of any new payment system leveraging MFAs as we found in our recent Open Banking study. With nearly 60% of respondents considering security as the most important factor in adopting new payment systems, closely followed by privacy at 41%; it is clear that strong authentication measures like MFA play a crucial role in building consumer trust. This can help merchants to improve loyalty with existing customers.

Protection from chargebacks

Chargebacks can hit merchants hard with fees and lost revenue and they also involve extra administrative work. Additionally, they can damage the merchant’s reputation and lead to a loss of productive hours. Strong authentication methods like MFA may make unauthorised transactions less likely to occur. For example, in the EU, transactions that have successfully passed 3D Secure 2 (3DS2) authentication cannot be disputed under the ‘fraud’ reason code, providing merchants with an added layer of protection. This can reduce fees and disputes, saving businesses time and money in dealing with these issues.

Flexibility and adaptability

MFA systems can be designed to balance security requirements with user experience. Merchants can choose the most appropriate combination of authentication measures based on the level of risk for different actions or user activities. At the end of the day, the goal is to offer a secure but also seamless payment experience that complies with regulatory requirements.

How emerchantpay helps merchants

Implementing MFA in payment systems is a strategic move that offers numerous benefits, from enhancing security and ensuring regulatory compliance to building customer trust and reducing operational challenges. For merchants, it is a key step towards offering their consumers a safer and more reliable digital payment experience.

With advanced fraud management features and capabilities, emerchantpay helps businesses accept payments securely. Our payment gateway is built to support security and compliance with authentication factors that can enable success for merchants. With over 20 years of experience, our expertise as a PCI Level 1 compliant payment service provider and acquirer positions us to expertly guide you through the intricacies of payment processing. This ensures that payment systems can be both secure and compliant with payment laws and regulations globally.

Additionally, we offer one of a kind seamless support through a dedicated Account Manager and Risk Analyst. Our expert, personalised technical support ensures smooth operations and proactive risk management, so you can focus on growing your business far and wide.