KEY TAKEAWAYS:
--Network tokenization has emerged as an ideal solution for numerous businesses. It involves substituting a customer's primary account numbers (PANs) and other card details with a token issued by the card brand at the point of checkout. The PAN numbers remain securely concealed throughout the transaction, guaranteeing protection against data breaches.
--According to Visa, payment transactions using network tokens can reduce fraud by nearly 26% and have an average authorization rate increase of 2.2%.
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Over the past few years, the global economy has witnessed a remarkable digital payment revolution. Since the onset of the pandemic, an increasing number of consumers have made their initial shift from traditional cash payments to digital and contactless alternatives.
This surge has been particularly pronounced in industries reliant on digital transactions such as retail, restaurants, banking and insurance. In fact, according to McKinsey, a staggering nine in 10 Americans are now embracing various forms of digital payments, driving a substantial demand for faster, more convenient and secure payment experiences.
As the volume of contactless payments rises, so does the volume of challenges, specifically in payment security. To counter these security threats, an increasing number of businesses are turning to tokenization. Tokenization is a security measure that replaces sensitive information with a unique code known as a token. These tokens provide a protective barrier against identity theft, proving especially valuable in cases where a consumer's information is compromised, exposed or stolen.
Below are some of the biggest benefits of payment tokenization for both businesses and consumers.
See also: How Blockchain Enhances Reliability, Speed
Leveraging the Value of Network Tokenization
Network tokenization has emerged as an ideal solution for numerous businesses. It involves substituting a customer's primary account numbers (PANs) and other card details with a token issued by the card brand at the point of checkout.
The PAN numbers remain securely concealed throughout the transaction, guaranteeing protection against data breaches. However, unlike other tokenization methods that rely on processors or non-portable vaults exclusive to specific digital platforms or channels, network tokenization boasts end-to-end interoperability within the entire payments process. Consequently, it can seamlessly traverse various channels it encounters. In this system, cards are directly tokenized with the card networks, such as Visa and Mastercard, and their authenticity is confirmed by the issuing bank.
As security breaches and threats become more common, businesses must find solutions for limiting risk of exposure and alleviating compliance obligations, making network tokenization more critical for merchants than ever.
Here are three reasons why companies are turning to network tokenization and how it has become one of the most powerful tools available:
Higher Payment Authorization Rates
Payment cards can be declined for various reasons, from suspicion of fraud to inaccurate or outdated information, which may result in the loss of sales and a poor customer experience. With network tokenization, brands can directly communicate with the issuing bank to verify the legitimacy of the card, preventing card declines.
Because the tokens are going directly to the source, these transactions are deemed to be more secure and trusted by both the issuing and acquiring banks. According to Visa, payment transactions using network tokens can reduce fraud by nearly 26% and have an average authorization rate increase of 2.2%. With more successful payment transactions, businesses increase revenue and create loyal customers who are likely to repeat transactions from that brand.
Lower Interchange Rates Create Lower Costs
Accepting credit cards entails costs, with the majority originating from interchange fees. These fees serve to balance processing expenses and mitigate potential risks associated with payment approvals. The interchange rates are calculated using units of measurement called "basis points." For credit card processing, one basis point (BPS) is typically 1/100 of one percent.
In 2022, Visa disclosed a rate increase of nine to 10 basis points for qualifying Visa transactions when processed without using a network token. The rate increase has affected many interchange categories across several verticals, including insurance, banking and retail. By using network tokenization, businesses can avoid these rate increases on qualifying categories, thus lowering costs.
See also: Why Are We Still Talking About Digital Transformation?
Increased Retention and Persistency
According to Visa, more than two-thirds of U.S. consumers choose to store a credit card on file or set up recurring billing with merchants to avoid manual key entry. However, people many times gave a scenario where they need to be reissued a credit card. Per Visa, 35% of their survey respondents admitted they had forgotten to update their card information with merchants at least once. Their research also found that merchants generally reach out to customers two to three times to try to update card details before canceling services.
When organizations that offer services like insurance, utilities and subscriptions and other recurring payments move to digital payment methods, they often require additional resources that add to operational costs. These issues can lead to missed payments or cancellations, damaging the customer experience. However, network tokenization offers a solution by allowing real-time updates to tokens, preventing recurring payment failures. This, in turn, reduces the need for service center calls, minimizes disruptions and enhances customer retention.
The Positive Impact of Network Tokens
Network tokenization wields significant financial influence, particularly for large enterprises dealing with substantial transaction volumes. Even a slight reduction in interchange fees and payment declines can yield substantial benefits when applied to thousands or even millions of monthly transactions. The transformation of stored credit card data into secure network tokens offers online customers, whether they are shoppers, diners or policyholders, the benefits of enhanced security, convenience and an overall improved customer experience.
In the era of rapid digital payment growth, customers expect greater speed, convenience, safety and choice. Collaborating with payment networks to harness this essential capability, businesses are undoubtedly poised to boost revenue through increased repeat business while consistently providing a smooth, hassle-free payment experience.
