Payment Security: What Is Tokenization in Payments

Payment Security: What Is Tokenization in Payments

what is payment tokenization

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.

What is tokenization?

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.

How does tokenization work?

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:

1. The customer enters their card details into the payment form.
2. A token is created in the payment gateway’s API and sent to the token server.
3. The authenticated response is returned and a token is sent to a merchant’s system.
4. The merchant can securely process payments with a token that represents the cardholder’s data.

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.

Why is payment tokenization important for merchants?

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.

Benefits of payment tokenization

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

Increased security. Even if a fraudster steals tokenized data, they won’t use it as they will be unable to link the token to credit card information stored as a token. Tokenization highly minimizes the risk of exposing sensitive data.
Cost savings. If a merchant works with the right payment platform, they can save costs related to meeting PCI compliance regulations and their customers’ data can be managed securely.
Enhanced user experience. Customers can store credit card information in their mobile wallets or at checkout during online payments, so they can be recharged without exposing the original card information. As tokens can be used in subscriptions and one-click payments for future transactions, they enable merchants to provide smooth payment flow and a much better user experience.

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.

Wrapping up

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.

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Sandra Wróbel-Konior

Sandra Wróbel-Konior

A well-established Content Marketing Specialist with a tech-savvy personality, experience in writing, and a passion for reading. Staying up to date with the latest technology and social media trends, in love with GIFs and craft chocolate.

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