Network Tokenization vs. Payment Tokenization: What’s the Best Fit for Your Business?

Last year, it cost businesses—on average—over $4 million per data breach. For some companies (think small), a data breach is a minor annoyance with limited impact. However, for some companies, data breaches are full-on disasters—including Slim CD, a payment processor that was breached by an “unauthorized actor” in June 2024. As a result of the breach, up to 1.7 million customers were affected. Unfortunately, they have not publicly disclosed details of the breach, such as who accessed the data and what regions were affected.

Utilizing tokenization within your payment systems can help prevent fraud and data breaches  — substituting random strings of numbers to process payments rather than expose privileged customer information. For that reason, there’s both network tokenization and payment tokenization.‍

Though both help to prevent data breaches and are a type of tokenization, they’re not exactly the same. Think apples to pears, not apples to apples. The tokenization strategy you choose for your secure payment processing can significantly impact the security, strength, and speed of your payments. Let’s explore their differences to help you find the best solution for your company.

What is Network Tokenization?

Network tokenization refers to the process used by major card networks like Visa or Mastercard to replace card details with a token networkwide — essentially doing the hard work for you. It offers next-level security by preventing sensitive data from entering your payment environment. That way, even if your systems are breached, there is little to no risk to customers, and the credit card company shoulders most of the liability.

Key Benefits of Network Tokenization

Automatic Card Updates

Billing information changes over time; cards expire, or customers move and change their billing address. With network tokenization, the tokens automatically update when cards issued by the same token provider are updated, reducing failed transactions and keeping the customer experience smooth.

Improving Payment Acceptance Rates

Thanks to real-time updates and network-level security, network tokenization reduces false declines, improving acceptance rates and maximizing revenue. It addresses the two most common types of false declines stemming from identity or structural issues. 

Identity-related false declines occur when outdated information causes a transaction to fail. Real-time card updates ensure information is current before it reaches the gateway, reducing the risk of declines. Structural issues are to blame for false declines caused by overly sensitive fraud detection and prevention systems. Due to their clout, size, and history, the card networks have a high level of trust they can leverage to bypass certain risk checks, preventing overly sensitive fraud detection measures from flagging authentic transactions as security risks.

Enhanced Security

Network tokens are unique, specific to each domain, and limited to a singular device, merchant, channel, or transaction type. Even if these tokens end up in the wrong hands, they’ll be useless to thieves as they cannot replicate the exact use case or perform merchant-specific authentication.

Less Risk and Liability

With network tokenization, sensitive card data never enters your digital environment and is removed from PCI scope. Card companies bear the risks and liabilities that would otherwise fall to merchants. If there is a breach, the credit card company must take corrective actions and prove it complied with safety regulations at the time of the breach. 

Lower Transaction Costs

Network tokenization can unlock lower processing costs by eliminating vendor lock-in, driving competitive prices. This is especially true of companies that leverage custom interchange pricing plans. Enhancing transaction security may even allow your business to qualify for these plans and reduced fees.

Drawbacks of Network Tokenization

It’s not all benefits, of course. Network tokenization does require some coordination on a large scale:

Higher Implementation Complexity 

You’ve got to have good teams in place—teams with experience handling payments. A more general development team may not cut it. Integrating network tokenization may require specialized knowledge, technical effort, and cross-company coordination with the credit card company, which can be difficult to achieve at scale.

Limited Merchant Control

With this tokenization method, merchants rely on card networks for token management. This means they can less easily control the token’s behavior, which can sometimes leave merchants feeling shut out.

Restrictions to Major Card Networks 

Network tokenization is only offered by major players like Visa and Mastercard. If you accept alternative or digital payment methods, you may need another tokenization or security solution. That means dealing with the hassle of implementing multiple security systems. Suddenly, going outside network tokenization can feel like the Wild West.

What is Payment Tokenization?

Payment tokenization is a more fluid term that can mean something slightly different to each person using it. In this instance, we’re using it to refer to the process of using a proprietary token vault owned by a company to create tokens and safeguard data without the use of a third-party platform.

Payment tokenization puts power back in the merchant’s hands. Merchants who don’t use network tokenization often rely on third-party processors or gateways for tokenization. However, with the right software solution, they can store payment data and issue tokens directly while sending payment messages to their processors. This approach carries some risk, but companies sometimes prefer it because it gives them greater control while avoiding vendor lock-in.

Key Benefits of Payment Tokenization

Merchant Control

Merchants can customize payment processing to their hearts' content, thanks to their increased control when not relying on network tokens. More control over payment processing means merchants can optimize transaction routing to choose the most cost-effective processors for each transaction.

Flexibility Across Payment Methods 

Since you’re not relying on a single network, payment tokenization can apply to a broader range of payment methods without needing multiple tokenization solutions. For example, ACH transactions, credit cards, and digital payment methods can all be tokenized in a singular system.

Simplified Implementation

Payment tokenization can be easier for merchants without a deep knowledge of payments or experience working with major car companies — especially when they use third-party providers for payment gateways.

Drawbacks of Payment Tokenization

Manual Card Management

Manual card management means the tokens might become invalid when card details change. This can increase failed transactions and decline rates. Also, updating cards manually can cost more time and money.

Security Limitations

Don’t get us wrong — tokenization is a secure method of storing and transmitting data. But payment tokenization doesn’t offer security restrictions for device types or channel types or offer the real-time updates that network tokens do.

More Fraud Risk 

Since a payment token doesn’t have to offer fraud prevention on a network level, the merchant company is responsible for meeting PCI DSS compliance requirements. Failure to do so could mean increased fraud risk with each transaction.

Side by Side: Network Tokenization vs Payment Tokenization

Security and Fraud Prevention

• Network Tokenization: Network tokenization makes security and fraud prevention more robust, thanks to device- and merchant-specific tokens that automatically limit misuse across multiple channels.
• Payment Tokenization: While it offers secure transactions, it does not provide device, channel, or transaction type-specific protections.

Transaction Success Rates

• Network Tokenization: Tokens supplied by networks can improve authorization success with automatic updates via the card network. This significantly reduces the chances of failed transactions. After all, outdated card details are no longer an issue. Additionally, network token transactions can bypass some security checkpoints due to enhanced trust.
• Payment Tokenization: Payment tokens may be more prone to failed transactions due to manual updates and potential human error.

Merchant Control

• Network Tokenization: Merchants have practically zero control; card networks manage the tokens and their overall lifecycle.
• Payment Tokenization: Merchants get the flexibility and control they want, letting them decide how tokens behave and implement additional security measures. 

Implementation Complexity

• Network Tokenization: Network tokenization can sometimes require more technical specialty to implement, which can require a larger upfront investment of time and effort.
• Payment Tokenization: is generally easier to implement, especially if you work with a third-party PSP such as your existing payment gateways and processors.

Payment Method Coverage

• Network Tokenization: These are limited to the major cards issuers.
• Payment Tokenization: Payment tokens offer broader applicability, ensuring that all information is treated equally and receives the same level of protection.

Which Should You Choose?

Given all the comparisons above, which makes sense for you? Here are our suggestions:

Network tokenization is ideal if you…

• are an established enterprise with a high volume of transactions, especially if much of that volume comes from subscription payments.
• are a company looking to maximize transaction acceptance and keep failed payments as low as possible to optimize revenue.
• have customers who overwhelmingly use credit or debit cards issued by major networks—including Visa and Mastercard.

Payment tokenization is ideal if you…

• need more control over and transparency in the tokenization process.
• have customers that use various payment methods with no clear preference for one over the other, especially if many of them are not made using a major network card.
• are looking for cost-effective solutions that don’t require tons of technical know-how to integrate and install.

Get Started With Tokenization Today

Network tokenization is great for fraud protection and optimizing acceptance rates, but it comes at the cost of increased complexity and less merchant control. On the payment tokenization side, you’ll regain control but increase your liability and PCI DSS scope on top of the cost and risks of manual card updates.

To better understand which is best for you, why not contact a payment expert today? Get started, book a time to discuss your payments challenges and goals with one of our team members.