The credit card concept has been a payments staple since Frank McNamara pioneered the way in 1950 with the first charge card. After almost 70 years, the payments business has evolved immensely. With the rise of online accounts, mobile wallets, and consumer demand for both effortless convenience and security, a paradigm shift in the significance of the 16-digit number is set to take place.
Technologies like tokenization are quickly bubbling to the top of industry conversations as the next generation of payments technology and for good reason. In the last 12 months, the Forrester Wave Data Security and Privacy Report placed it nearly at the peak for its high business value, and Forbes named it the second hottest data security technology. Simply put, tokenization is using a randomized number, or token, in place of sensitive data – like a credit card or bank account number. It’s recognized as an invaluable tool for adding an additional layer of security to credit card transactions and for its potential to provide the seamless experience consumers seek. The technology also has benefits for brands – for instance, it can aid in reducing subscription churn and security risk. With a number of advantages coming to light, the opportunities for the technology’s future growth and overall industry adoption look bright.
Streamlining the Customer Experience
In the future, there will be a heightened significance in how card issuers tie transactions to proprietary tokens. We anticipate these companies will align the same token to an individual’s credit card, even after a 16-digit number has expired. This will allow merchants that already have an individual’s payment information on file to continue billing as usual even after the physical card expires. Additionally, consumers won’t need to worry about contacting a vendor to update their personal details. It’s a win-win.
While the physical card will likely remain within arm’s reach as a fundamental payments tool that shoppers feel comfortable with, its level of importance will diminish as more consumers become familiar with tokenization.
Reducing Subscription Churn with Tokenization
As consumers’ desire for a shopping experience that is equally convenient and personalized grows, so does the success of the subscription services model. Consumers love the no-hassle nature of subscriptions and are signing up for recurring costs in exchange. However, once credit cards expire, many customers forget to update payment information before their next billing cycle. For example, in a recent Forrester research study, it was revealed that 34 percent of all subscriber churn is in fact involuntary. As a result, subscription services are often unnecessarily terminated, which disrupts the experience and impacts a business’ overall churn rate and profitability.
Tokenization can eliminate this problem and help support a more seamless shopping experience as payment information is tied to the token and not the digits on a physical card, once again removing the need for the consumer to update their payment details. These changes not only benefit the shopper, but also help to reduce a merchant’s churn rate.
Customers Expect a Secure Shopping Experience
As we spend more of our time online, the likelihood of having our credit card information compromised has increased. According to Identity Theft Resource Center and CyberScout, the number of U.S. data breach incidents increased 44.7 percent in 2017 over the previous year. While tokenization doesn’t protect a merchant from a breach, it lessens the financial impact for both consumers and merchants. Unlike encryption, which uses an algorithm to provide an encrypted code and can be decoded if a hacker is able to crack the algorithm, tokenization replaces the secured data with a randomly-generated sequence of numbers. This means as consumers pay for goods online, each merchant receives only the token, and doesn’t ever see the full credit card number.
Consumers benefit from the added security by limiting the number of merchants who have access to their credit card data. And merchants become less of a breach target since they aren’t storing credit card numbers that can be used for fraud. Given the financial costs and reputation risks associated with a breach, it’s easy to understand the appeal of this added layer of security.
As merchants and payment processors alike push for the “uberfication” of the industry, making payment processes relatively invisible to customers, they will evaluate hundreds of technologies that help increase security and meet consumer demand. It is clear that tokens are a piece in that unsolved puzzle in driving us towards a more seamless and positive consumer experience.