InnovationTechnologyResearch and Insights
Jim Magats, SVP, Omni Payments
Payment card authorization rates have a direct correlation to the health and success of a merchants’ business. The higher the card authorization rate, the greater likelihood for repeat customer transactions, and the higher the business revenue.
Through our strong partnerships, multiple funding instruments, next-generation risk models and tokenization efforts, PayPal offers a higher than industry average approval rate for merchants.
Let’s look at one of those areas in particular – network tokenization – a key enabler of authorization rates. PayPal was an early adopter of card-on-file network tokenization and currently is one of the largest network token providers with over 125M+ cards tokenizedi in key global markets across all PayPal, a number that’s increasing daily. Network tokenization works by creating a unique credential for a card that is separate from the number imprinted on a physical card, which can be used for conducting transactions. While merchants have used tokenization for several years to secure the cards in their vault, network tokenization is a relatively newer paradigm. This broadens the scope of stakeholders participating in the tokenization process, unlocking the value of an end-to-end solution.
Network tokenization is also not a new concept; however, the industry is just starting to generate momentum in rolling it out to traditional card-on-file ecommerce use cases, opening the door for significant opportunity. So, let’s talk in greater detail about the benefits of network tokenization and how exactly it enables higher authorization rates.
There is a lot of excitement around network tokenization due to its ability to improve card lifecycle management, keep information secure and ultimately improve the cardholder shopping experience – all of which help improve the authorization or approval rates for the merchant.
Improved Card Lifecycle Management and Card Storage:
Since the token is separate from the primary account number, it can be insulated from disruptive card re-issuance events. For example, if a consumer reports their card lost or stolen, or if the card data was breached at another merchant, the card issuer can simply close, suspend or update tokens in real time. In addition, issuers can update token details when a card is near expiration, so the experience is not disrupted when the customer is ready to make another purchase. Eliminating the friction that comes with having the cardholders manually updating card information results in repeat customer transactions and a seamless customer experience.
Another major benefit of network tokenization is enhanced security. As part of the tokenization process, a unique cryptogram is created and used with each cardholder-initiated transaction, making it difficult for a criminal to use these credentials fraudulently. Further, network tokenization provides a unified global infrastructure and domain controls that can be used to comply with global regulatory and network mandates, which otherwise come at a high cost for merchants.
Greater Brand Recognition and Trust:
Network tokenization allows consumers to see the card art, which improves the brand presence of networks and issuers, and helps build consumer trust in the transaction.
Network tokens are one of the many tools used to improve authorization rates. However, there are a lot of misconceptions around them.
Misconception No. 1: State of readiness is one size fits all
The payments ecosystem is incredibly complex and dynamic. The proliferation of this technology doesn’t happen overnight. It takes time for network tokenization to be enabled and optimized across the payments landscape because it involves all the key players in digital card payments to cooperate (merchants, processors and issuing banks). However, there has been a great deal of traction made so far, and we can expect greater adoption of this in the coming months and years.
Misconception No. 2: They are a silver bullet for authorization rates
While incredibly powerful, network tokens are only one part of the solution to address payment challenges that merchants face. Network tokenization should be deployed in conjunction with other techniques to improve overall authorization rates. For example, to ensure merchants are only rejecting the fraudulent transactions and not the legitimate ones, they should deploy advanced risk models using Payment Account Reference (PAR).
Misconception No. 3: They always provide immediate authorization uplift
The timeline and benefits reaped from network tokenization can vary from merchant to merchant based on several factors including the state of merchant’s current vault, the merchant’s business model, issuer readiness in the market as well as other tools the merchant and their payment processor have put in place over the years to improve authorization rates.
PayPal has a unique advantage. By executing network tokenization at a massive scale across major networks, we have visibility into where issuers are along their journey to readiness. In situations where the issuer isn't ready, a network token could be declined while a primary debit or credit account number could be approved. Particularly in a card-on-file context, issuers have to thoughtfully calibrate their risk decision systems to account for tokenization. Thus, if not done well, network tokenization could actually lead to a lower authorization rate during the initial phase of deployment.
Beyond the conversion rates for card-on-file use cases, initial results from the PayPal wallet indicate that issuer decline rates have reduced by approximately 100 bps, which leads to better conversion for merchants.
PayPal's wealth of data about the evolving issuer landscape allows us to know where these pitfalls are so we can both insulate merchants from the dynamic landscape and help them to build customized strategies to boost their authorization rates.
We’ve thought a lot about how we can further optimize network tokens, which has led us to the introduction of bulk tokenization. This is a new functionality live with Mastercard and VISA and currently in development with Amex and Discover. With bulk tokenization, large quantities of stored cards can be assigned a network token in mass instead of one-by-one as cards are loaded to the vault.
With traditional methods, the initial assignment of network tokens to millions of cards can be a taxing process that leverages a significant amount of network bandwidth and time. Bulk tokenization addresses this by vastly reducing processing capacity constraints, allowing us to more efficiently utilize all our resources in an optimal manner. Bulk tokenization also allows for the optimal usage of network and issuer bandwidth, delivering an optimal tokenization path for merchants.
We are excited to be the first in the industry to utilize bulk tokenization. We believe this new capability will further propel merchants forward on their journey to securing higher authorization rates.
iThe number of cards tokenized as of April 2020. This number is updated regularly to reflect the latest figures.
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