In our fast-paced digital world, embedded payments are no longer just a convenience; they have become essential for businesses to stay competitive. However, how can businesses ensure that these frictionless embedded payment experiences are both efficient and secure? The answer lies in tokenization. Serving as the foundation of embedded payments, tokenization empowers businesses to deliver seamless and secure transactions, fostering trust and encouraging innovation.
Tokenization: The Secret Sauce of Embedded Payments
Consider a consumer making a repeat purchase at an e-commerce store. After adding items to the basket, the consumer proceeds to the checkout page and decides to pay using the same credit card which he had used last time while making the purchase at this store. The consumer must follow a cumbersome process of providing his card details, and if any one character is wrongly input, the consumer has to repeat the entire process. It becomes frustrating, and consumers abandon the cart. This constitutes over 20% of cart abandonment reasons. If the consumer is provided with an option to save his card details at his favorite e-commerce stores, the checkout process will become frictionless. However, the card information should be securely stored so that even if there is a data breach on the merchant’s online store, the card data cannot be accessed. This can be achieved using tokenization.
At its core, tokenization involves replacing sensitive payment information—such as credit card numbers—with a unique identifier or “token” that carries no real value. The card data is securely stored with the card issuer and the payment network (Visa/Mastercard, etc.), and these entities generate an alias for the card information (“token”), which can be used to make payments. Even if someone intercepts the token, they cannot reverse-engineer it to access the original data.
In the realm of embedded payments, tokenization serves a greater purpose than merely protecting information. It enables in-app purchases, subscription renewals, and one-click checkouts to be not only possible but also seamless and hassle-free.
The card tokenization can be of two types – device-side tokenization and server-side tokenization. Device-side tokenization binds the tokens generated with the device and can be used only with that device. It can be used for tap-to-pay at physical stores of merchants that have NFC-powered POS devices, as well as for making in-app purchases where the merchant directs the payment fulfillment to another application that stores card tokens. Server-side tokenization binds the card token with the merchant and can be used to make purchases at the merchant’s e-commerce store across any channel (web, mobile, etc.).
Why Tokenization and Embedded Payments Work So Well Together
- Effortless Customer Experiences
Embedded payments thrive on convenience, and tokenization is what makes it work. By securely storing tokenized payment details, businesses eliminate the hassle of customers re-entering card information every time they make a transaction. Take apps like Starbucks or Amazon, for example: Their embedded payments, powered by tokenization, enable smooth and fast checkouts, driving customer loyalty. - Enhanced Security That Builds Trust
When customers use embedded payments, they expect their information to be secure. Tokenization ensures that sensitive data never leaves the secured network. For example, ride-hailing apps like Uber and Lyft utilize tokenization to manage payment details safely, guaranteeing that every transaction is instant and protected. Understanding this, users are more likely to trust and engage with these service platforms. - Streamlined Subscriptions
From Netflix to Spotify, subscription services depend on embedded payments to guarantee seamless billing cycles. Tokenization simplifies this process by automating the updating of tokens for expired or reissued cards. It decreases churn resulting from payment failures and sustains a continuous relationship between businesses and customers. - Scalability Across Borders
Tokenization enhances the scalability of embedded payments across borders. For companies operating in multiple nations, tokenization ensures compliance with regional data protection laws while facilitating cross-border transactions and commerce. - Reduction in Data Handling Costs
Handling sensitive card data can have significant financial implications. Tokenization minimizes the amount of sensitive information stored, directly impacting data handling costs and mitigating any financial loss from a probable security incident. According to Visa, the tokens issued by them have resulted in a 28% reduction in fraud cases. - Reduction in False Declines
Tokenization improves acceptance of card transactions by nearly 3% and reduces mistaken rejection of legitimate transactions due to suspicion of fraud. Since tokenization reduces the risk of fraud, fraud detection systems are less likely to block such transactions.
Tokenization as a Catalyst for Business Growth
- Building Trust Through Security
Customers are more likely to adopt embedded payment options when they believe their data is secure. Tokenization fosters this confidence, resulting in increased usage and repeat business transactions. - Reducing Operational Complexity
By outsourcing the storage and management of token-sensitive data to a specialized payment orchestration layer, businesses can focus on their core activities. Additionally, tokenization effectively fulfills requirements such as PCI DSS, allowing companies to adhere to security standards. - Boosting Customer Loyalty
Imagine making a purchase and automatically earning loyalty rewards without any effort. Tokenization allows merchants to create offers for various card categories that have been tokenized on their platforms, thus boosting convenience and promoting repeat purchases. - Unlocking Innovation
With tokenization as a foundation, businesses can explore innovative payment models such as one-click payments and click-to-pay, which offer secure remote payments using digital wallets storing multiple card tokens.
Ready to Embrace the Future?
Tokenization is not merely a security feature; it forms the basis of embedded payments, which are revolutionizing commerce. As businesses increasingly embrace embedded finance models, tokenization will remain essential for secure, scalable, and user-friendly systems.
We have developed a Global CXO Report on Embedding The Future: Transforming Business with EMBEDDED PAYMENTS to assist businesses in navigating this evolving landscape. The playbook outlines the importance of embedded payments and offers practical strategies for staying ahead.
