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

The rapid pace of migration to digital payments was only quickened by Covid-19. In fact, two-thirds of consumers worldwide believe that the pandemic has been the cause of a fundamental shift in payment preferences, and has encouraged greater use of contactless card payments. The global digital payments segment itself is projected to reach $13.91tn by 2026, with consumers having developed an appetite for invisible, frictionless payment with one-click solutions and mobile wallets growing in popularity. It’s a transforming landscape that’s presenting a range of new opportunities for organisations.

Consumer-driven change

Today, consumers expect a frictionless experience, and globally prominent organisations such as Netflix and Uber have worked to utilise tokenisation to deliver payment experiences to customers. Netflix for example 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 exposed.

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

Tackling tomorrow with tokenisation

Tokenisation is a key technology in facilitating frictionless payments. The retailer or checkout passes 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 saved from a prior transaction and retrieved. The major drawback of a card-on-file strategy is the increased incidence of false declines, usually due to the expiration of card details or information being lost or stolen. Tokenised payment solutions are much more secure and don’t require consumers to update their details with every business they are dealing with online, for example when a card expires.

Network tokenisation is achieved in a few steps:

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

This only occurs when the card details are first tokenized, i.e. doesn’t have to be repeated for all transactions.

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

Added advantages

Network tokenisation allows for all participants from across the payments ecosystem to benefit. With reduced numbers of declined transactions and saved time on each transaction, consumers gain from increased security and are likely to show greater loyalty to the organisation. Merchants can achieve higher revenue and enhance customer satisfaction, with a frictionless payment process encouraging higher approval rates by schemes and reduced risk of data leaks and fraud.

For payment service providers, merchant authorisation rates are increased and higher revenues can be achieved. In contrast to proprietary tokenisation, network tokenisation enables additional end-to-end security with reduced requirement for Payment Card Industry (PCI) compliance. For issuers, fewer cards need to be replaced due to the lower risk of fraud, which also means cardholders are less likely to revert to an alternative. Risk of data breach is also reduced.

Evolution of payments

Tokenisation has already taken off, and digital payment hesitancy has been eradicated for many consumers as they gain a willingness to trust such solutions and provide their data. More players in the industry, such as merchants and payment service providers must take action as the contactless narrative becomes reality.

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

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