The slow but irresistible rise of tokenized wallet payments online and at the POS
With the holidays and the associated gift giving (and spending) frenzy here, couldn’t we be doing more to keep the ghost of Christmas fraud in check? And what about further simplifying the cardholder’s purchase experience? The advent of the mobile wallet and the tokenization of card payments promise to do both – will this season finally be the long predicted tipping point for tokenization?
Tokenization is ultimately a method of protecting card data. Instead of sharing primary account numbers (PANs) with merchants across the payment network, unique, randomly generated alphanumeric identifiers are shared to unambiguously identify the card to be used. Tokenization eliminates the need for merchants, e-commerce sites and operators of mobile wallets to store sensitive payment card data on their networks, thereby closing many doors to potential fraudulent use. When used in association with mobile wallets, the consumer purchasing experience can be as simple as tap and go.
Hype beating reality
The mobile wallet concept has gone through many incarnations as technology evolved, but is finally starting to show traction with financial institutions and customers. Apple Pay, Android Pay, Samsung Pay, all the “Pays” in fact, have been hoping for a major uptick in usage, but the numbers do not match expectations.
As the migration to EMV replaces card swipes with PIN entry, the cardholder experience has changed little, and fraud remains a major concern despite EMV’s additional security precautions. Tokenization promises to change all that, with seamless payments requiring minimal interaction from the cardholder, applicable both online and at a traditional retail POS.
New payment mechanisms take time to become embedded. Consumers, retailers and financial institutions cannot be expected to make an overnight switch. Consumer demand is certainly high, but financial institutions and card processors have been slow to offer tokenized payment solutions to their clientele. Merchants too, already busy with EMV migration, have been slow to offer mobile tokenized payment capability on their websites or POS terminals.
The reality is that many merchants and many issuers are not ready yet. This leaves us in a situation where card-present payments remain the mainstay of retail purchasing, and online payments continue to rely on card-on-file transactions.
Reasons to be cheerful
Although still comparatively small in numbers, wallet purchases at the POS are changing the tide. Predictions are that within two or three years, mobile wallet payments will be worth over $50 billion annually in the U.S., with over one billion transactions (source: Javelin, March 2015).
Unsurprisingly, millennials are leading the change. It is suggested that almost half of 18-to-35 year olds already have mobile wallet capability on their phone. Generation Xers are somewhat lower, with about one-third of middle-aged consumers mobile-wallet ready. Boomers, by contrast, are only around the 15 percent mark. However, the growth rates in tokenized mobile payments are strong and continue to trend upward.
Pushing for a tokenized world
The reliance on card-on-file for online merchants remains a major security concern. With the adoption of tokenization, there is no longer a need for merchants to maintain and manage 16-digit card numbers for all customers on their databases. Instead, merchants become token requestors at the POS, whether online or in-store. It is then incumbent on financial institutions and issuers to be able to tokenize account details and respond to merchant requests in near real time.
The move to EMV has mandated the upgrade of merchant POS terminals – often cited for the slow merchant adoption rates – but many of these new terminals are mobile-ready, with built-in NFC capability. It is just that the functionality is not yet turned on. Visa, MasterCard, PayPal and others are already going through the transition from accounts and cards on file to the realm of tokenization.
With the potential advantages of tokenization becoming more evident, online retailers are looking to get the same benefits as retail outlets, eliminating the need to maintain card details on file. We can expect big shifts towards tokenized solutions through 2017 and, by this time next year, we can anticipate that mobile wallet payments using tokenized card payments will play a significant role in the payment market place.
Tokens for all
Mobile, tokenized card payments look to grow in significance as adoption grows. Card processors are already driving the change, but issuers need to offer the service before the uptake is significant. And all banks have a part to play; this is not just something bigger banks can offer.
With a simplified user experience, seamlessly operating with instore or online retailers, customers and merchants of all stripes look set to benefit from more traffic. But in today’s real-time world, the fact that tokenization significantly reduces fraud – thus filling many of the security holes within the EMV ecosystem – will probably be the driver that makes the difference.
The “card-on-file” tokenization by merchants will definitely change the landscape for mitigating fraud, as virtual accounts will be more secure, with tokens replacing the 16-digit primary account number (PAN), which is far safer than the plastic we carry in our back pocket. The internet merchants who enable recurring automated billing with those account numbers in their databases (cable TV, AT&T, Utility Bills, etc.) can now replace those PANs with tokens in order to reduce the risk of account breaches and enhance the security of those accounts from fraud.
Consumers are adopting the mobile commerce experience itself, the use of tokenized payments is not just another payment type. The drive toward tokenized mobile payments will drive wholesale change in the payment market. There is no turning back now.