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Tokenized Credentials Accelerate Fraud Reduction and Get Higher Approval Rates

The holy grail of payments — for merchants, for consumers and financial institutions — has two essentials:

Reduced friction, and reduced fraud.

Individuals want to be “known” to the entities with which they are engaging — and for the enterprises themselves, “knowing” the customer can bolster trust, so that transactions are approved in seamless fashion.

The rise of tokenized card credentials has been illuminated in recent earnings reports from the network giants.

The Mechanics

Tokenization, as it relates to the card schemes, refers to the practice of protecting a user’s card-specific data. The card’s primary account number (PAN) is replaced by a randomly generated number sequence, 16 digits in all, corresponding to the tally normally found on the cards themselves.

In addition, the networks also generate a cryptogram for each transaction, which bolsters defenses against bad actors. The tokens themselves are provisioned by the networks in partnership with the issuing banks. The actual card data is stored in a token vault, which acts as a secured database.

For merchants, tokenization makes it easier to offer secured, automated checkout. The tokens themselves can be used across all parties in a transaction chain and are interoperable. Vault providers, such as Spreedly, help ensure that the cards are updated with regularity, skirting the pain points that interrupt transactions when cards expire or need to be replaced.

PYMNTS Intelligence data has noted in the recent past that more than two-thirds of consumers have said that a streamlined checkout experience is “very or extremely influential” in determining whether they will shop with a merchant again. Almost all respondents said that that knowing their account data is safely stored helps lead to a satisfactory checkout experience. In the “Combating Online Fraud With Digital Identification” report, a PYMNTS Intelligence and Prove collaboration, security was found to be “highly important” for 83% of consumers, while 53% say consistent experiences across different platforms — which we at PYMNTS note is enabled by the interoperable nature of the tokens — impact trust in financial institution.

Improved Transaction Metrics

Commentary from Visa’s most earnings report revealed that tokenized credentials grew 6% in the most recent quarter, and the company now has 8.7 billion network tokens issued. At the same time, acceptance locations grew by 17%.

Separately, Mastercard said in its own earnings commentary that tokenization is being driven across all channels, spanning devices, commerce platforms, card on file and guest checkout. CEO Michael Miebach said on the call that tokenization has reduced fraud and has increased approval rates in the range of 3 to 6 percentage points.

Elsewhere, Discover said late last year that it had launched its new cloud-based network tokenization platform. The network tokenization platform is an extension of Discover Stored Payment Tokens.