Network Tokenization, Explained (2022)

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 As a result, customers experience fewer false decline due to out of date information and have a better user experience for their subsequent and recurring transactions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.

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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?

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 retailers will lose about $130 billion between 2018 and 2023 to fraud. According to the LexisNexis Risk Solutions True Cost of Fraud Study: e-Commerce/Retail Edition, “Fraud now costs companies $3.36 for every dollar in fraud chargebacks compared to $3.13 in 2019 and $2.40 in 2016. This is an increase of $0.96 over five years.”

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 2022, payment declines doubled in value increasing from $5 billion in December 2021 to $11 billion in January 2022. 

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.

Cost Savings

Visa has announced that it plans to charge non-token transactions at a higher rate starting this year.  Merchants can help mitigate those rate increases by adopting network tokens.

According to an analysis from  J.P. Morgan, “In some cases, interchange rates for non-token transactions will go up, so while the net benefit may not reach 10 basis points, merchants that do not take advantage of the digital wallet incentive will undoubtedly be leaving money on the table. As eCommerce continues to grow, shifts like these to the overall cost of payments will have significant cost implications and influence a merchant’s product development roadmap.”

Wrapping Up

Network tokenization is the latest evolution of card tokenization. With the digital e-commerce boom, consumers now expect faster and seamless transactions, failure to which a company's reputation suffers.