Insurers want to offer their customers payment choice and convenience, and they also want to ensure they protect their policyholders from any security threat. As more policyholders pay for their insurance premiums online, the role of tokenization becomes more critical. In these ‘card not present’ scenarios, both the possibility of fraud, as well as the rate of declined transactions, are greatly increased. On top of that, insurers’ costs are also higher. Why is this and how can network tokenization help?
When Card Transactions are Declined
If a card transaction seems even a little suspicious, the card issuer can decline to authorize it, meaning that many genuine transactions can end up being declined. Called ‘false declines’, they occur quite often. Per recent PYMNTS research, 11% of consumers experienced payment declines just in January 2022. In the same period, the total value of declined U.S. consumer payments came to $11.1B.1
Card-Not-Present Transactions & Fraud Increases
It’s much easier to use stolen card information for card-not-present transactions. Frequently, consumers don’t even know fraud has taken place. In fact, 24% of U.S. payments fraud victims took at least a week to realize that they were even victims.2 Per Visa, the payment authorization gap between card present and card-not-present as of the middle of 2020 stood at more than 400 basis points (or 4%), with the value of card-not-present fraud volume expected to increase by 14% before 2023.3
Credit Cards and Interchange Fees
There are costs associated with accepting credit cards, and the majority of that cost comes from interchange fees. The purpose of these fees is to offset processing costs and any potential risk involved in payment approval. The interchange rates are calculated using units of measurement called ‘basis points’. For credit card processing, one basis point (BPS) is typically 1/100 of one percent.
Although the card associations determine the interchange fees, the money actually goes to the issuing bank (e.g., cardholder’s bank). Whenever a credit card or debit card transaction is processed, funds are transferred from the issuing bank to the acquiring bank. Credit card associations (e.g., Visa, MC, Amex, Discover) facilitate the process. Interchange fees cover the cost to convert a charge on an account holder’s card to a cash deposit at the merchant’s bank account, including billing services, credit risk, fraud risk, and float.
The Wall Street Journal recently reported that Visa and MasterCard will be increasing their interchange fees in April 2022 after a 2-year hiatus due to the pandemic.4
Leveraging the Value of Network Tokenization
Interchange rates are determined for each transaction based on the merchant’s industry, the card type (e.g., credit, debit, rewards, etc.), the card process method (e.g., card-not-present vs. card present), the transaction size, and other factors. And although interchange fees are non-negotiable, there are ways insurers can optimize payments to offset interchange rate increases and garner additional value, one of which is network tokenization.
Here are 3 ways that network tokenization benefits insurers:
Higher Payment Authorization Rates
With network tokenization, card brands go directly to the issuing bank to verify the legitimacy of the card. Since they are going directly to the source, these transactions are deemed to be more secure and trusted. Both the issuing and acquiring banks have more confidence in the authenticity of the transactions. Per Visa, transactions using network tokens can reduce fraud by nearly 26% and have an average authorization rate increase of 2.2%.5 And more successful insurance payment transactions translate into increased insurer revenue, happier policyholders, less customer support calls, and an increased likelihood for repeat transactions.
Lower Costs from Lower Interchange Rates
Visa has announced there will be a rate increase of 9-10 basis points on qualifying Visa transactions when they are processed without the use of a network token. The rate increase will affect many interchange categories across several verticals, including insurance. Utilizing network tokenization will void these rate increases on qualifying categories, thereby equating to lower costs for insurers.
Increased Policyholder Retention and Persistency
More than two-thirds (69%) of US consumers choose to store a card-on-file or have recurring billing set up with merchants to avoid manual key entry.6But problems can occur in this scenario when cards need to be reissued for any reason. Per Visa, 35% of their survey respondents admitted they had forgotten to update their card information with merchants at least once. Their research also found that merchants generally reach out to customers two to three times to try to update card details before cancelling services.7 For insurers, this amounts to greater resource allocation and higher operational expense. For policyholders, these issues can result in insurance policy lapses or cancellations. But with network tokenization, tokens can be updated in real-time to prevent recurring payment transactions from failing.
The Benefits of Network Tokenization
Insurers can leverage network tokenization to not only improve payment security, but to also drive additional value, both for their companies and for their policyholders The positive financial impact from network tokenization is substantial, especially for enterprise organizations with high volumes of transactions. Even a marginal decrease in interchange fees and payment declines can have a huge impact when applied across thousands—or even millions—of monthly transactions. Since network tokenization can help to increase revenue, decrease costs, and improve policyholder retention and persistence, it packs quite a punch. And the improvement in customer experience is priceless.
Insurance Payment Optimization with One Inc
In a recent interview with Corporate Risk and Insurance, One Inc CEO, Ian Drysdale, discussed the impact of interchange fee increases, the benefits of network tokenization, and the substantial savings insurance carriers can achieve by having the operational fluency of issuer tokenized payments.8 By building our network to access this critical capability, we enable carriers to increase revenue and deliver a frictionless payment experience.
We’re here to help. To discuss how One Inc can partner with you to optimize your payments, please call (822) 209-1688 or email inquiries@OneInc.com.