Tokenization Becomes the Norm in Online Payments

Tokenization Becomes the Norm in Online Payments

by August 25, 2022

Southeast Asia’s digital economy is booming, driven by an extraordinary shift in consumer behavior, soaring digital consumption and the rise of digital merchants. But this explosive growth is also attracting criminals and putting merchants, banks and consumers at risk of financial losses and missed revenue opportunities.

Between 2020 and 2021, e-commerce gross merchandise volume (GMV) in Southeast grew by a staggering 62%, soaring from US$74 billion to US$120 billion, data from Google, Temasek and Bain’s e-Conomy SEA 2021 report show. By 2025, it’s projected that e-commerce GMV will grow 18% from 2021’s level to reach US$234 billion, implying that the growth of Southeast Asia’s e-commerce sector is showing no sign of slowing down.

At the same time, fraud and criminal activities are surging as malicious actors look to capitalize on expanding digital footprints. Juniper Research estimates that there was a US$27 billion e-commerce transaction fraud loss in 2020, a number which is expected to surge to US$52 billion in 2025 as the e-commerce ecosystem expands.

FTC Reported Identity Theft Cases 2020

To combat rising fraud but also ensure that customer experiences remain superior, merchants, payment services providers (PSPs), payment gateways and large merchants are fast adopting tokenization as a way to provide greater security to online payments and reduce friction in the shopping experience.

Payment tokenization refers to a mechanism in which payment card information is substituted with a unique value called a “token.” These tokens are issued automatically in real-time and come to replace sensitive card information and card numbers along the payment chain.

Ultimately, this means that the underlying security of digital payments is enhanced since the risk typically associated with compromised, unauthorized or fraudulent use of payment account numbers (PANs) is limited. Plus, payment tokens can be equipped with certain properties such as a limited validity period or usability for a very specific purpose, providing participants with the ability to control or constrain usage to their intended use.

Card networks like Visa, Amex and Mastercard, tech firms such as Apple, and fintech leaders such as Adyen have been amongst the earliest adopters of payment tokenization, embracing the technology as early as 2013/2014 which they view as an efficient and cost-effective solution to combating fraud all the while ensuring a frictionless online shopping experience.

A frictionless shopping experience

For Nitin Palande, Head of Sales and Partnerships at Netcetera, a global software company, tokenization has become a necessity in digital payments and online commerce because the benefits associated with embracing the technology expand well beyond security but also include greater convenience for consumers and speed.

Nitin Palande

Nitin Palande

“The health and success of a merchant’s business correlates strongly with payment card authorization rates: the higher the rate, the greater likelihood of repeat customer transactions and the higher the business revenue,”

Nitin said during a presentation at Seamless Asia last month.

“But we know that … the average conversion rate for e-commerce sites being less than 3% … This further underlines the fact that low friction and customer satisfaction when it comes to online payments is crucial.”

Because tokenization raises the security level of online payments, it also contributes to a better conversion rate and reduced false declines. This ultimately leads to a improved customer experience since fraud attempts are spotted more accurately and that customer friction is only introduced when necessary.

Netcetera says its experience has shown that tokenization allows online merchants to improve conversion rates by approximately 6% compared to card-on-file transactions where payment information are stored by the merchant.

Headquartered in Zurich, Netcetera provides IT products and individual digital solutions in the areas of secure digital payment, fintech, media, transport, healthcare and insurance. A world leader in digital payments, Netcetera claims to serve 80% of banks in Switzerland, Germany and Austria, with over 170,000 merchants using their acquiring products, protect 50+ million plus cards worldwide, and process over 30+ million transactions on their payment platform each month.

Netcetera’s tokenization solution is a platform that enables payment services providers (PSPs), payment gateways, and merchants to easily connect to the tokenization services of card organizations. This provides them with a single access to all of the main card schemes like Visa, Mastercard, and American Express through one integration, Nitin said.

Rising adoption of payment tokenization comes on the back of an evolving regulatory landscape where policy makers have started mandating payment players to introduce more effective safeguards to digital transactions.

In India, for example, new regulation came into force this year, requiring all authorized card networks like Visa, Mastercard and American Express, to issue merchant-specific tokens against card details starting July 01, 2022.


Featured image credit: Edited from Freepik