Company Spotlight

Tokenization Goes Private

MasterCard’s news earlier this month that it will be the first network to add tokenization support for private label (store-branded) credit cards was nothing if not big. Among the first retailers to participate will be BJ’s Wholesale Club, JCPenney and Kohl’s. The banks on board will include Synchrony Financial, Citi Retail Services and Comenity, a bank subsidiary of Alliance Data’s card services business.

That’s already a lot going on, so MPD CEO Karen Webster couldn’t talk about the details of this breakthrough with just one person. Instead, she spoke with three different individuals, all of whom are very close to the action — albeit from different angles. Ed McLaughlin, Chief Emerging Payments Officer at MasterCard, talked about the plan; Carol Juel, Chief Information Officer at Synchrony Financial, broke down the nuts and bolts; and Bill Werner, Senior Vice President of Finance at BJ's Wholesale Club, provided a view from the merchant floor.


MasterCard_Logo.svg“A huge win for MasterCard.”

Those are Karen Webster’s words — spoken to Ed McLaughlin, Chief Emerging Payments Officer at MasterCard – about the network becoming the first to add tokenization support for private label credit cards for use in digital wallets.

The big breakthrough? McLaughlin agrees with Webster that it was MasterCard creating the NFC spec that private label cards can now use to enable mobile payments at the physical point of sale.

“In working with a lot of merchants,” he tells her, “[we learned that] they had an investment in their private label portfolio. Some of their most dedicated customers, obviously, like to use their private label cards. For them to introduce payments innovation using the mobile device, they also wanted to make sure that they could also extend and offer that innovation to their most dedicated customers.”

With the new mechanism in place, retailers like Kohl’s, JCPenney, BJ’s Wholesale Club and others now can enable those private label cards in that way. McLaughlin says that these companies are opening up to accept contactless payments “with great enthusiasm.”

Additionally, customers who still want to use open-loop MasterCard payments products in the store can do so with ease.

To facilitate the transaction — which operates by having MasterCard pass the tokenized account number to the issuing bank, which then processes it along its rails as usual — McLaughlin shares that his company has been working closely with the “elite set of issuer processors” that specialize in private label.

“From the start, our MDES [MasterCard Digital Enablement Service] system was always fully Durbin compliant,” which is to say that the support capabilities for routing and alternate networks were already in position. “It wasn’t that far to take what we had done to support alternate routing on debit cards [and] say, 'Here’s how we can route the private label transactions while still providing all the security, while still doing the interface into the various wallets that will hold it’ — whether it’s an Apple, or a Samsung, or an Android Pay transaction — or any of the others.”

In putting the system together, MasterCard made sure not to disrupt the rewards and redemption elements that merchants have in place for their private label customers. Using the example of a debit card, McLaughlin explains that, after the token used for a transaction passes back into the system, MasterCard has already translated it to the underlying identifier — ergo, the specific and proprietary value is maintained.

There’s no issue with degradation of the data, either. Says McLaughlin, “We’re providing the service to enable the mobile environments, but it is backward compatible with the systems they have in place.”

Another bonus for MasterCard, in McLaughlin’s opinion, is that the private label tokenization service is providing a better understanding throughout the industry of MDES’ capability for multiple applications and, as a result, a wider appreciation for the value of its tokenization process.

[pullquote]One important thing we’ve always honored is [that] merchants want to serve all of their customers.[/pullquote]

“One important thing we’ve always honored is [that] merchants want to serve all of their customers,” McLaughlin remarks. “Whatever handset that customer happens to have chosen — for all sorts of reasons, whatever best fits their life — we can enable it.”

By enabling tokenization for private label cardholders, MasterCard may have removed the final obstacle for merchants to widely adopt mobile payments. While private label customers are a small percentage of the overall consumer base, they are nonetheless a particularly valuable subset — one that merchants are keenly interested in keeping happy.

McLaughlin actually sees opportunities for the merchants’ profitability from that “dedicated cohort of consumers” to increase, as they can now move some of them into an open-loop co-branded program.

A lot of other issuer-processors, says McLaughlin, “are very attuned to what their merchants want to do. So we think this will be really compelling for lots of merchants” as those organizations come calling, interested in getting in on the private label tokenization action.

To do that, they might want to get a fuller understanding of how the system works “under the hood,” so to speak — just as Webster herself sought. For that inside look, we turn to Carol Juel, Chief Information Officer at Synchrony Financial.


“Obviously,” Juel tells Webster, “private label transactions do operate a bit differently than your normal MasterCard, Visa, Discover and Amex transactions.” Juel characterizes that “difference” as the strong value proposition along with data, that is a critical incentive for consumers to use and a critical capability for rewards to be fulfilled at the point of sale.

“It’s very important for [Synchrony] to ensure that we maintain the value proposition of our card as we work with the many new mobile payments innovators emerging throughout the various ecosystems that are emerging.”

SF_RGB_Logos_AllSizes_BrandVaultSynchrony has been working closely with MasterCard to enable its cards to work within Apple Pay, leveraging its tokenization services. Doing so allows Synchrony to tokenize its private label cards through the MasterCard process, while at the same time getting what it requires from a private label transaction to fulfill value proposition-related commitments to its customers, merchants and retailers.

The process, Juel explains, required Synchrony do to a great deal of work to code to the MasterCard spec, ultimately resulting in tokenization into BIN ranges — a necessary aspect for Synchrony to be able to leverage for its private label cards across its private label network.

As for solving for merchants’ concerns about tokenization schemes potentially limiting their access to customer data — an essential aspect in servicing private label cardholders — Juel points to the level of integration that Synchrony has with the retail process at the point of sale.

“Our business is B2B2C,” she states, “so the way we bring value to our retail partners is by bringing programs that help them drive their sales. And in doing that, they’ve created an interface with us that has data that helps us to fulfill those value propositions — the data that’s provided at the point of sale transaction, as well as data that’s provided from a settlement transaction — to ensure that we [can] meet that. So working through the process of creating that transaction as it flows to us over our rails is part of the integration that occurs with the retail partner.”

It’s a more complicated process than there is with a traditional bankcard because of the number of players involved. There’s Apple as the hardware piece — as well as the operating system — there’s the retailer, there’s MasterCard and then there’s Synchrony.

“It’s really a four-party process that [is required] to understand the difference in the transaction,” says Juel. “Each person has a really strong view on the transaction and what pieces are important to them in ensuring … that it flows as it needs to.” 

In the transactional relationship between MasterCard, Synchrony and the retailer, the actual tokenization process tends to be divvied up among the three.

“There are services that MasterCard provides [as part of MDES] for decrypting and encrypting tokens,” Juel tells Webster, “but we [also] use tokenization in places throughout our processing network … [and] most of our retail partners are working at tokenization at the point of sale. So in some cases you actually have tokenization of a token — this is where it gets a bit technical.”

[pullquote]It’s the kind of stuff that can make your head spin.[/pullquote]

A bit? “It’s the kind of stuff that can make your head spin,” says Webster.

Apple Pay did not initially go to market with the capability for loyalty offers to be redeemed at the point of sale. The service has since been enhanced to accommodate that need, but Webster is curious to know if those enhancements are sufficient to enable private label card rewards.

“I can’t really answer for Apple,” is Juel’s answer — although only in part.

She goes on to explain that there is a distinction between how loyalty rewards and promotions operate within the private label space and how they operate outside of it. For retailers that are integrated with Synchrony — Juel cites the example of JCPenney, a partner with the bank — much of the logic related to promotion processing is already built into their transaction systems. All they have to do is be able to code for the Apple Pay transaction in order to redeem loyalty offers via that system.

While JCPenney, Kohl’s and other retailers are no doubt excited to be able to offer tokenization capability on private label cards, the operation didn’t exactly come together overnight. Juel estimates that it took six or seven months to achieve full implementation.

What actually helped keep it from taking even longer, she says, is Synchrony’s longstanding relationships with both MasterCard and JCPenney. Those three entities together were actually able to help Apple Pay gain the necessary understanding of the private label card business.

“All the parties were aligned in solving the problem,” Juel remarks.

The plan is for Synchrony-issued private label cards within Apple Pay to be available to consumers of JCPenney and other retailers in the fall. Juel has little doubt that a lot of merchants will be watching closely, anxious to turn on the capability for themselves.

“We’re very excited about it,” she says but is quick to tell Webster that Synchrony is mobile wallet agnostic. “We support a large number of merchants and retailers and wallets across the U.S.”

The company is not in the business of predicting a winner among those, explains Juel, because “ultimately we feel that consumers will decide.”

You know who might know something about consumers? The final stop for Webster on this trilogy of interviews: Bill Werner, Senior Vice President of Finance at BJ's Wholesale Club.


BJs-LogoWhat makes things a little easier for BJ’s to hook up with MasterCard’s mobile wallet tokenization scheme is that its store card is already a co-branded one with MasterCard.

A little easier — notes Werner — not a lot. Because, MasterCard affiliation aside, through Comenity, a bank subsidiary of Alliance Data’s card services business, BJ’s card is more or less treated as a private label card in-club.

“We just launched our product in October, so some of the bells and whistles are kind of still to come,” Werner remarks. “But one of the things that we … want to have the ability to do is offer our members the more ‘private label’ type of promotional stuff on the card — like double points and zero percent financing on certain purchases. In order to enable [those things], you need a more direct connection with the bank than you would get … authorizing and settling it over the MasterCard rails, which is why we opted for a co-branded and not a private label product.”

Building those data-dependent enhanced features into a preexisting co-branded card, he says, proved something of a challenge. The company had to sort out how to navigate alternating card numbers generated by tokens (the token of a token issue mentioned by Juel earlier), and enhanced security features embedded in the transaction. Those steps enable that very security while remaining capable of identifying the transaction and getting Comenity the information it needs to ensure BJ’s has the same experience with Apple Pay that it does when somebody swipes (or taps) a physical card.

The key, Werner tells Webster, is “making sure that the bank is able to affect the process on the back end so that we can first get the token information to MasterCard to decrypt the transaction and get the payment credentials, and also get that information over to Comenity with the enhanced settlement data to complete the transaction.”

He acknowledges that he’s probably not as worried as other merchants are about losing customer data or access to it, by virtue of the fact that BJ’s is a membership club, so it already has all of that information on hand.

“The major problem we needed to solve for was just making sure that we could identify the transactions through the entire process to say, 'Hey, double-bonus this transaction ... give zero percent financing on this transaction,” to make sure we maintain the flexibility. I would say that there was a great partnership between Comenity, MasterCard and Apple to work through a solution for us because they recognized that this was an important problem for BJ’s to solve.”

As a merchant, BJ’s was already NFC-enabled before MasterCard’s private label tokenization scheme came to its doorstep — in fact, the chain was one of the first launch merchants for Apple Pay. It got on board with MasterCard’s plan because, as Werner explains, “we really wanted to make sure that … members who have the My BJ’s Perks MasterCard, [who] are some of our most loyal members … had the same experience in-club as other members did.”

That goal may speak to the reason why BJ’s is less concerned with tracking the percentage of Apple Pay transactions within the scope of NFC (which, Werner notes, is “pretty slim”) as it is with making the experience as convenient as possible for its customers.

Perhaps a little bit different from other membership clubs, Werner observes, “We try to make sure … that members can use any type of payment they want, any card they want.”

There’s a potential opportunity in that flexibility, Webster proffers, insofar as BJ’s could attempt to stimulate more usage on the part of its members simply by having them put their co-branded cards in their Apple Pay wallets.

“It’s no secret that what you want to get with the co-branded card is robust internal sales and more trips,” acknowledges Werner. “But you also want to … make sure it’s top-of-mind to people when they’re shopping outside the club. We’ve developed what we think is a pretty good program to give people some good benefits, not only on what they spend inside of BJ’s but also when they use that card in other stores, too.”

With the industry in a frenzy over mobile payments, BJ’s counts itself among the merchants that are getting solicitations from any number of providers looking to get a piece of Apple’s pie, so to speak. Looking to the future, Werner says that the company is “prepared to support anything that is cost-neutral to us and gives our members … flexibility — and obviously maintains my flexibility as a merchant."

[pullquote]I need to be giving my members the best experience I can every day.[/pullquote]

“I need to be giving my members the best experience I can every day,” he adds, “so we’ll gladly work with those partners.”


He’s quick to add, though, that because of his company’s long partnership with its bank, “there’s always good dialogue in terms of what we want to do.”



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