2024 Financial Landscape: The one trend to rule them all

When I sat down to write this blog, I thought about payment trends that could happen this year. I could have written a paragraph on each, but when I looked at them, I realized that not a lot has changed from the predictions from last year, and yes, they were still sort of trending, but nothing blew my socks off as a mindblowing trend that would change the world in 2024. However, one slow-moving trend/movement is changing the world and potentially could fundamentally disrupt this payments ecosystem we all live in.

I am talking about tokenization, and I don’t just mean storing card numbers as tokens but the potential of tokens, making the system far more secure and, therefore, less risky, which could change the economics of commerce.

Let’s start at the beginning. The system we have had until recently has involved you having a set of 15 or so numbers on the front of your credit card along with an expiry date that you would give to a wide array of merchants across the internet so that they could bill you for the services or product. This seems like an excellent, simple way to make payments, but a lot could and did go wrong behind the scenes. We will talk about card-not-present fraud later in this blog, but let’s start with what happens if a merchant gets hacked or someone steals your card number. When you find out about it, it’s usually because you or your bank start to see unauthorized charges to your card, and a whole series of things ultimately occur that means your card gets canceled and a new one is issued with a different number. This, in this subscription age, is a massive PITA. For the next few months, you receive threatening messages from the companies you subscribe to that your card has failed and you need to update it, and this inevitably means you ask yourself whether you really need to be subscribed to a “dog toy of the month” club. Sometimes, this incurs penalties/ fines, etc. ( I had one of my insurances cancelled and then had to get reinsured at a higher rate, for example). But fundamentally, this comes down to the problem of having one number that is shared with everyone.   

The world of Network Tokenization. 

This newish system means that your card number is swapped for a unique token to you and that merchant in transactions. This means that if that merchant gets hacked, the token is useless to the hacker, and you do not need to get a new card issued.   Seems like a great idea, right?   

Rollout has been slow, and merchant adoption is gradually creeping up, incentivized in some markets by liability shifts and lowered (not higher) interchange rates. But the card schemes want to move quicker as issuing new cards (printing plastic and shipping) is expensive. They also see the threats of being disintermediated by the wallets like ApplePay, Google, and PayPal.   Therefore, outside the US (We will come back to that), the schemes are beginning to roll out “Click to Pay.”

Click to Pay (C2P) is yet another elegant solution where your bank will register your new cards (or you can) on a central register shared by most of the card schemes. When you go to an e-commerce site for the first time and type in your card, the “Click to Pay” system will remember you on the site, and then the next time you visit, you will not need to enter card details at all as a list of all your card in the registry will appear and all you need to do is select one. You will then be contacted on your cellphone to authenticate the transaction, and you are done. What the merchant gets is a Network Token, as above.  

Suppose all merchants started using C2P and tokenization. Essentially, we’d have a far less risky system, and accordingly, we see some of the card schemes starting to offer liability shifts on cards not present fraud. This has implications across the payment industry, and I have listed some of those that come to mind.

Interchange

Card-not-present transactions are much more expensive for a merchant than in-store or in-person transactions. The justification has always been that this is because they are much riskier. Now, if you are using C2P and Tokenization, then this argument may not apply. You are authenticating a transaction using a mobile device with your bank app, which has been secured using bank-level mobile security. How can this be riskier than walking into a store with a card and swiping it through a machine or even entering a PIN. Therefore, logically, interchange should lower on card-not-present, which is great for merchants and should be reflected in the prices charged to consumers eventually.

Commerce

The main reason you don’t see as many Apple store or Decathlon experiences with sales assistants walking around with tablets and checking you out in the aisle rather than at a till is that to do that; these transactions are usually marked as card-not-present and, therefore, more expensive. This should change with the above as interchange comes down, and we should start to see some amazing in-store payment experiences, including full payment orchestration on tablets.

Anti Fraud

The anti-fraud industry was born out of the rise of card-not-present fraud. Someone who got hold of your card number could use it to go and buy things on your account. You or your bank would spot this, and after a process, you would get your money back (most of the time). However, for some reason, which always feels a little unfair, the merchant whom the person who stole your card chose to buy something ends up being liable and responsible. The emphasis is/was on merchants to prove you are allowed to use that card before they allow you to buy from them.   This was manual and gave birth to the anti-fraud industry, which provides tools to calculate the risk of selling to an individual to limit fraud.   If C2P and tokenization are successful, liability shifts from the merchant back to the bank, and you no longer need to do all these checks. However, this does not mean these companies die out; it means they have to evolve as fraudsters will do what they always do and find another vector of attack. Also, this doesn’t solve friendly fraud, return fraud, or Account takeovers, so the anti-fraud companies will just evolve to combat the new vectors, which some will do better than others.

Subscriptions

The subscription or repeat payment companies will also need to evolve to deal with network tokens and the process of storing, updating, and assigning these to users and merchants. It will become much easier for a consumer to cancel a subscription at their bank as all they will need to do is cancel that token and put the emphasis back on the service provider to chase them on payment. Ultimately, this could mean fewer ghost subscriptions, and ultimately, the prices will have to go up.

Vaulting

Storing payment details and card numbers on behalf of merchants is a decently sized business (of which we are part), but in the long term, with Network Tokens and C2P, this service becomes less useful for merchants as raw card numbers are stored. However, again, I don’t think these companies die; they just evolve to tokenize other things like bank details and other sensitive data rather than just card numbers.

A Note on the US

The eight largest US banks have decided to opt out of “Click to Pay” and instead have decided to group to build a very similar system called “Paze.” We are waiting to see what this means for liability shift, interchange rate, and, frankly, what happens to those who don’t bank with the big eight? It’s an area to watch.

In Conclusion

I’m sure there are a lot of other areas of the payment industry that will need to adapt to this, but the truth is that this could be a fundamental shift that will ultimately need to be deployed by merchants. There will be u-turns, miss-starts, and surprises, as there always are with core changes, but merchants need to be ready to adapt. This makes it imperative that you either have a robust, adaptable payment orchestration platform in-house or are working with a Payment Orchestration Company that can make the transitions as painless as possible while allowing you to take advantage of all the benefits that will come from it.   You could wait and see, but this will turn out to be more expensive in the long run and put you at a competitive disadvantage. Of course, at Gr4vy, we are always available to discuss what you are looking for and how we can help free your payment strategy. 

So there it is, my one trend for 2024 that changes everything!