News

The gathering storm over tokenization

A new report explains how tokenization will affect the payments value chain, and how Apple Pay might affect the fortunes of Google, PayPal, MCX and Softcard.

November 6, 2014

A new research report from Mercator Advisory Group, "Payment Networks 2.0: The Battle for Tokenization," delves into the workings of network tokenization, starting with the EMVCo specification and a review of the Apple Pay implementation.

The report describes the technical challenges associated with implementing host card emulation and explains how tokenization will affect the payments value chain. In addition it assesses how the Apple Pay will affect the fortunes of Google, PayPal, MCX, and Softcard.

Tim Sloane, Mercator VP of payments innovation, and author of report, commented on the likely impact of tokenization on the payments sector:

Tokenization will change the payments industry in interesting ways. The networks have clearly carved out a new business model for themselves, and the implementation of tokens will enable payment providers to enter adjacent markets, such as identity management and loyalty management, if they wish. Indeed tokens offer so many growth paths that determining which path any individual payment provider will follow will likely consume corporate strategic thinking for the next few years.

The report offers discussion and analysis of topic that include:

• consumer behaviors driving the growth of mobile payments;
• aspects of mobile payments that could give merchants the advantage if networks do not adjust their business models;
• the failure of EMVCo to deliver a tokenization spec that resolves issues around debit routing and ATM use;
• process flows illustrating the steps to implementing tokenization for Apple Pay and the complexities of managing a technology such as HCE;
• the banking sector's response to Apple Pay and tokenization and recommendations for a response going forward;
• the impact of Apple Pay on major payment network competitors;
• how MasterCard and Visa will monetize tokenization;
• key components of the EMVCo tokenization specification that will influence the rollout of mobile payments;
• the threat of tokenization to the business models of EFT network providers and issuing processors; and
• the need for standards if payments innovation is to leverage consumer contextual information.

One of eight exhibits in the 40-page report: