Tokenization: Strength in (random) numbers

For as long as most can recall, card fraud has been a thorn in the side of nearly every entity along the payments chain. Today, however, fraudsters have finally gotten under the skin of another, arguably more feisty, foe – the consumer.

Keenly aware we are living in the “age of the consumer,” retailers, financial institutions and their payments partners do not take increasing consumer worry about payments security lightly. Simply put, we can’t. And that’s why we’re seeing more high-profile support for the technologies those of us behind the payments curtain have long been touting. EMV and tokenization, for example, have been considered industry jargon by some until recently. Now, these terms are finding their way into more mainstream conversations.

Apple gets credit for the brighter spotlight on tokenization, which describes the use of random, valueless numbers as a replacement for traditional 16-digit account numbers. In fact, Visa has described Apple’s rollout of its tokenization-dependent wallet solution as “a coming out party for tokenization.” When Apple demonstrated its support for this game-changing technology by building it into Apple Pay, people listened. It was terrific for the industry and couldn’t have come at a better time.

What EMV promises to do for card-present fraud, tokenization promises for card-not-present (CNP) fraud. The later makes up 16 percent of the entire U.S. card fraud picture today and resulted in more than $5 billion in losses in 2013 alone. What’s more, history has demonstrated that CNP fraud increases in countries that have fully implemented EMV. Facing the pressure of what is predicted to be an even hotter CNP fraud environment after EMV takes hold in the U.S, domestic card issuers are naturally curious about tokenization’s promise to stem the CNP-fraud tide.

Yet, it’s important for credit unions deciding when to tokenize their card programs to consider that tokenization has the potential to do more than impede card fraud. When combined with other technologies, like biometric authentication and near-field communication (NFC), it has the power to improve the overall consumer experience. In fact, this is likely the reason Apple has thrown its weight behind this particular combination of technologies. Since its foundation, Apple has been a master of fixing systems that aren’t actually broken. Acting on behalf of its loyal user community, the company’s leadership is driven by the potential to build something better, faster, easier… or just more fun. What Apple did with Apple Pay was to take three existing technologies – tokenization, biometric authentication and NFC – and bundle them into a brand new experience for consumers.

These three technologies, working in concert inside the U.S. payments system has the potential to enhance the mobile buying experience for all consumers. How? By making mobile point-of-sale purchases – whether they be from a smartphone or a pair of Google Glass – carefree. For starters, the marriage of tokenization and biometrics reduces consumer concern about their card data being accessed by a hacker, fraudster or even small-time pick pocket. Second, NFC makes checkout at the POS easy and painless with just a tap of a device against a terminal. Third, the powerful combination of technologies allows consumers the ability to pay from every digital device they may own using card accounts they already own.

For its part, tokenization will also make life easier for consumers when their cards are compromised as part of a retailer data breach, for example. Today, issuers often choose to shut down compromised cards and reissue them – a process that can take up to 10 days for cardholders. Tokenization will more easily allow issuers to disable certain tokens without shutting down an entire card account.

Agility is the key to remaining relevant in a fast-paced, changing payments landscape. Tokenization, along with other technologies like EMV, biometrics and NFC, will be terrific tools to help credit unions be nimble and swift in the face of increased competition for the loyalty of more discriminating financial consumers.

To learn more about these tools, credit union leaders this week attended a webinar hosted by TMG Senior Product Manager Brian Day. The recording is available here. http://bit.ly/10PAbaM.