Network Tokenization and Toucan

If you’re selling products or services online, you know successful payment processing relies on a frictionless checkout experience. You not only want your customers to make their first purchase without any trouble, but you also want to establish a relationship with those customers so they patronize your business again. Ultimately, business success doesn’t result solely from acquiring new customers, but from delighting existing ones. One proven method for delivering on customer satisfaction and encouraging repeat purchases is to save customer payment credentials on file using network tokenization.

The term “tokenization” gets thrown around a lot in the payments industry. You might hear it in reference to merchants and processors, who have their own methods for vaulting and securing cardholder data by replacing card information with tokens. But the primary form of payment encryption we’ll talk about today is network tokenization, whereby card brands encrypt cardholder data in payment tokens that they share with merchants. When a merchant leverages network tokenization, they create a payments environment in which customers thrive, as they experience less issues at checkout and trust their payment data is kept secure.

I won’t dig too deeply into how network tokenization works, but I want to showcase the benefits of network tokens and how Toucan by Pagos can help you take advantage of them to delight your customers and increase your overall revenue. We know that doing what is right commercially for your business often needs to be executed technically with your engineering team—that’s where Toucan comes in.

How Network Tokenization Can Benefit Your Bottom Line

Most customers know and understand the pain of losing a credit card or having one stolen. Getting a new card from your bank isn’t a quick or painless process, and after you receive the new card, you still have to manually update your payment information for all of your favorite places to shop. As discussed in our Introducing Toucan blog post, this happens to nearly 30% of all issued cards in the US each year. That’s a lot of customers left scrambling to update their payment method for recurring or repeat transactions before their now-canceled card is charged and declined. When customers don’t remember to update their card information, it impacts the overall transaction approval rates for the affected merchants.

This is where network tokenization can be a game changer. By definition, network tokens are decoupled from their underlying card and primary account number (PAN), so if that card changes, the token doesn’t expire—it just gets updated. As a customer, this means you can still make purchases with a tokenized payment method even if the underlying card is canceled and in the process of being replaced. As a merchant, this translates to a much lower decline rate for transactions processed with tokenized payment methods. In fact, network tokens can help reduce the declines rates of eight specific decline reason codes, depending on the card, market, and issuer. The table below outlines these decline codes and how network tokenization impacts their occurrence:

Decline Reason CodeNetwork Tokenization Impact
not_sufficient_fundsIssuers may misclassify a small percentage of transactions as insufficient funds due to risk reasons. Network tokens can allow them to be more accurate.
do_not_honorSome percentage of Do Not Honor declines are really hiding other issues – especially on credit cards. Network Tokenization is a more secure transaction, therefore allowing issuers to accept more transactions confidently. 
refer_to_issuerSimilar to Do Not Honor.
invalid_transactionIssuers may classify a transaction as invalid for a number of reasons. Network tokenization can eliminate some of the underlying reasons for declining transactions.
invalid_account_no_numberWith network tokenization there should be no invalid account numbers.
pick_up_cardWith network tokenization there should be no invalid account numbers.
expired_cardWith network tokenization there should be no invalid account numbers.

Does embracing network tokenization really impact decline rates and your bottom line all that much? Consider an example merchant processing 100,000 transactions a week, with an average order value of $60 USD. With these stats, this company processes around $6 million in transaction volume a week, or $320 million a year. Let’s assume they aren’t using network tokenization and have a decline rate of 10%. This means each week, they see around 10,000 declines with a total declined transaction value of approximately $600,000 USD.

Decline reason code breakdown for an example business that's not leveraging network tokenization.
Decline reason code breakdown for an example business that’s not leveraging network tokenization.
Source: Pagos

Many businesses would be happy with a 90% approval rate, but is this really the best this company can do? Is there a way to capture some of the $600,000 a week—$31.2 million a year—in lost sales due to declines? Absolutely. By employing network tokenization, the merchant in this example saw a notable drop in declines for many of the reason codes listed above. Ultimately, they processed nearly 1,000 additional successful transactions a week; that’s a $60,000 increase in weekly revenue, or over $3 million annually. In addition, this company receives all the other benefits of network tokenization that we haven’t even touched on yet, such as a lower churn rate and fewer incidents of fraud. Not too shabby.

Decline reason code breakdown for an example business after they employ network tokenization. The orange bars represent the reduction in declines due to using network tokenization.
Source: Pagos

Where Toucan Can Help

At Pagos, we see the value in network tokenization, and we want to help you harness it. Toucan by Pagos allows your business to implement and execute a network tokenization strategy in the easiest way possible. Specifically, Toucan simplifies the following three processes: provisioning a token from a primary account number (PAN), obtaining a cryptogram for transacting with the network token, and handling a lifecycle management event for a token. It is by using these three capabilities together that you can address the decline codes noted above and reduce declines. Learn more about these capabilities and how to test them in our Toucan Tokenization Overview guide.

If you’re interested in addressing declines, increasing your approval rates, reducing costs, and transacting with more security—but you don’t want to rip out your current payment providers—try us out! Contact us today to get started with Toucan.

Albert Drouart

Albert Drouart

CPO and Co-founder at Pagos

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