By John Stewart
Just within the past year or so, tokenization has assumed a central role in digital payments, and in that business three major card networks are the dominant—indeed, only—players performing a crucial function known as the token service provider. But this new form of payment processing is moving fast, and now experts are predicting that the networks’ hammerlock on token services will soon yield to a wide array of rival providers.
“Our discussions in the market indicate that a number of issuers and processors are not entirely convinced that they want to rely on networks as TSPs [token service providers] in the long term. We believe that over the coming years we will see new TSPs emerge,” says Zilvinas Bareisis, a London-based senior analyst at financial-services research firm Celent, in a report issued Monday.
In fact, there is a mathematical potential for there to be about 1,000 token service providers in the market competing with today’s trio of vendors, American Express Co., MasterCard Inc., and Visa Inc., according to Bareisis’s report, though he says this number is unlikely.
While it’s hard to say just how soon this explosion of TSPs could happen, the token market has clearly hit the accelerator just over the past year or so. There’s nothing new about the business of providing a random string of digits to mask a real primary account number for a payment account. Acquirers and technology companies have been doing this on a limited basis for years. But with the March 2014 release of tokenization specifications by EMVCo, the standards body for the EMV chip card system, and Apple Inc.’s launch a year ago of its Apple Pay mobile-payments service, tokenization was quickly transformed into a big-time business.
Sensing an opportunity to capture more transactions, the Big Three networks wasted no time launching TSP platforms. Even pricing became a tactic to win volume. Earlier this year, for example, Visa announced it would waive tokenization fees for issuers that use Visa for processing.
Yet, at least some card issuers are skittish about relying on the Big Three for the long term, Bareisis argues in his report, “Payments Tokenisation Evolution: Glancing Into the Future.” Ironically, one of the reasons for this is cost. For example, issuers with significant on-us volume, where the issuer and acquirer are the same entity, could see processing costs rise since all tokenized transactions have to pass through the network. “Even if the networks don’t charge explicitly for tokenization, they do charge for every transaction they see,” the report notes.
Issuers are also concerned about the potential for loss of control of tokenization as well as increasing reliance on the networks, Bareisis says. They also fear that the networks will slap on token fees once their position in the market is more secure, he says.
These concerns will evoke competitors, Bareisis argues, but probably not as many as the 1,000 or so that potentially could operate as TSPs. “We don’t think the role of TSP is for everyone,” the report says, speaking for Celent. “We think that only the largest issuers, processors, and perhaps selected national or regional networks will have the necessary know-how and appetite to become ‘full in-house Token Service Providers.’”
Indeed, Bareisis foresees the emergence of a sort of token gateway provider, what he calls a token requestor aggregator, that will link token requestors—players like Apple Pay or Android Pay—with TSPs created by issuers and processors.
Still, the Big Three aren’t likely to stand still. “We expect the networks to continue to offer their TSP services as they do today and roll them out internationally,” says the report.
As a result of all this activity, the business of tokenization “will look rather different in a few years,” Bareisis predicts.