Payment Security: What Is Tokenization in Payments

Payment security is on the agenda of every online business as it needs to protect customers’ data from cyberattacks. And in an ideal world payment security would be combined with convenience for end users. How can payment tokenization help?

The number of ways of making online purchases is growing along with technology development, so the payment industry needs solutions that reduce the risk of fraud and data breaches.

Tokenization is a process of replacing sensitive information with tokens—random strings of characters. Tokens are used to represent cardholder’s information, such as a 16-digit card number or bank account details during the payment process, so the data are passed through a payment gateway without the card details being exposed.

The tokenization method is also widely used because of the Payment Card Industry Data Security Standards (PCI DSS) that have driven the adoption of payment tokenization. As tokenization provides merchants with a one-to-one replacement for a card’s Primary Account Number (PAN) information, it can be safely stored and processed outside of a PCI DSS compliant environment. This means that sensitive data never touch the merchant’s servers.

The encryption method has been used in various ways for years and is one of the most effective methods of transferring sensitive information, but for the payment industry tokenization turned out to be more secure and cost-effective. Payment tokenization adds an extra level of security to credit and debit card payments and is an effective method to fight fraud.

Tokens are automatically generated in real time during payment, so it doesn’t slow down the process.

Customers’ card data are securely stored, so a token can be used by a merchant to charge subsequent purchases. What’s important here is that a merchant doesn’t see or store the credit card number, which highly protects both customers and the merchant’s system from fraudulent activity.

Here’s the process in short:

So, each time a customer uses their device to make a payment the platform will be able to authorize the subsequent transaction without displaying the customer’s sensitive data.

Face the fact—every online transaction comes with the risk of fraud, so it’s crucial to reduce it to the minimum. And here comes tokenization, as it solves the problem of storing real credit or debit card data and helps to secure the payment process on your website or mobile application.

The customer’s data are safely stored, so they can save their payment data during an initial purchase and use one click for future transactions on a certain website. Merchants can leverage the data to create a buying history on the customer’s account and start a loyalty program.

In case of data breach there’s very little possibility that the token can be actively used by a fraudster, as it’s a string of meaningless characters that say nothing to the fraudster.

There are several ways merchants can benefit from payment tokenization. The most common ones are:

Tokenization also helps to reduce the scope of PCI compliance, as fewer system components have access to cardholders’ sensitive information. However,  when a merchant works with a reliable payment platform that is PCI compliant, they don’t have to worry about storing card data on their servers.

Payment tokenization is especially helpful for merchants that accept recurring payments, offer one-click purchases or quick mobile payments. The method of substituting real card data during a transaction is one of the most effective ways of customer data protection, so it’s no surprise that more and more platforms adopt this approach.