Why Visa, Mastercard tokenization plans worry merchants and processors
Since the late 1950s, processors and merchants have cast a wary eye toward the major card brands' fees and rules. As such, they believe they can spot warning signals when the card networks establish new rules or introduce new services.
Today, some merchants, issuers and processors find themselves feeling uneasy about the networks' intentions for tokenization of mobile payments,
They are concerned that the card brands will tout their "ownership" of payment card prefixes — the first set of numbers on a card that the International Standards Organization established to identify card networks for processors more than 50 years ago — as a basis for requesting that mobile transactions on their cards be routed to their networks and screened through tokenization services they provide.
Technically, only the first number in that prefix, called the Major Industry Identifier, establishes which card network is associated with the issuer number, or BIN.
But number identifiers aside, detractors say an "ownership" move would essentially be a way to bypass the Durbin amendment's Reg II debit routing mandate, in which merchants are able to choose to route to a network based on pricing or other benefits, rather than being told to route to a certain major network.
It also would discourage innovation and competition from processors or issuers that have proprietary tokenization services in place or in development.
"Visa and Mastercard are saying we have to simplify this tokenization process and make it easier for everyone," said John McAllister, a consultant for smaller banks/issuers and merchants with Dorado Industries. "The card networks are saying if we have 12 or more companies out there tokenizing every transaction, it is a problem for number management and we are going to start getting de-tokenization wrong and have false declines and the world is going to be chaotic. They want to screen the tokenization of their card transactions."
On the other side of the argument, issuers and acquirers fear that demanding tokenization routing is "a territorial grab to subvert intentions, at least on the debit side, of the Durbin rules," McAllister said.
"I can see both sides of the issue on this, but I do share the concern of others about the routing," he added. "Also, right now, tokenization is virtually free, but what if we start adding basis points to these transactions, yet they only flow in one direction?"
Under that scenario, even if everyone benefits from the added security of tokenization, only one party ends up paying for it. "And that's probably not right," McAllister said.
Mastercard says these concerns do not reflect the intentions behind its proprietary services.
"We'd simply note that routing choice remains the same today, regardless of how the account is presented, either plastic card or digital wallet," said Mastercard spokesman Seth Eisen.
Each issuer and merchant is making decisions on which technologies and security they will provide to their customers, Eisen said. "We will continue to innovate with and for our customers in order to deliver the most convenient and secure payment experience," he added.
That commitment includes "investing in proprietary services like our tokens for mobile wallets and Internet of Things," Eisen said.
Visa did not respond to PaymentsSource inquiries by deadline.
Those leery of what the card brands have in mind regarding tokenization point to the four-year legal tussle Visa and First Data engaged in over First Data Net, a network that was established to connect merchants directly to their card issuers. First Data Net eventually was dismantled as part of an agreement with Visa in 2006.
Visa used the same defense that comes into play for tokenization in seeking to stop the First Data Net setup, saying that too many Visa transactions were moving through First Data and bypassing any security measures the card brand could apply to them.
For the most part, the Merchant Advisory Group, among others, expects a similar attitude towards tokenization.
"I don't have documents in hand to show someone saying no one other than the card brands can do tokenization, but Visa has said at the outset of their tokenization about who can and cannot use it," said Mark Horwedel, CEO of the Merchant Advisory Group. "They are opening it to IT folks to get the standard out there in a global way, but not appearing to give it to the independent networks or processors who have wanted tokenization from the start."
In that regard, the potential for card brands to dictate screening and routing of tokenized transactions is more of "a strategic issue, and not a technical challenge," Horwedel added.
In short, merchants fear a similar conflict to that which dominated the development of a common application identifier for EMV debit routing. Then, as now, merchants feared that the major card brands would use their position to defang federal routing mandates.
The EMV debit routing conflict endured for more than a year before Visa and Mastercard agreed to make technology available to other networks to meet routing mandates. Still, that structure came under fire a year ago, as independent debit networks complained about how point of sale terminals were wording the choices for consumers to make on card routing. The wording favored the familiar consumer-facing card brands while lumping independent networks under the barely descriptive "U.S. Debit" label, according to the complaints.
However, with tokenization, it doesn't make sense for the card brands to take a stance that they somehow "own" their designated card prefixes, and thus can mandate that mobile transactions with their numbers must move through their network, said Doug Kantor, a partner at Steptoe & Johnson LLP who has represented merchants in legal disputes against the major card brands.
"Are we to assume that no other network can emerge to compete with those guys?" Kantor asked. "That's a real strange problem, especially in the payments world we now live in where our hope would be that many new technology innovators would come forward."
The last thing the payments industry needs is for an innovator to develop an excellent technology for digital payments or virtual currency security only to learn they "are out of luck" because they can't expect to have any card transactions, Kantor added.
It's not a far-fetched notion, considering for the past three years both Visa and Mastercard have bolstered their standing in the digital payments landscape by pushing tokenization services, both describing their product as a Digital Enablement Program.
Any move by the networks to demand routing based on tokenization services would prompt merchants to use it as another abuse-of-power example in other cases or in new arguments, according to Kantor.
No matter which way tokenization and routing is implemented in the near future, Kantor said there is a growing sense that the card prefixes themselves may be a dated technology that is no longer needed.
"With technology today, you'd think there would be something out there [to render card prefixes useless]," Kantor added. "You see it with Venmo and other payment services, and they seem to be able to move transactions without a number of value [for specific card networks]."