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Network tokenization: the key to seamless, trusted CX

Insights
6 Mins.

How can online merchants and payment service providers design the e-commerce customer journey so it delivers both improved security and a better checkout experience? Network tokenization has emerged as the clear answer.

The growth of e-commerce is set to pass yet another milestone during 2022 when, for the first time, over 20% of all retail sales globally will be made over the internet. Accelerated by pandemic-driven changes to consumer behavior, online spending will hit $5.6 trillion and continue to rise by around 10% annually through to 2025, when it will account for almost a quarter of all expenditure.1

However, that rapid evolution has highlighted some fundamental challenges that continue to beset a significant proportion of online sales. The rates of declined online transactions and fraud-to-sales ratios continue to be worryingly high. Surveys of online retailers show that around 3% of all transactions are declined due to suspected fraud – whether there is actually fraud or not.2

But that is dwarfed by the number of abandoned baskets that result from less-than-optimal customer experiences when a poorly designed interface, a confusing customer journey, or a complex or unclear payment process gets in the way of the sale.

The rise of false declines

Man at home buying online on his laptop with a card

Nevertheless, customers appreciate the convenience of one-click checkout and having their cards saved for recurring purchases, trusting that their payment credentials will be kept secure from online fraudsters. In most cases, such purchases use card-on-file (CoF) approaches where customer card information has been saved from a prior transaction and held (hopefully) in a secure way. That may provide a highly positive user experience, but there can still be friction in the form of false declines.

According to finance-sector research group Javelin, for every $1 in losses due to credit card fraud, merchants lose $13 to false declines.3 The situation is not improving, either, as retailers wrestle with ever-higher levels of cybercrime. In the US, 62% of merchants report that their false decline rates are actually increasing, according to research undertaken by Aite-Novarica.4

There are some well-documented reasons for those declines. Cards are lost/stolen or they have simply expired, making stored card details unusable. Card payments are also frequently suspected as being fraudulent by issuers based on signals such as a very large order from a first-time visitor, a purchase made from a different IP address, or a mismatch of billing and shipping address for a rapid purchase.

As a result, whenever customers have to re-authenticate or re-identify themselves – whether it’s re-entering their card details multiple times or updating information because of an expired card – their transaction experiences friction, often leading to an abandoned cart, or worst of all: a third of customers whose purchases are wrongly declined choose not to shop with that particular merchant again.5

So how can such a bottleneck in digital-payment ecosystems be resolved so that merchants and payment service providers (PSPs) can bring both improved security and an enhanced customer experience to the vast majority of e-commerce transactions, thereby creating greater business opportunities?

Token response

For those looking for a highly secure method of storing customer payment credentials, the answer seems to be clear: network tokenization.

“Tokenization is a mechanism that replaces sensitive data, such as card details, with a unique digital identifier known as a token, which has no inherent value if compromised,” explains Alex Gatiragas, Director, Solution Experience, at G+D. “The token allows payments to be processed without exposing actual details, such as card data. With network tokenization, the token for card details, for example CoF for a merchant, is created and managed by the payment network provider, and the mapping of the payment card details is kept in a very secure fashion.”

Any transaction passing through the payments ecosystem goes through six simple steps:

  1.  A customer enters their payment information at checkout
  2. The merchant’s PSP requests a network token from the card scheme
  3. The card scheme then shares the information with the card issuer
  4. The card scheme replaces the customer’s payment information with the network token
  5. In turn, the card scheme shares the network token with the merchant’s PSP
  6.  Payment is processed using the network token.

That may sound like a lot for a single transaction, but it’s an automatic and near-instant process that safeguards security while making life more convenient for customers.

Network tokenization also represents a major step forward from the historical storage of CoF account numbers in merchants’ own databases, Excel documents, or CRM systems. And it also is key in establishing end-to-end security that reaches across the payments ecosystem.

PSPs have been providing a form of tokenization to their e-commerce merchant partners for many years. However, such proprietary tokenization only protects customers’ account numbers from compromise at the merchant: card issuers do not have visibility of token activity on the merchant side. That has created pressure to extend tokenization across the payments network, giving issuers increased confidence that network tokens are being applied by merchants to protect their cardholder data. That said, network tokens can either be used in partnership with PSP token solutions or as a standalone.

In recent years, such network tokenization has been the backbone payments mechanism for many online giants, including Netflix, Google Pay, and Amazon. And Visa and Mastercard have also signed a reciprocal tokenization agreement to use tokens across their payment value chains.

That is helping to overcome one of the core challenges of the mechanism, says Gatiragas. “Network tokenization requires that participating card issuers also support network tokenization. This capability is rapidly growing. However, there may still be instances where a customer’s CoF details cannot be network tokenized, and that requires other non-network tokenization capabilities to be used in parallel – at least for a transition period.”

Big benefits of network tokenization

The benefits of network tokenization are evident for all participants across the payments ecosystem:

Consumers
It makes for a better payment experience for CoF payments, the most popular type of online transaction. Once a token has been created, the customer can see a visual representation of their card on the merchant’s payment pages. They are less likely to experience declined transactions, and when their card expires or needs to be reissued, they don’t have to go through that process of updating their details.

Merchants
It enables merchants to achieve higher revenue and enhance customer satisfaction. The automatically updated payment credentials facilitate a frictionless payment process and in turn encourage much higher approval rates by schemes, while secure tokenization of credit card details reduces the risk of data leaks and fraud. Additionally, customers can see an image of their card during checkout, which enhances their trust in the payment process.

Payment service providers
For PSPs, it provides a clear uplift in merchant authorization rates and higher revenue. In comparison with proprietary tokenization, network tokenization allows for additional end-to-end security with a reduced need for Payment Card Industry (PCI) Data Security Standard certification. Further, higher approval rates by the relevant schemes and automatically updated payment credentials lead to improved conversion rates and enhanced consumer trust. 

Issuers
With a lower risk of fraud, fewer cards need to be replaced and there are fewer negative experiences for cardholders. Also, when a card is renewed or replaced, there’s less danger of it losing the coveted top-of-wallet status (because there is no need for cardholders to update their details with a merchant – or to consider reverting to an alternative card). It also minimizes the risk of a data breach.

Challenges and evolution

The benefits may be clear, but there are still challenges. So how will network tokenization evolve in coming years?

Kurt Schmid, Marketing & Innovation Director, Secure Digital Payments, at Netcetera, argues that international gateways, as well as large merchants, already view the future of e-commerce payments as being driven by network tokenization instead of proprietary tokens. But Tier 2 and Tier 3 merchants and PSPs also need to be fully on board to make network tokenization the default.

“International gateways and large merchants already view the future of e-commerce payments as being driven by network tokenization. But Tier 2 and Tier 3 merchants and PSPs also need to be fully on board“
Kurt Schmid
Marketing & Innovation Director, Secure Digital Payments, at Netcetera

“Education – as well as inducements – are being made to shift merchants and PSPs to this form of tokenization. Additional services such as Click to Pay [introduced in late 2019 by Visa, American Express, Mastercard, and Discover] will drive further growth in the overall tokenization ecosystem as merchants seek to continuously improve the checkout experience for their customers,” says Schmid.

The role of network tokenization will only grow in importance as e-commerce becomes an even greater proportion of the global economy.

  1. Global Ecommerce Forecast, 2022

  2. The True Cost of Declined Orders, Card Not Present, April 18, 2019

  3. False Declines Cost You More Than Fraud, ClearSale

  4. False Declines Industry Report, ClearSale

  5. Everything You Need to Know About False Declines, The ClearSale Blog

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