By: Michael Seaman, CEO & Founder of Swipesum
Network tokenization is a trending topic in the payments industry, transforming how transactions are processed and providing valuable benefits to merchants and consumers. As e-commerce and the use of digital wallets continue to grow, network tokenization helps deliver on consumer expectations for a fast and convenient payment experience. At the same time, this innovative payment technology allows merchants to improve customer experience and enhance the security of digital transactions.
More and more merchants are adopting this technology to unlock a wide range of benefits, such as increasing authorization rates, reducing payment costs, providing a more seamless customer experience, and more.
Network tokenization explained
Initially created to support digital wallets like Apple Pay and Google Pay, network tokenization replaces sensitive cardholder data, such as primary account numbers (PANs), with a unique identifier (token) to protect data during transactions. In other words, the actual card information is never shared or exposed when consumers use digital wallets in-store, make payments in-app, or shop online.
With tokenized transactions, sensitive payment data is secured in a digital vault, not on merchant systems, which helps protect consumer information from fraud and data breaches.
Network tokens are generated automatically by card networks such as Mastercard and Visa. Tokens are dynamically updated with the latest card data, so payment information remains current even if a card is outdated or replaced.
Benefits of network tokenization
Network tokenization delivers a wide range of benefits that deliver tangible business value and can give merchants a competitive edge. By adopting this transaction technology, merchants can:
- Reduce fraud
A study from Juniper Research forecasts that merchant losses from online payment fraud will exceed $362 billion globally between 2023 and 2028, with losses of $91 billion alone in 2028.
Network tokenization offers greater payment security and reduces the risk of fraud. The technology conceals card details across every step of transactions and provides a unique merchant-specific token that can’t be duplicated or used with another retailer. Network tokens are also encrypted, making the data useless to fraudsters intercepting a tokenized transaction.
According to Visa, network tokenization reduces average fraud rates by approximately 26%.
2. Improve authorization rates
Because network tokens are updated dynamically and tied directly to card networks, fewer transactions are declined due to expired, lost, or stolen cards. This is especially important for businesses that rely on recurring payments, like subscription services.
Visa reports that its token card not present (CNP) transactions have seen a 4.6% lift in authorization rates globally, compared to PAN. These higher authorization rates and fewer false declines translate to improved customer experiences and increased conversions for businesses.
3. Accrue cost savings
Network tokens can help lower the cost of transactions for businesses that operate on custom interchange pricing. Additionally, with this technology, merchants don’t store customer payment data, taking some of the complexity out of compliance and saving security and compliance costs. Lowering the incidence of fraud also allows retailers to avoid fraud-related financial losses. That cost avoidance is critical to protecting the bottom line, considering that in 2021, merchants absorbed 47% of losses from fraudulent transactions reported by covered issuers.
4. Enhance customer experience
Network tokens deliver on customer expectations for frictionless transactions by ensuring that once a card is saved, it stays updated and ready for use, even if the underlying card information changes. Merchants can reduce cart abandonment and boost revenue by eliminating the frustration of entering new card details when a card is lost or expired.
Retailers adopting network tokenization can also cut down on false declines, negatively impacting the customer experience and often causing consumers to abandon their carts and shop elsewhere. According to data from 451 Research, false transaction declines led to $16.3 billion in abandoned purchases in 2021.
Network token transactions also enhance the consumer experience by providing shoppers with peace of mind, knowing that their transactions and card details are secure.
5. Simplify compliance
Network tokens simplify Payment Card Industry Data Security Standards (PCI DSS) compliance by reducing the scope of sensitive data that needs to be protected. With Network tokens merchants don’t store payment data, completing transactions instead with encrypted tokens that are useless to fraudsters. That makes it easier to meet PCI regulations and maintain compliance.
Getting started with network tokens
Adopting network tokens isn’t a complex process with the right partner.
First, merchants should understand that not all payment providers offer the same level of support for network tokens. Look for a provider with built-in management tools and a seamless integration process. Once network tokens are implemented, monitoring authorization rates regularly is critical. AI-powered tools can help optimize these rates by intelligently routing transactions based on real-time data.
Next, retailers should ensure their payment systems are flexible enough to adapt to dynamically changing tokenization technology and card network protocols.
Lastly, merchants should be prepared to educate customers on how this payment technology works and why it makes transactions safer and more reliable. This can go a long way in building loyalty with customers increasingly concerned about data security.
In the digital payment landscape, network tokens transform how companies handle payments, delivering tangible business value that can give businesses a competitive edge.
Today, network tokenization is poised to become a payment standard, eventually replacing the use of primary account numbers everywhere. Businesses that adopt this technology now will be better prepared for future developments in payment security, reliability, and efficiency.
About the Author
Michael Seaman is the co-founder and CEO of Swipesum, a comprehensive payment processing and merchant services consultancy delivering innovative auditing solutions to businesses nationwide. Seaman founded Swipesum in 2016 with his brother, Stephen, to serve as Chief Payments Officer for businesses nationwide, combining industry knowledge, AI and proprietary software to create a transparent payments strategy that optimizes payment processing fees. The company has by the Inc. 5000 as one of the fastest-growing privately held companies in the U.S. Before starting Swipesum, Michael worked at Worldpay after graduating from Samford University where he earned a place in their Athletics Hall of Fame as a pole vaulter.