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If you asked your merchants to name some of their key payments concerns, they might list tighter security, lower costs and a better cardholder experience. Recently, Visa and Mastercard have begun offering network tokens — a product that helps providers check off all three boxes at once, while significantly reducing interchange costs.
Network tokens is a security feature that replaces a cardholder’s sensitive payment information completely, protecting merchants from the rising costs of cyberattacks and data breaches. But, they do more than improve security. Network tokens also unlock lower interchange fees on qualifying transactions, reduce fraud rates, boost approvals and keep recurring subscription payments running smoother than ever.
Below, we dive into this unique functionality and examine what network tokens are, why they’re so valuable, how they fit into the NMI ecosystem and how you can start selling them to your merchants today.
What Are Network Tokens and How Do They Work?
Tokenization goes beyond standard encryption like secure socket layer (SSL) and transport layer security (TLS). Instead, it replaces a cardholder’s payment data with a completely separate, unique token. The token acts as a proxy for the cardholder’s primary account number (PAN), representing their payment data for authentication purposes without actually containing it.
By only sending a unique token across the network when a transaction is processed, this technology effectively walls off cyber threats. Even if a hacker manages to intercept the token, they cannot turn it back into the cardholder’s card information, a huge advantage in safeguarding consumer payment data and minimizing the risk of costly breaches.
Traditionally, tokens were issued by a gateway provider, like NMI. That type of security, known as primary account number (PAN) tokenization or gateway tokenization, is still available today. But, network tokens, which are issued directly by the major card networks like Visa and Mastercard, are quickly becoming the norm.
Functionally, network tokens work similarly to other tokens, but, because they come directly from the network, they offer some added advantages. Since they’re issued by card networks, network tokens ensure merchants have the absolute best in payments security. Even more importantly, tokens issued by the big card networks are processor agnostic, meaning they are capable of working with multiple payment processors. That flexibility maximizes their long-term interoperability and utility.
Where Are Network Tokens Used?
Tokenization is common among merchants who offer recurring payments and fast checkouts. Consider a recurring payment like a Netflix subscription. The streaming platform needs to store the subscriber’s card data so they can bill them each month without requiring them to re-enter their information.
The problem is that storing large amounts of cardholder payment information makes merchants vulnerable to cyberattacks. To mitigate that risk, they opt to use tokens instead.
It’s the same for fast checkout experiences, like Amazon’s Buy Now feature. To make the checkout experience smoother (or even reduce it to a single click), a merchant needs to store a copy of a shopper’s card information for future use. Tokens enable them to do that while reducing their exposure to cyber threats and the liability that comes with them.
Why Are Network Tokens So Valuable to Providers and Merchants?
We’ve talked about the way network tokens bolster cybersecurity and mitigate risk by removing the cardholder’s PAN from the equation, but the benefits go far beyond stopping hackers. Network tokens also:
- Optimize interchange fees
- Minimize payments fraud
- Improve transaction approval rates
Combined, those benefits make network tokenization highly valuable to merchants and their payment providers.
Network Tokens Reduce Fees Through Interchange Optimization
Outside of security, arguably the biggest benefit of network tokenization is interchange optimization. When the card networks like Visa and Mastercard set interchange fees, lower risk generally equals lower rates.
For example, a card-present transaction will generally have a lower interchange rate than a card-not-present transaction because the card user is present, thereby reducing the risk of fraud. Card-not-present transactions that are secured with network tokenization are treated similarly to card-present transactions and may benefit from lower costs than those using traditional PAN tokenization or other less secure methods.
While rates differ from network to network and can change from year to year, it’s currently common for network token transactions to carry fees reduced by as much as 10 basis points. For providers like independent sales organizations (ISOs), payment facilitators (PayFacs) and software providers, that represents major savings that can either be passed on to their merchants or applied directly to their bottom line.
Network Tokens Reduce the Costs and Headaches of Payments Fraud
In addition to stopping cyber attacks, network tokens also help reduce average fraud rates by 28% or more. Since the token and the PAN are separate, if there is fraudulent activity on a card, it doesn’t impact the network token. That means tokenized payments can still go through even while the cardholder is waiting on a replacement.
Because of the added security, network tokens trigger fewer false declines in anti-fraud systems, improving the end cardholder’s experience and maximizing the merchant’s revenue.
Network Tokens Automatically Update Expiring Cards
One additional benefit of network tokens is that they attach to the cardholder account for the life of the card. So, even when a card rolls over to a new expiry date and security code, the network token doesn’t change. The card network makes the necessary adjustments, requiring no updates by the processor or the merchant.
That means network tokens effectively eliminate declines due to expirations. For merchants selling on a subscription basis, that’s a huge benefit, since they no longer have to chase cardholders for updated payment information — a process that interrupts service, reduces the quality of the cardholder experience and costs merchants money.
How Network Tokens Fit Into the NMI Ecosystem
NMI makes tokenization easy. Network tokens are stored in the NMI Customer Token Vault — the same system we use for our in-house tokenization solution. For merchants who have them enabled, network tokens are the top level of security. Because NMI’s aggregator only supports Visa and Mastercard’s network tokens, payments with alternate card brands such as Amex won’t be eligible right away. In those cases, merchants are backed up by NMI’s native gateway tokenization.
When a transaction can’t be network tokenized, the system will automatically default to the payment card data, which ensures the transaction is still protected and sensitive information is still walled off from bad actors. Likewise, for transactions where network tokens don’t apply, NMI’s other services can pick up the slack with things like automatic card updating and fraud reduction, ensuring merchants always have access to secure, smooth payment processing.
To find out more about how easy NMI makes it to set your merchants up with network tokenization, reach out to a member of our team today.
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