Network Tokenization FAQ: What SaaS Businesses Need to Know About Preventing Payment Fraud

With merchant losses due to payment fraud expected to reach a staggering $362 billion between 2023 and 2028, and every $1 of fraud costing U.S. retail and ecommerce merchants $3.75, the urgency for effective fraud prevention measures is at an all-time high. Technologies such as network tokenization provide SaaS businesses with advanced data protection for their clients that also boosts merchant sales by increasing authorization approval rates. 

Exact Payments is excited to announce our network tokenization offering. Network tokenization has been proven to reduce fraud by 28%, making it essential for online businesses that prioritize protecting customer data and their reputation. Additionally, the PCI Security Standards Council states that network tokenization reduces PCI scope. According to data from Visa, using network tokens leads to a 3-4% increase in authorization approval rates for online transactions, effectively increasing sales and enabling businesses to outperform their competitors. 

So what is network tokenization? And how does it work? In this post, we’ll first explain the concept of tokenization to give you a solid foundation and then delve deeper into network tokenization. Read the frequently asked questions below to understand how this advanced payment security technology can help your business prevent fraud, increase approval rates, and grow sales. 

What is tokenization?

Tokenization is the process of replacing sensitive cardholder data with algorithmically generated data, ensuring that no actual card information is stored or transmitted, only randomized digits. 

How does tokenization work? 

Tokenization securely maintains the link between a token and sensitive card data in a database known as a token vault, which is safeguarded with encryption. When a customer initiates a payment, the token is transmitted instead of any sensitive card details. 

The tokenization and detokenization processes occur in highly secure environments, often within the secure infrastructure of a payment processor or token service provider, minimizing the potential for exposure during tokenization. 

Additionally, network tokens are typically associated with specific merchants or transaction types. For example, a token generated for a credit card transaction with Google Pay is only valid for Google Pay transactions, reducing the token’s usability if it is compromised. 

As the real credit card number or sensitive information is neither transmitted nor stored in the merchant’s systems during transactions, there is significantly less risk of this data being stolen through data breaches or hacking attempts.

Why is tokenization better than other security protocols? 

Unlike encryption, which can be reversed with the correct key, tokenization does not allow for reverse engineering to obtain the original data from the token. This makes it a more secure method for protecting data. 

A key difference between a tokenized transaction and a standard credit card transaction is the fraud prevention technique. While a credit card uses a static, never-changing CVV, a token uses a dynamic CVV that changes for every single transaction.

Using this cutting-edge technology, payment tokens cannot be utilized by bad actors in the event they are intercepted. This offers businesses a secure method for storing cards for future transactions, a use case that is common for SaaS or subscription-based businesses that operate recurring payments.

What are network tokens? 

Network tokens are created by the bank’s system (via the Visa or Mastercard network) rather than an external party like a payment processor or payment gateway. The bank establishes the correlation between the token and the cardholder account and can trace the activity across the token lifecycle. 

Why are network tokens more secure? 

The start-to-finish security journey that network tokenization offers by being issued by the Visa or Mastercard systems results in significantly less risk of data loss through malware, phishing attacks, and data breaches.

Network tokens can also be integrated with advanced security measures such as biometrics, multi-factor authentication, and behavioral analytics. This additional layer of security blocks fraudsters, making it more difficult to steal credit card data. 

Some network tokens are created with a limited lifespan. Once expired, these tokens are invalid and can’t be used for future transactions, again limiting the opportunity for fraudsters.

How does network tokenization contribute to higher approval rates and increased sales? 

Approximately 3% of card declines occur because of expired card data. Network tokens, created and issued by the bank’s system, ensure that the card data associated with these tokens is always current. As a result, merchants storing these tokens do not need to update them with the correct information, leading to higher approval rates and increased sales.

False declines happen when a legitimate transaction is rejected on suspicion of fraud. Network tokenization, with its added security and authentication accuracy, helps in identifying legitimate transactions, thus lowering the false decline rate. This results in more genuine transactions being successfully processed, leading to increased overall sales.

How does network tokenization balance seamless transaction experiences with security
requirements? 

Heightened security measures have often led to reduced customer satisfaction and increased friction. For instance, customers may encounter card declines due to discrepancies between the data stored with the merchant and that held by the bank. This experience can be incredibly frustrating for customers and is a significant contributor to churn in subscription-based businesses.

Since the bank manages tokens and their underlying data, token associations are promptly updated with the latest data on file at the point of sale. This system benefits sellers, as well as their finance and billing teams, by boosting authorization approvals and saving time that would have been spent contacting cardholders for updated card information on declined transactions. Cardholders also benefit from a seamless experience since they are not required to log into a portal or respond to emails or phone calls to update their card information.

Consumers prefer shopping with ecommerce businesses that provide a convenient experience, including the ability to pay by card without adding extra friction to the process, such as repeatedly entering credit card numbers. Network tokenization allows businesses to meet these customer expectations by enabling one-click payments or offering the option to authorize future payments.

Exact Payments is excited to offer this advanced form of fraud prevention to its clients. For more information on network tokenization, feel free to contact us.