A consumer-driven field of opportunity

By Alex Gatiragas, Director Digital Solutions Experience at Giesecke + Devrient

The rapid pace of migration to digital payments was only accelerated by Covid-19. In fact, two-thirds of consumers worldwide believe that the pandemic has caused a fundamental shift in payment preferences, encouraging greater use of contactless card payments. The global digital payments segment itself is estimated to reach $13.91tn by 2026, with consumers developing an appetite for invisible, frictionless payments with one-click solutions and mobile wallets gaining popularity. It is a transforming landscape that presents a number of new opportunities for organizations.

Consumer-driven change

Today, consumers expect a frictionless experience, and globally prominent organizations such as Netflix and Uber have worked to use tokenization to deliver payment experiences to customers. For example, Netflix adopted the Visa Token Service in 2018. This essentially means that the consumer’s card details are replaced with a unique digital identifier to ensure that their sensitive account information cannot be revealed.

Consumers are more likely to be willing to hand over their personal information in return for a seamless transaction journey, where they don’t have to search for their physical card to enter information for a purchase. The concept of payment was previously seen as a time-consuming inconvenience, but merchants now perceive the concept as a central aspect of the consumer journey.

Tackling tomorrow with tokenization

Tokenization is a key technology to facilitate frictionless payments. The merchant or cashier gives a token to the payment provider, who then decrypts it and creates the transaction with the card data. This differs from card-on-file approaches, where information has been stored from a previous transaction and retrieved. The biggest downside to a card-on-file strategy is the increased incidence of false declines, usually due to card details expiring or information being lost or stolen. Tokenized payment solutions are much more secure and do not require consumers to update their details with every transaction they engage in online, such as when a card expires.

Network tokenization is achieved in a few steps:

1. Payment information is entered in the checkout by the consumer
2. A network chip is requested from the card scheme by the merchant’s payment service provider
3. The card scheme shares relevant information with the card issuer
4. The card scheme exchanges the customer’s payment information with the network token
5. The card scheme shares a network chip with the seller’s payment service provider
6. The payment is processed with the network token

This only happens when the card details are first tokenized, i.e. it does not have to be repeated for all transactions.

Network tokenization is key to establishing end-to-end security across the payment ecosystem and removes the need for card-on-file account numbers in a merchant’s own database.

Added benefits

Network tokenization allows all participants from the entire payment ecosystem to benefit. With a reduced number of declined transactions and time saved on each transaction, consumers gain increased security and are likely to show greater loyalty to the organization. Merchants can achieve higher revenue and increase customer satisfaction, with a frictionless payment process that encourages higher scheme approval rates and reduced risk of data leaks and fraud.

For payment service providers, merchant authorization rates are increased and higher revenues can be achieved. Unlike proprietary tokenization, network tokenization enables additional end-to-end security with reduced Payment Card Industry (PCI) compliance requirements. For issuers, fewer cards need to be replaced due to a lower risk of fraud, which also means cardholders are less likely to revert to an alternative. The risk of data breaches is also reduced.

Development of payments

Tokenization has already taken off, and digital payment hesitation has been eradicated for many consumers as they gain a willingness to trust such solutions and hand over their data. Several actors in the industry, such as sellers and payment service providers, must take action when the contactless narrative becomes reality.

The next step is network tokenization, with many international gateways and major merchants seeing the technology as the future of e-commerce payments. It still remains that Tier 2 and 3 sellers and PSPs must be fully on board. Already, however, other services such as Click to Pay are expanding the tokenization system. As e-commerce becomes a significant driver of the global economy, network tokenization will be the key to frictionless payments.