There is no dearth or shortage of online payment options available to the consumers like payments through cards, tap-to-pay, mobile wallets, contactless payments etc, however, there is something as apparent that makes these various kinds of payments possible, which is payment tokenization. Payment security is considered as one of the biggest concerns for businesses all over the globe which is why this topic is under their main agenda list, as they are required to protect valuable customer data from all kinds of cyber attacks. Hence, the tokenization of transactions is crucial to each and every industry and the businesses involved since it provides a concrete data-centric approach with absolutely minimal risk of security flaws. Let’s get ahead and learn more about tokenized transactions.
Did you know? According to market studies, North America has the highest share of payment tokenization across the globe at 58%, followed by Europe with a 23% market share and Asia- pacific with a 12% market share.
Tokenized Transaction Meaning And Benefits
Tokenization is the card payments industry is considered beneficial and important to protect all kinds of cardholders from experiencing any kind of online fraud and comply with the given industry norms and government regulations.
Tokenization refers to the process of protecting all kinds of sensitive data by replacing it with a kind of algorithmically generated number termed a token. Under the credit card tokenization system, the PAN of the customers is replaced with a series of numbers which are randomly generated numbers, which are termed tokens. Tokenization’s main aim is to prevent cyber attackers from stealing or duplicating any sensitive information like the bank details of the customer. The term “ tokenize” refers to substituting or converting one particular thing into something else.
How Merchants can Benefit from Payment Tokenization?
There are various ways through which merchants can largely benefit from payment tokenization, which are:
Enhancement of security
Even if a fraudster steals any kind of tokenized data, the token will not be able to be linked with the credit card information which is stored as a token. It reduces the risk of exposure to sensitive data.
A merchant will be able to save money through the method of PCI (Payment card industry ) compliance by associating themselves with the right kind of payment platform which will ensure that the data of their customers are managed safely and securely.
Improvement in user experience
Customers can store card information in all kinds of mobile wallets or they can check out during an online payment without giving away essential card information, which helps in providing the merchant with a smooth payment flow and the user with a much improved and smooth user experience by allowing one-click payments for all kinds of future transactions.
How does tokenized payment work?
The good news for merchants is with the help of the right kind of system in place, Tokenization would hardly require any kind of additional resources to provide a secure payment process to thousands or even millions. The tokenization process can be broken down into five steps, which are as follows:
Collection of payment details
In the first step of the tokenization process, The customer initially provides the payment-related details, which can either happen through an online checkout process or with the help of a POS system. The process remains the same when happening on an e-commerce gateway or through a point-of-sale system.
Generation of token
Once the payment data is entered, the system generated an alphanumeric id, which is termed a “ token”. If the data processed consists of 123 456 789 number, then the corresponding alphanumeric code can turn it into something like HF6223785T6, it represents the real data of the number given used to verify the transaction.
Sending token to the payment processor
The token is then encrypted and sent to the merchant’s payment processor. The real information is meanwhile stored in the vault of the payment gateway. Then the payment processor matches the token with the original data provided for payment. During this process, other kinds of essential information get attached to the token like the kind of payment wallet used for the transaction.
Encrypting the token and sending it to the ACH network
Once the encrypted token has been received by the payment provider of the merchant, the information provided is then again encrypted before being sent to the relevant corresponding ACH network for the process of verification of the transaction.
Authorise transaction and notify relevant parties
Once the payment process is authorised by the relevant network and the payment gateway, a confirmation that the transaction is deemed complete is sent to all the relevant parties involved in the transaction, which involves the merchant, the payment processor and the customer involved in purchasing the goods. Once this is done, The customer’s purchase process is deemed to be complete. This five-step process of tokenization helps to increase the convenience factor in payment security.
Comparative study between Tokenized payments vs encryption
Tokenization in payments and encryption both are considered to be used for data security and ultimately PCI compliance, but there are some significant differences between the two data security methods, which are as follows:
- Tokenization is considered to be only readable by the one who originated the token, which means that the data given cannot be read elsewhere. Whereas, encryption implements end-to-end security where the sensitive information of the consumer is encrypted from one end and then decrypted from one end.
- Tokenization in payments removes all kinds of organisations that are involved with the handling of data in the form of tokens from the scope of PCI compliance. In the case of encryption, when the data is deemed to be decrypted from one end, it is considered to be open to the requirements laid out by the PCI DSS (decision support system) since the encryption process involves reversible data which is considered as much more of a data security risk.
- The biggest difference between tokenized payments and encryption is encryption can be reversible. Any kind of information that can be encrypted can be returned to its original form at any point in time as long as the person involved knows the algorithm behind it.
- Since the encrypted data is considered to be breakable, the PCI council views it as something sensitive, which is why meeting all kinds of compliance obligations with encryption is considered to be much more expensive than the tokenized form of payment.
- Encryption is still considered as one of the strongest data protection methods for transactions when the card involved is physically present. On the other hand, tokenized payments provide a much more secure and safe form of payment even when the card is physically not present.
- Encryption involves translating the data in the form of a ciphertext with the involvement of a key and an encryption algorithm, it is a method to secure data so that only the authorized parties can have access to it. Tokenization payments refer to replacing all kinds of vulnerable data like credit card number, and bank details into a temporarily random generated form of alphanumeric code, which is termed as a “ token” to safeguard all forms of data involved.
This was all about what is tokenized transaction meaning and its various benefits, The process of payment tokenization and the comparative study of tokenized payments vs encryption. We hope that with the help of the information shared in this blog, readers will be able to grasp the concept based on the payment tokenization and its various essential components.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium enterprises (MSMEs), business tips, income tax, GST, salary, and accounting.