Tokenization matters more than ever before
Even before the pandemic, ecommerce payment volumes had been growing fast. And despite a difficult 2020, it is estimated that worldwide retail ecommerce sales grew 27.6% for the year3. This sudden increase in new behaviors that developed out of necessity during the crisis has served as a powerful catalyst for the payments ecosystem.
These shifts have drawn attention to the shortcomings of ecommerce. Despite the advances made in recent years, it has to be acknowledged that, compared to face-to-face, online payments are not always as efficient as we would all like. This is largely because, from the issuer’s perspective, ecommerce transactions are riskier, as reflected in higher rates of fraud, so are more likely to be declined.
As of mid-2020, for example, the authorization gap between card present and card-not-present stood at more than 400 basis points and the volume of card-not-present fraud was forecast to continue its climb –set to grow by 14 percent by 20234.
And as the world adopted digital conveniences out of necessity in 2020, a percentage of the workforce was forced to be remote, and a 20 percent increase in security breaches was reported5. Fraudsters didn’t discriminate between technology giants, hospitality and entertainment chains or health care companies.
The acceleration of ecommerce growth has amplified these challenges tremendously, but along with them, the value of tokenization. Today, tokens are more important than ever in the ecommerce landscape. They provide enhanced security for the credential itself, greater issuer confidence in the transaction and hence, higher authorization rates, as well as better consumer experiences through capabilities like lifecycle management and device-binding.
Financial institutions have recognized the value tokens bring in reducing friction
With the growing importance of top-of-wallet status, financial institutions have turned their attention and efforts to achieve and maintain that status. A single poor customer experience can have significant repercussions, such as loss of top-of-wallet or worse, loss of spend overall if the customer stops using the card.
For financial institutions, that seemingly higher-risk world of ecommerce can be costly. Every bit of fraud reduction can translate into tremendous savings, with fewer card reissuances and less impact of a negative customer experience.
With tokens, financial institutions can have more confidence in the authenticity of the transaction, which leads to higher authorization rates. This is due to number of factors: richer data carried with the token (e.g. device info) enables better decisioning from the bank, and often for card-on-file, they know that a merchant has requested a token for a valued customer so issuers can be more likely to authorize. Add lifecycle management and you can have even fewer declines for expired/reissued credentials.
There is also potential to bring greater effectiveness to loyalty and co-brand programs, for example, by using tokenization to give financial institutions access to data, which would enable a 360-degree view of customer purchases.
In fact, over 95 percent of North American payment volume is enabled by the issuers to support digital network tokens. To drive continued digital token momentum, there is a heightened focus on push provisioning, which “pushes” credentials issued as tokens straight into the merchant or wallet environment, helping to preserve top-of-wallet status and of course, emphasis on overall token optimization in the ecosystem.
Tokens unlock the ultimate success metric for merchants
In the ecommerce community, conversion rates tend to be the ultimate success metric – with online merchants often happy to invest in initiatives that might increase conversions by just a few basis points.
Network tokenization has been shown to increase authorization rates by an average of 2.1 percent6 in North America, with some pilot merchants seeing an uplift of tens of millions of dollars.
The exact magnitude of the increase will, of course, depend on many variables. All merchants can benefit from digital network tokens, especially if they have experienced sub-optimal authorization rates, with a high rate of declines due to expired or invalid account data.
Across the payments industry, the benefits extend well-beyond higher authorization rates. For example, network tokenization has been shown to reduce average fraud rates by around 26 percent7. Replacing PANs with tokens means less risk from a data compromise event – even if one happens, the stolen token credentials are virtually worthless for use anywhere else.
Tokens also bring a commensurate improvement to the customer experience, not just from the improved authorization rates and fewer false declines. Network token lifecycle management can significantly drive down the events of stale credentials, saving consumer frustration at the time of transaction.
And it’s easier than ever for merchants to tokenize their transactions. More than 150 payment gateways and merchant service providers utilize network tokens, including many of the larger payment gateways and merchant service providers, and many more are in the process of introducing the capability. This makes it relatively simple for merchants to benefit from tokens.
Quick and easy online checkouts are a reality with digital network tokens
Speaking of improvement of the customer experience, card-on-file, whereby a cardholder authorizes a merchant to store their account details for future payments, has emerged as a prominent way of paying online. It is far quicker and easier than entering our card details afresh each time, and we can all think of examples of how it makes life quicker and easier – when you pay for your ride by stepping out of the car, for example, or pay and tip the pizza delivery person in a mobile app before they even arrive, or your monthly subscription for the streaming TV or music service is automatically debited.
It is perhaps no surprise, therefore, that more than half of all North American ecommerce transactions are now card-on-file or recurring billers versus manual key entry8.
However, card-on-file payments do present their own particular challenges, especially when a card expires or needs to be reissued. For example, some 35 percent of survey respondents say they have forgotten to update their card information with at least one merchant9 and, on average, a merchant will reach out to a customer two-to-three times to ask them to update their card details before cancelling services10 - which, as well as being an irritant to consumers, adds a considerable layer of operating costs for merchants.
Meanwhile, storing all of that sensitive data places a heavy security burden on merchants. They are required to meet stringent standards and, if they do suffer a data compromise, the average costs for 2020 have been calculated at $3.68 million11.
Digital network tokens remove some of these traditional card-on-file barriers. Once a customer’s credentials are authenticated via a verification process, a token can be generated on their behalf. This is then stored, in place of the PAN, and processed just like a conventional transaction, across the entire industry infrastructure – except that, unlike the card details, the token does not go stale.
Token capabilities like device-binding and life cycle management provide a foundation in enabling truly seamless and frictionless transactions for the customer. With the ability to recognize a user more confidently through rich known-device information, or stale credentials being a thing of the past, the potential is created to truly make payments both secure and invisible – the ultimate North Star of payments’ consumer experience.
Tokenization momentum is industry-wide, growing and global – with more than two billion Visa tokens issued so far
Tokenization is nothing new. It was a prerequisite for the introduction of ‘the pays’. And the use of these device-specific tokens brings additional benefits such as the potential for lower fraud-to-sales ratio among tokenized transactions.
What is more recent is the mass deployment of digital network tokens through additional third party wallets and payment service providers. With this approach, it becomes possible to extend and accelerate the benefits of tokens to merchants across all of digital commerce – both card-on-file and guest checkout.
Importantly, tokenization has global, cross-industry backing. The specifications are managed by an independent organization, EMVCo, and the technology has been deployed in more than 193+ countries worldwide. Within the Visa ecosystem alone, some 8,600+ issuers have been enabled for tokenization, more than 615,000+13 merchants are transacting with Visa tokens, and more than two billion Visa tokens have so far been issued.
In the future we can see a scenario where every card-not-present Visa transaction is tokenized, which has the potential to completely eliminate the use – and the risk – of sensitive data. But, for now, the emphasis is to encourage and enable its mass-deployment in the ecommerce channel.
Even before the COVID-19 pandemic, the direction of digital network tokens was clear, with many more payments shifting online. The process has now been accelerated and, in step, we need to accelerate the adoption of tools to keep the ecommerce experience secure and easy-to-use for the consumer, and also for financial institutions and merchants.
Tokens play an important role in securing the ecommerce experience, creating a seamless customer experience and driving value for merchants and financial institutions. With all the necessary pieces in place, we expect them to become widely adopted in 2021 – and approach token ubiquity soon after.
Strong support from industry players
The introduction of network tokenization has been a collaborative, cross-industry endeavour involving a wide range of merchants, merchant service providers and payment businesses. Here’s what three of them have said about it:
“Tokenization is the lynch pin to enabling exceptional digital experiences that address rising consumer expectations for unified commerce. That is a consumer expectation to be recognized consistently in every channel in which they interact. An integrated tokenization strategy is key to unifying channels and delivering a compelling consumer experience.” Andre Machicao, Senior Vice President, Head of Product, Cybersource
“Beyond the conversion rates for card-on-file use cases, initial results from the PayPal wallet indicate that issuer decline rates have reduced by approximately 100 basis points, which leads to better conversion for merchants.” Jim Magats, Senior Vice President, Omni-Payments, PayPal
“Network tokens are one of the key building blocks for the future of ecommerce. We are glad to be at the forefront of helping scale and mature network tokens so that more merchants can benefit and realize this future sooner. We are already seeing immediate benefits as network tokens are vastly improving authorization rates globally." Kamran Zaki, Chief Operating Officer, Adyen
The difference between a digital network token and an acquirer or gateway token
Most ecommerce merchants already use a form of tokenization often delivered by their payment service provider. These acquirer or gateway tokens replace the PAN with tokens, protecting the PAN from compromise at the merchant. However, issuers do not have visibility to token activity on the merchant side. Issuers want to have the increased confidence that comes from digital network tokens being applied by the merchant to protect their cardholder data. Digital network tokens can either be used in partnership with these token solutions to enhance the value as well as be used as a stand-alone.
Digital network tokens extend the protection of the PAN through the network, giving visibility to issuers. The more visibility and control that the issuers have on the credential, the more confidence they are likely to have in approving a transaction.
1 VisaNet, Visa global card not present transactions for token vs non-tokenized credentials, May-July 2020
2 “VisaNet, U.S. fraud rate reduction for CNP & CP token participating merchants with digital wallet token requestors, April–June 2018
3 Ethan Cramer-Flood, “Global Ecommerce Update 2021”, emarketer.com, Jan 13, 2021, https://www.emarketer.com/content/global-ecommerce-update-2021
4 eCommerce Fraud Trends 2019, Merchant Fraud Journal, https://www.merchantfraudjournal.com/ecommerce-fraud-trends-2019
5 U.S. Cybersecurity and data privacy council outlook and review, Gibson Dunn, January 28. 2021, https://www.gibsondunn.com/us-cybersecurity-and-data-privacy-outlook-and-review-2021/
6 VisaNet, Visa global card not present transactions for token vs non-tokenized credentials, May-July 2020
7 VisaNet, U.S. fraud rate reduction for CNP & CP token participating merchants with digital wallet token requestors, April–June 2018
8 VisaNet, US Visa CNP Merchants, Jan-Dec 2018
9 U.S. statistics, Credential-on, Research conducted by Engine Group, Inc., June 2018
10 U.S. statistics, cited in Credential-on--le Pain Point Research conducted by Engine Group, Inc., June 2018
11 Cost of Data Breach Report, IBM Security, 2020, https://www.ibm.com/security/data-breach
12 Source: Global VisaNet and NSPK Data (Russia); Global Merchants, Jan 2020-Dec 2020
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