Network Tokenization Explained

For businesses it’s key is to safeguard sensitive customer information without hindering the flow of transaction cycles. What you need for this is network tokenization. Swapping out traditional card details for tokens linked with a particular transaction or device enhances not only the security of the payment but also such practical issues as those created by expired or stolen cards. Below, we'll explain how network tokenization works, its real-world benefits, the providers who offer it, and how Spreedly can enable it.

What Is Network Tokenization?

Network tokenization refers to payment card tokenization that payment networks like Mastercard, Visa, American Express, and Discover offer to replace primary account numbers, also called PANs and other details, with a token provided by the card brand.

Merchants benefit from dynamically updated network tokens through higher authorization rates, the simplification of fraud management, and an improved customer experience. With network tokenization, payment methods update in real-time, ensuring the card holder’s credentials are current even after a physical debit or credit card is locked due to fraud.

Lost, stolen, expired cards, or other failures become irrelevant because the network token is proactively updated. As a result, customers experience fewer false decline due to out of date information and have a better user experience for their subsequent and recurring transactions

Network tokenization varies from PCI tokenization. PCI tokenization replaces a PAN at a specific end point instead of across the entire payment ecosystem. PCI tokens are interoperable and meaningful across players in the payment ecosystem of a single payment.

Network tokens are specific to domains meaning they are limited to one device, merchant, channel or transaction type. Network tokenization was made popular by device-specific methods like mobile payment solutions such as Apple Pay and Google Pay and card chips.

Network Tokenization, Explained

Over the past few years, we have seen a dramatic shift in consumer spending habits. Studies show that one in five transactions today are digital, with eCommerce growing faster than in-store sales. However, this rapid growth and the evolution of technology also bring new challenges.

There has been an increasing rate of fraud, yet merchants are under intense pressure to deliver an effortless payment experience to accommodate the ever-rising consumer demand. Many merchants are turning to various technologies, including network tokenization, to strike a balance between a seamless purchasing experience and high security.

While it's easy to think of network tokenization as an optional addition, it's a transformative technology that facilitates simpler online commerce and secure payment details with network tokenization.

What are the benefits of Network Tokenization?

Network tokenization provides several benefits to the merchants and consumers. Actually, the benefits go beyond security, slightly touching efficiency, cost-cutting, and an overall better payment experience.

Network tokenization is a key factor in the development of digital payments and their acceptance by merchants. It enables real-time updated tokens and authentication, thus allowing higher authorization rates for merchants with reduced fraud risks and a frictionless experience for customers. Increasing security is important, but optimization of operations and customer satisfaction are also key benefits.

Increased Security

Since network tokens are different from PCI tokens, they are interoperable in the payment flow leading to a PAN that doesn't need to be transmitted or revealed to any party during a transaction. These tokens are given by a token service provider and are domain restricted to a single token requestor.

Since each network token-based transaction has to be authenticated using merchant-specific details, they generally fall outside of PCI token scope. When PCI scope is removed, there is no risk of a breach since a token alone is inoperable without its ability to perform merchant-specific authentication for every transaction.

By converting stored credit card data to secure network tokens, merchants  get the benefit of higher security, better customer experience, and increased authorization success rates. By using an agnostic orchestration layer in conjunction with a network token strategy, an organization can leverage their choice of network token or a secure, vaulted PAN token. This provides the flexibility to use whichever method is accepted by a given payment processor. 

There is also opportunity to  tokenize at the time of retention as well as backfill previously captured card data giving merchants the full benefits of network tokens across all their payments.

Reduced Declines

Fast-growing businesses invest a lot of effort to improve authorization success rates by a few points. 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. This eliminates declines related to expiries, fraud or lost details and boosts issuer confidence.

In a traditional fraud scenario, one fraudulent action would result in the suspension of the cardholder's account entirely until they are issued with a new one. However, with network tokens, a card is neither suspended due to fraud nor does it require updates. With network tokens, fraud resulting from another merchant's frequently provided token does not affect other tokens in the ecosystem.

Every network token has a domain restriction tied to a single merchant. This enables card issuers and networks to confidently carry on with supporting transactions for cardholders whose PAN was suspended on fraud suspicion.

Additionally, dynamically updated network tokens don't expire. Declines resulting from expired account details are removed, and cardholders don't need to enter new credentials to maintain card-on-file accounts. This improves security and confidence in network tokens from issuers, leading to fewer false declines.

Reduction In the Cost of Fraud

As eCommerce grows, so too does fraud. It's more important than ever that new security measures be put in place to mitigate fraudulent activity. Industry experts predict that US retailers will lose about $165.1 Billion in the next 10 years due to card fraud.

According to the LexisNexis Risk Solutions True Cost of Fraud Study: e-Commerce/Retail Edition, Every $1 of fraud now costs U.S. retail and ecommerce merchants $3.75 which is 19.8% higher than the pre-Covid study in 2019 which was at $3.13."

Still, the fraud rates keep increasing and in a very competitive industry such as this where every dollar counts, blindly throwing money isn't a sustainable solution. Network tokenization offers an end-to-end security proposition that significantly reduces the risk and alleviates the impact of malware, data breaches and phishing attacks. In simpler terms, if anyone steals tokenized data, they won't be able to use it.

Improved Checkout Experience

The collective effect of reduced declines and enhanced security is an improved customer checkout experience for online transactions. Nearly 35% of cardholders stop shopping after their card declined once. Studies also indicate that more than $331 billion is lost due to false declines.

With more consumers online shopping in 2023, payment declines are expected to increase in value. At an average 15% decline rate that's $306,150,000 in the United States alone.

Removing expired card-on-file account details lead to customers never needing to log in to their accounts to update payment methods. When the merchant and not the cardholder is authenticated, the service will no longer require verifications such as CVV/CVC that one can easily forget or inaccurately enter, resulting in a false decline.

Accounts get verified during token provision, thus eliminating the need for merchants to perform authorizations that show up on the cardholder's statement.

PCI Compliance and Payment Security

Network tokenization, offered by payment networks, streamlines PCI compliance for businesses handling payment data. By replacing primary account numbers (PANs) and other sensitive details with non-sensitive tokens, network tokenization minimizes the scope of data subject to PCI DSS requirements. Since these tokens hold no intrinsic value, businesses can securely store, process, and analyze them without exposing sensitive data. The result is a simplified compliance process that enables organizations to reduce their security overhead, focus more on core operations, and protect their business and customers. Adopting network tokenization for payment security not only fosters customer trust but also makes navigating the compliance landscape simple.

Cost Savings

In 2022 Visa started charging non-token transactions at a higher rate. Merchants can help mitigate these rate increases by adopting network tokens.

In certain instances interchange rates for non-token transactions will increase. By not taking advantage of the digital wallet incentives, merchants are leaving money on the table. As eCommerce transactions continue to increase what would normally be an unnoticeable fee per transaction now directly affects a merchant's  bottom line. With interchange fees changing bi-annually merchants need to be prepared for cost increases.

Streamlined Recurring Payments

As businesses are increasingly adopting subscription-based models, the importance of a secure, frictionless method for managing recurring transactions cannot be understated. Network tokenization is the key, as it replaces sensitive card data with unique tokens in coordination with the card networks and issuing banks, effectively creating better cohesion within the transaction chain. These token values keep cardholder details and retain the ability to transact even when the physical card is lost, locked, or expired, essentially imbedding card-updater functionality and protecting recurring payments - whether on-demand or in a subscription model. 

A streaming service could save significantly on transaction failures and customer service costs by employing network tokenization. Moreover, the higher payment authorization rates associated with this system lead to a reliable revenue stream for businesses, and a smoother, more satisfying experience for customers. A streaming service with one million subscribers paying $10 a month. Even if only 1% of payments fail each month due to outdated card information, this could result in a potential loss of $100,000 monthly. Implementing network tokenization will substantially mitigate these losses.

Network Token Providers

Providers of network tokens are important to the payment ecosystem, adding a layer of security around tokenization in place of sensitive card information with unique tokens. Unlike payment gateways, which handle transaction processing, or payment orchestration providers like Spreedly who manage multiple payment services, for them, it is all about enhancement in security at the card network level. They generate and manage tokens specific to merchants, devices, or channels, keeping safe and seamless customer payment experiences as the focus. Integrations with these providers help merchants reduce fraud, operating costs, and improve authorization rates.

Popular Providers:

• Mastercard Digital Enablement Service: MDES enables the secure digitization of Mastercard cards onto different digital means of paying, such as mobile wallets and e-commerce. It replaces sensitive card details with dynamic tokens, hence more security and contactless payments.
• Visa Token Service: VTS offers one platform for tokenization of a wide range of channels-from online and mobile payments to, now, beyond the digital marketplace. It replaces sensitive account information with unique digital identifiers that ensure security during transactions, reducing fraud.
• American Express Token Service: AETS is responsible for the tokenization services of American Express cards to ensure secure digital payments at point-of-sale, online, or in-app. It aims at security and user experience improvement by replacement of card details with tokens relevant to devices or merchants.

Each of them should be integrated into the payment ecosystem in providing secured, tokenized transactions, further complementing both payment gateways and orchestration platforms.

How Payment Network Tokenization Fits Into The Network Tokenization Landscape

Transacting with network tokens is a distinct tool within the broader concept of payment method tokenization that specifically addresses the security of payment card information. Different ways to tokenize a card, whether through a network token, processor-specific token, or cloud token, provide optionality and overlap for stored payment methods. This redundancy and the ability to maintain several token-formats alongside the underlying PAN creates protective redundancies and imparts agility within a payment system.

Merchants can build network tokens into their routing or retry systems - if a preferred gateway declines a transaction using the PAN, the transaction can be resubmitted to a secondary provider with a network token. Understanding and utilizing all the tools available to your payments stack is crucial for businesses seeking to balance and optimize their payments.

Wrapping Up

Network tokenization is the latest evolution of card tokenization. With digital e-commerce booming, consumers now expect faster and seamless transactions. Without seamless transactions companies can not capitalize on the continuing increase in online transaction volume.

If you'd like to learn more about network tokenization, contact one of our open payments experts today and also find out how Spreedly provides results for merchants.

Download the Tokenization eBook Below