Tokenization in Payment Terms


In the payments industry, the term “tokenization” has taken on several different meanings. The concept can prove confusing to anyone trying to evaluate payment solutions. When trying to understand what tokenization is, and what benefits it offers, we at Quisitive LedgerPay believe that every transaction should enhance the relationship between a merchant and a consumer.

No transaction is meaningless in the consumer experience. All transactions should help strengthen the relationship between the merchant and the consumer, in every real-time visit and for all future visits. If the result of a visit, is a less-than-ideal experience for the consumer, and the merchant makes little to no margin on the transaction, then there is lost opportunity on both sides.

Here, it makes sense to briefly address cardholder data. This is the sensitive information that’s on a consumer’s credit or debit card allowing the card to be used to make a payment. It’s sensitive because, in its original form, that information can easily be used to commit fraud. Understandably, merchants generally don’t want to store cardholder data in its original form. There is an inherent risk of private information being stolen in a data breach, and consequently, all the negative publicity that comes with that.

Storing sensitive information also creates a significant expense for merchants. To store cardholder data, it is necessary to maintain an environment for that data that complies with PCI-DSS (Payment Card Industry Data Security Standard) standards and perhaps even attain certification from an accredited certifying entity. In brief, hanging onto cardholder data is a bit like handling radioactive material, and should be left only to a small group of qualified professionals.

So, how does tokenization help? In general, there are two important forms of tokenization available for payments. One is incredibly common, especially in the online retailing world, and it solves one narrow and specific problem. It’s standard for any payment solutions provider supporting online transactions. The other type of tokenization is uncommon and solves a much broader set of problems related to understanding consumer behavior and potentially adds a huge amount of value to the consumer experience. Those two types of tokenization are as follows:

  1. Tokenization to provide the merchant with online security. We’ll call this Security Tokenization.
  2. Tokenization to help the merchant understand consumer activity and provide personalized, hyper-relevant offers, assortments, and services. We’ll call this Payment Tokenization.

Security Tokenization

The first tokenization option, Security Tokenization, is widely available from payment providers. While it provides a very specific benefit, it’s also very limited in its scope and purpose. The purpose of Security Tokenization is to allow online merchants to store payment information so that customers do not have to enter it every time they come back to buy something new. It’s a shortcut code to payment information that the merchant can use to tell the processor which previously used cards can be used again for a new transaction. The consumer doesn’t have to go through the effort of keying in that credit card number, expiration date, and security code every time they come back to shop.

This is a somewhat useful option if you’re an online retailer, but it has three major shortcomings:

  1. It’s only useful for online transactions. If you’re a brick-and-mortar retailer, there’s nothing in it for you. There’s no reason to store card information for a consumer who has the card in her hand. She simply swipes or inserts her card at the point of sale. 
  2. You’re now locked into that payment processor. Once a processor stores a card’s information, only that processor can access future orders. If you don’t like your processor (and odds are good that you don’t), or if you want to use more than one processor in different situations (in different countries, for example), then you’re out of luck. 
  3. That token isn’t useful for any other purpose. I’ll explain more about this below, but the use of this token (i.e. stored information) is very limited to this one relatively simple problem. 

This summarizes Security Tokenization. 

Payment Tokenization

The next type of tokenization, Payment Tokenization, is much more powerful in terms of consumer engagement. 

Consumers want convenient access to goods and services, and they want a friendly buying experience that provides them with value. Merchants, especially brick-and-mortar retailers and restaurants, spend a lot of time and budget strategizing about what to sell to consumers. The objective is to provide the best, most relevant promotions that hopefully, the customer will take advantage of. 

Unfortunately, historically it’s been very challenging for retailers to provide promotions that are relevant to the many different personas who would visit the store or restaurant. In grocery, for example, it’s impossible to predict whether the next person at checkout is going to be a retired veteran buying light bulbs, a soccer mom purchasing a week’s worth of groceries, or a college student buying beer. Each of these personas could arrive at the store at any moment and in any sequence. If you’re a retail category manager or marketer who spends time creating promotions that appeal to different consumer constituencies, it’s incredibly frustrating to have an amazing promotion ready to share with a soccer mom, only to have the opportunity missed by the college student. More frustrating still, marketers are likely aware of exactly what to offer, if only they knew which persona they’re interacting with. 

Traditionally, this has been the role of a loyalty program. If you can figure out a way to incentivize the customer to enroll in a loyalty program, then you can use that card or phone number. However, there are two key problems with that:

  1. Even the best loyalty programs only attract a small percentage of all customers. Most retailers only know which consumer is transacting in about 3-10% of their overall transactions. That’s not a very big group, and it’s not a very diverse group. In any case, it’s a big blind spot when you’re trying to drive revenue. 
  2. The customers that do enroll in loyalty programs are already your best customers. As a retailer, you don’t want to spend a lot of time and budget giving deals to customers who were already doing what you wanted them to do in the first place. That’s silly. You want to spend on the customers who aren’t already convinced and only until they’re on board. 

If loyalty isn’t the best answer, then what is? Quisitive LedgerPay’s Payment Tokenization solution allows retailers and restaurant chains to:

  • See consumers’ historical activity, including when they visited and what they bought or ordered. Provide insights into what they’re likely to want next.

…all without needing that consumer to enroll in any type of loyalty or coupon program.

This is where payment tokenization comes into play. The ability to use payment information to track consumer behavior responsibly and safely, without requiring that consumer to self-select into any program, is invaluable. Quisitive LedgerPay can provide fundamental tracking history and sophisticated reporting and analytics, including advanced modeling with AI and Machine Learning, all based on that consumer’s electronic payment information adapted to merchants’ custom POS environments as necessary. We can then deliver highly personalized promotions to each consumer in real-time, right there at the POS, on the receipt, the PIN pad, or any other marketing display. No more scattershot offerings just targeted solutions for each consumer. 

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