Network Tokenization and Digital Identities Are Quietly Transforming Payment Security

One innovation above all others dominated the headlines in 2023: artificial intelligence (AI).

But while AI, particularly its impact on the payments landscape, captured public eyeballs and enterprise attention, other technical innovations like network tokenization and digital identities are reshaping the way transactions occur and payments are processed in today’s modern economy.

That’s because today’s digital consumers — and therefore today’s businesses that serve them — have the highest expectations around transaction contexts: they want it to be seamless, they want it to be personalized, they want there to be options, and they want this all to happen without a second thought or hiccup.

Network tokenization and digital identities are poised to give this to them by quietly revolutionizing the core of financial transactions and protecting against the insidious, zero-day nature of 2st century fraud.

They are not just technological enhancements; they are fundamental building blocks for a secure, interconnected, and personalized financial ecosystem.

All that’s missing is a little bit of ecosystem education to break down the incumbent inertia keeping payments system stakeholders from making the shift.

Read also: Unmasking Digital Imposters Is Rising Priority for Industrial Economy

Network Tokenization Offers Improvements in Authorization and Risk Management

The adoption of network tokenization simplifies the payment process, offering a seamless experience for consumers and businesses alike. With tokenized transactions, the need for repeatedly entering sensitive data is eliminated, streamlining the user experience and reducing friction in digital payments — helping merchants strike the right balance between payment seamlessness and security.

How it works is by replacing sensitive payment details with payment “tokens” that can’t be easily reverse engineered to expose the underlying data, making them less valuable to hackers and other fraudsters.

Unlike PCI tokens, where the underlying data is revealed to card networks and issuers, network tokens conceal card details at every stage of the transaction, from the merchant to the PSP (payment service provider)/acquirer to the card network all the way to the issuer.

Network tokens, generated automatically by card networks such as Mastercard, Discover and Visa, offer exceptional added fraud protection and a security advantage: PYMNTS Intelligence finds the use of network tokens produce an average fraud reduction of 26%.

“We’ve seen payments evolve, and they will continue to evolve, but network tokenization improves the digital commerce experience by providing a more secure transaction, as well as helping merchants reduce payment breakage,” Valeri Vanourek, VP, digital products at Discover Global Network, tells PYMNTS. “The card member is able to transact more securely because [tokenization] isn’t exposing the 16-digit primary account number [PAN] on the front or back of a card in the payment rails and throughout the transaction process.”

“You’re improving the strength of the credential itself while improving the strength of the ability to know who’s on the ‘other side’ of the credential … and that they are who they say they are,” Swee-May Ngeow, vice president of North America client strategy and solutions at Visa, told PYMNTS. The end result of network tokenization is evident in higher authorization rates, better fraud rates and an improved consumer experience — “and that’s the trifecta” of payments.

Importantly, tokenization is not to be confused with encryption, which offers protection of sensitive information by using a “key” to scramble data. Whereas encryption results in identical output when using the same key, tokenization produces a unique token for each instance of PAN data entry, even if that data is identical.

See also: Digital Identity Becomes New Currency as Companies Turn IDs into Payments Credentials

Digital Identities Are the Cornerstone of Modern Transactions

In an era where digital interactions dominate, establishing trust is paramount. Digital identities, through biometric data and multi-factor authentication, fortify the security of transactions. This not only protects users from identity theft but also strengthens the overall trustworthiness of digital payment systems.

“We never really thought about, what does it mean to identify a person on the internet in a way that is portable and doesn’t require you to rely on a single private platform,” Mike Brock, CEO of TBD, a business from Block focused on open-source decentralized technologies, told PYMNTS.

Digital identities play a crucial role in meeting regulatory requirements. By providing a secure and traceable means of verifying user identities, businesses can navigate compliance challenges more efficiently, reducing the complexities associated with anti-money laundering (AML) and know your customer (KYC) processes.

“Combating Online Fraud With Digital Identification,” a PYMNTS Intelligence and Prove collaboration, finds that security is highly important for 83% of consumers, while 53% say consistent experiences across different platforms have a very or extremely big impact on their trust in financial institutions. These sentiments are shared by regulators, who are increasingly issuing guidelines for uses of authentication technology.

“With the world that we live in, digital identities are becoming more used than physical driver’s licenses or physical passports,” Erika Dietrich, VP, Global Fraud Prevention Risk Services at ACI Worldwide, told PYMNTS, adding that, “[Businesses] need to deploy cyberdefense strategies that can not only detect and prevent fraud but also enable them to authenticate and verify consumers’ digital identities in real time, protecting against account takeovers, while seamlessly integrating any updates to their account.”