It's no secret that the world of payments is currently undergoing a period of rapid transformation. From mobile payment apps to in-app purchases, digital transactions are becoming increasingly commonplace. However, there is still plenty of room for innovation to make digital payments even more frictionless using tokenization technology. What is tokenization? How can it make payment more efficient? Read on to find out.
Contents
What Is Network Tokenization? Why Should You Care?
It's hard to believe that the first credit card was issued in 1950. Thanks to network tokenization, card payments are becoming as ubiquitous as ever.
Think of your experience of adding cards to Apple Pay or any android phone 'pays.' Take a photo of your credit card. The phone manufacturer (Apple, Samsung, etc.) sends the details to the card's issuing bank through a payment network like Visa or Mastercard to replace card details with randomly generated numbers (aka network tokens). This token is returned to the phone, which programs it into its secure storage.
And tokenization is a vast business - in 2023, Apple Pay alone is projected to generate global revenues of $4 billion!
If you're a business owner, understanding network tokenization is essential to growing your business while ensuring the safety of your customers' information and improving the payment experience.
Here's a closer look at what network tokenization is and why it matters for businesses:
Difference between Network Tokenization and PCI Tokenization
Network tokenization replaces sensitive credit or debit card information with numbers or tokens that can be used to complete a transaction without revealing the card number.
However, payment card tokenization is not a new concept. This concept has been here since e-commerce payments (for example, Amazon launched one-click checkout in 1997). These are PCI tokenization, i.e., tokenization services offered or built by a PCI-compliant entity such as payment service providers (PSPs), gateways, acquirers, or even merchants. These PCI tokens replace the card data with tokens at the merchant end. However, issuers do not see such token activities on the merchant side. On the other hand, network tokens are visible to an issuer, and their creation is facilitated through payment networks like Visa and Mastercard. This means network tokens have better issuer approval rates and lower false declines than PCI tokens.
Benefits of Network Tokenization
Network tokenization is one of many technologies online merchants turn to strike the right balance between high security and a frictionless buying experience. Some security benefits include the following:
Securing Data in Transit
Card details are safeguarded in transit via network tokenization. If hackers accessed a business's network, they would only view tokenized data, not card info.
Domain Controls
Network tokens might be limited by device, merchant, transaction type, or channel. With new payment channels, including online, IoT, and voice, restricting and controlling network tokens is crucial to preventing cross-channel fraud. Network token usage can be regulated. If a token is hacked by one company, other companies can continue processing card payments.
However, the benefits of network tokens extend beyond payment security such as:
Increased Conversion Rates
Network tokenization helps protects card details throughout the transition lifecycle; issuers treat network-tokenized payments as more secure than non-network or PCI tokens. Studies show that transacting using network tokens offers an average of a 2.1% authorization lift over the usage of PAN for card-not-present transactions. Also, network tokens are updated in real-time, so customers' payment details are always up to date, and merchants don't have to worry about stale card-on-file information that can lead to payment declines.
Cost Savings
Network cost updates can mean using a traditional PCI token or PAN is often more expensive than a network token. For example, Visa has announced that it plans to charge non-token transactions at a higher rate starting this year. Merchants can help mitigate those rate increases by adopting network tokens.
Driving Interoperability in the Payment Ecosystem
The digital payments ecosystem helps to expand, and the burden of managing different proprietary PCI tokens from multiple acquirers, payment service providers (PSPs), and gateways will become increasingly challenging. Network tokens are interoperable across many acquirers. PSPs and gateways are hence much more efficient to manage.
Backend Compatibility
We must also consider the backend impact. Sometimes PCI tokens are not formatted as routable PANs, so they cannot be accepted as a like-for-like 'replacement.' Network tokens are in the same format as a regular PAN, so they can be accepted and routed along the standard payment rails without impacting the existing merchant systems.
Compliance
From 1 July 2022, only card issuers and card networks can hold India-issued card data for transactions processed by RBI-licensed payment service providers (RBI). So the migration to network tokenization is not good but a must if you have a returning customer business model in India. Another benefit of tokenization is that it can make it easier to comply with data privacy laws, such as the General Data Protection Regulation (GDPR).
Conclusion
Contact Us for More Information on Network Tokenization
As a merchant, you can benefit from network tokens through higher authorization rates, simplifying fraud management, and an improved customer experience. The following article of this series will look into how tokenization works.
If you're reading this article, you may be wondering what network tokenization is and why it matters—interested in learning more about it and how it can benefit you? Contact us today – we'd be happy to chat with you and answer any questions.
Also, read our blog on why one should switch to digital payments:
Cash is no more the King, switch to Digital Payment
