Visa and Mastercard Team Up for Tokenization

Navigator Edition: April 2017
By: Melissa Fox, Emma Causey, and Caleb Marley

Security is a primary concern for many consumers when it comes to mobile payments: according to First Annapolis’s latest research, one out of three smartphone users has not made a payment using their device in the past 12 months, and security concerns—cited by 48% of non-users—are the most common inhibitor.1 Visa and Mastercard took steps to address this barrier with their December 2016 announcement that they are entering into a reciprocal arrangement that will allow one network to request tokenized credentials from the other when consumers conduct digital transactions via Visa Checkout or Masterpass, to the benefit of digital commerce and the payments industry more broadly.

Token Reciprocity

Tokenization is the replacement of Personal Account Numbers (PANs) with a randomly generated string of characters, and it plays an important role in increasing the security of mobile and ecommerce transactions. Consumers’ actual PANs are secured by Token Service Providers (TSPs) inside a “token vault” and decrypted as part of the transaction flow: in the event of a compromise, no usable cardholder data is exposed.  The roll out of Apple Pay in October 2014 established Visa and Mastercard as token vaults and the de facto standard for tokenization, and the network brands continue to be the primary TSPs to the industry.

Mastercard currently allows Visa cards to be loaded into Masterpass, but they are not tokenized; Visa treats Mastercard cards similarly within Visa Checkout. This arrangement will change when the reciprocal agreement goes into effect in the second half of 2017, formally linking the Mastercard Digital Enablement Service (MDES) platform and the Visa Token Service (VTS) platform and enabling comprehensive tokenization across brands.

Implications & Outlook

The agreement between the two networks will likely expand the addressable universe of their digital wallet platforms and reduce barriers to adoption, creating benefits for issuers, merchants, and ultimately end users. By facilitating issuer participation and allowing for a more consistent user experience, the agreement is likely to accelerate the adoption of tokenization and provide a more secure environment for online commerce.  Improved security of digital transactions, particularly at a time when the industry is anticipating a shift in fraud from physical to digital channels with the roll out of EMV, should benefit the industry as a whole.

Preventing fraud requires a collective effort, and collaborative partnerships and uniform standards contribute to that effort. This reciprocal agreement positions Visa and Mastercard as digital leaders, not just for today’s mobile payments solutions, but for all connected endpoints where consumers and merchants do business. As Jason Anderson, Executive Vice President of Digital Payment Products at Mastercard, noted in his December 19 blog post, “…digital payment adoption could represent 20-30% of consumer payments by 2020. Core to this adoption [of digital payments] is the reality that it’s not just laptops, tablets and phones being used to make payments; rather, you’re seeing things like wearables and IOT devices – including some household appliances like refrigerators – becoming payment devices as well.”

Tokenization will be a critical component of digital commerce, and it remains to be seen whether Visa and Mastercard will face competition from other token service providers. Pricing and economics for token services are still unclear, making the business case for new TSPs challenging. By establishing reciprocity between their platforms, Visa and Mastercard dilute a potential advantage of non-Visa/Mastercard providers (i.e., brand agnosticism) and may reduce the incentive that issuers and merchants could have to enable alternative solutions. Accelerating the adoption of tokenization will create significant benefits for the payments industry, but it could also make the business case for alternative providers even more challenging.

1  First Annapolis Consulting, Study of Mobile Banking & Payments (March 2017).

For more information please contact Melissa Fox, Senior Manager,; Emma Causey, Senior Consultant,; or Caleb Marley, Analyst, All three specialize in Payments Strategy & Innovation.

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