As digital payments expand exponentially, so do payment fraud instances. According to an estimation online fraud losses will reach $110 billion worldwide by 2024 - an increase of 8 per cent over the previous year's losses.
More and more retailers are employing cutting-edge online payment solutions, such as tokenization, to safeguard their brands and customers from fraudulent activity. Payment tokenization is among the more effective solutions. This post will present an introduction to tokenization, outline its fundamental concepts and benefits, explain its operations and assist users with using it effectively.
What Is Payment Tokenization?
Let's delve deeper into the tokenization definition first. Payment tokenization technology helps protect transaction processing by employing random strings of characters generated using security algorithms and encryption, with no inherent value attached. This token represents payment data that is not directly usable in transaction processing.
Need For Payment Tokenization
Fraudulent activities have increased substantially over recent years, and one primary driver for payment tokenization is the protection of consumers when making online purchases from merchants' websites. When consumers submit payment data during checkout as input for processing as input data entry becomes even more vulnerable against scammer attacks; tokenization should therefore be utilized as an effective strategy against these threats.
Credit card data stored online or within an application is protected with tokenization technology to safeguard it against misuse for illegal transactions or access to an individual's account by criminals or fraudsters.
How Does Tokenization Work?
Sensitive data may be replaced with non-sensitive alternatives using tokenization; we refer to this replacement data as tokens. Any of the following procedures could be employed here:
- Reversible cryptographic functions.
- Un function, such as hashing that cannot be undone.
- An integer value or index function.
As such, although sensitive data that the token represents is stored securely on a central server known as a token vault, the token itself will become the exposed information, and only its original location within this vault can be found again.
Tokenization in payment processing involves substituting an inert token in place of credit, debit, and account data. Since tokens don't correspond with anyone or anything directly, tokenization allows payment processing without disrupting an individual's or an account's routines.
An alphanumeric ID created randomly takes the place of a customer's 16-digit main account number (PAN). Tokenization reduces security risks while making credit card transactions safer since there's no link between transactions and secret content. Storing credit card and bank account details securely within virtual vaults enables businesses to send data securely across computer networks.
However, as previously discussed, tokenization can take various forms without using vaults or secure storage facilities. Vaultless tokens store sensitive information using algorithms rather than secure vaults where tokens can be reversed or changed back later without losing original sensitive data stored elsewhere if this form is employed reversibly; this approach tends to be avoided more often.
Due To Lower Security Needs, Existing Types Of Payment Tokens
Payment tokens in the payment processing system fall into many categories, each with a distinct function.
Acquirer Tokens
As soon as an acquiring bank or payment processor receives a merchant request for payment processing, they produce and use this token. Often, it serves as the customer's sensitive card information representative during transactions, allowing an acquirer to process them safely.
Issuer Tokens
An issuing bank creates and manages issuer tokens on behalf of its client, often linked with transactions conducted using digital wallets such as Apple Pay or Google Pay and comparable payment systems.
Network Or Scheme Tokens
Visa and Mastercard produce these tokens; each card network offers unique token services that connect transactions to its network.
Payment Tokens
Payment tokens, a relatively recent development from issuer tokens, are designed for specific uses and issued through token program architectures. Each platform or payment provider may employ their processes when creating payment token examples.
Merchant Tokens
Companies providing retailers with payment systems generate this type of token to enhance the security, smoothness, and efficiency of consumer checkout processes and streamline recurring subscriptions and payments by not necessitating clients to submit card data continuously during each transaction.
Benefits Of Payment Tokenization
Once we understand payment tokenization and its operation, let's examine some key benefits it brings buyers and sellers alike.
Enhanced Data Security
Data security can be substantially enhanced using tokenization technology by exchanging highly secure tokens for customer card details, which allows payment information to be transmitted and stored safely despite an unfortunate data breach. With tokenized PAN numbers no one else could use for illicit activities, even if these tokens ended up falling into their hands, this cutting-edge security solution ultimately safeguards companies against financial loss and legal liabilities while helping ensure customer financial information stays safe while decreasing risks caused by data breaches.
Simplified PCI DSS Compliance
Adherence to the Payment Card Industry Data Security Standards (PCI DSS) is essential for companies handling cardholder data. However, attaining compliance may be complex and resource-intensive, and not all internet-based companies meet the requirements. Merchants may narrow the focus of their PCI DSS compliance efforts by utilizing payment tokenization. It streamlines compliance requirements, resulting in cost savings and a more efficient procedure for achieving compliance because tokens are used in place of sensitive card data, and the retailer does not keep or transfer the sensitive data.
Streamlined Payment Processing
Tokens don't require extensive encryption as they're random character strings that are not directly related to sensitive card data. As a result, transactions may be completed more rapidly, leading to faster checkout procedures and greater consumer satisfaction.
Fortified Customer Trust And Confidence
Merchants understandably are concerned with protecting consumer payment data since they handle sensitive consumer information. By showing commitment to consumer safety and data security through tokenization strategies such as OpenTokenizerTM, merchants can assure their customers that they can make online transactions safely, thus increasing customer trust. As a result, their client loyalty may increase; customers who appreciate this dedication often prefer using companies that prioritize data protection over those that do not.
Read More: Exploring The Expansive World Of Digital Tokens: Beyond Bitcoin
Tokenization Vs Encryption
Two technologies are commonly employed to protect customers' sensitive payment information: tokenization and encryption. However, their purposes and methods of operation vary significantly. These technologies also serve different uses; tokenization provides secure data storage.
Encryption is a method that utilizes a secret encryption key and algorithm to convert sensitive data into ciphertext, with critical solid management procedures required to protect keys from compromise and decode them for fraud purposes. Conversely, tokenization involves replacing payment data with something completely separate that does not correspond with or reveal anything about user account information rendering such tokens irreversible and more resilient against fraudster attacks than encryption.
Encryption primarily facilitates secure information transfers between parties involved in payment processing, with tokenization often employed within recurring payment scenarios, online retail platforms and subscription-based enterprises. A multi-layered security strategy would incorporate tokenization and encryption as components.
Where Tokenization Of Payments Is Used?
Several online business sectors that place a high priority on the security of sensitive payment data employ tokenized payments. These are a few such usage cases:
Subscription-Based Services
Tokenization facilitates subscription-based businesses by streamlining recurring payment administration for products and services they sell. It eliminates needless repeat entry of payment information by customers and improves overall customer experiences. Thus, tokenization technology improves and simplifies customer interaction.
E-commerce
Tokenization may lower cart abandonment rates for online and e-commerce purchases. When consumers repeatedly have to input payment data for every new transaction, cart abandonment often follows suit; tokenization makes purchases easy for customers by saving their information in the payment system.
Recurring Billing Payment Services
Businesses that send consumers periodic invoices, like subscription box providers or utility providers, often utilize tokenization.
Travel And Hospitality
Hotels and airlines use payment tokenization in the travel industry to protect sensitive consumer data when booking and checking out.
Conclusion
Payment tokenization security measures are suitable for businesses of all sizes and sectors that deal with online transactions, particularly payment processors that accept online payments for products or services. When considering whether tokenization would work well in this case, you should consider all your company's specific payment processing needs.
