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How Does Payment Tokenization Work?

Payment Tokenization Workflow

Payment Tokenization — One technology to make all the stakeholders of digital transactions happy!

Tokenization market worth is estimated to be $4.8 Billion by 2025.”

- Markets and Markets

Simply put, the word “Tokenize” means substituting, and it is an ingenious concept introduced in 2005 by Shift4payments to protect cardholder data. It factored in data security at its core and is now a popular term due to the surge in online transactions.

In fact, a token is a concept that has been long around; for example, the coins that we buy in the gaming arcade or a casino have no value outside the premises. But inside the building, you get to buy your stakes or favorite superhero toy. Likewise, tokens replace or mask the sensitive data in the online transaction by replacing it with random alphanumeric characters.

By enabling payment tokenization, the merchants and networks can move data without the hovering threat of payments fraud or identity theft. Tokenization helps in finding a perfect balance between “data security” and “user experience.”

What is ‘Tokenization’ in payments?

In the world of payments, the card account number is masked by a single-use randomized alphanumeric character of the same length. This camouflage is called tokenization in payments. Meaning, each account number is now a ‘Token’ representing the original confidential information. In contrast, the actual data is stored safely in a digital token vault.

It is also referred to as ‘Credit Card tokenization’ interchangeably. It helps in removing the credit card information from the internal network or database. The concept is more popular with credit cards as it involves a higher magnitude of the fraud.

Why do we need Payment tokenization?

Pandemic fostered digital transactions at a faster pace than ever before indeed. As there is an increase in digital commerce, businesses came up with enhanced solutions that facilitated online transactions to confront consumer preferences.

Improved digital transactions put security under question. While the consumers are worried about their sensitive data being visible to many online platforms, the merchants fret about losing loyal customers.

‘Tokens — the trustworthy representatives,’ alleviates these roadblocks effectively as the original data( ex: credit card number) never reaches the merchant’s server. The merchants enjoy retaining the customers without compromising the reputation while staying PCI-DSS(Payment Card Industry Data Security Standard) compliant.

Credit card Tokenization
Credit Card Tokenization

How does Payment Tokenization/Credit Card tokenization work in action?

Tokenization is not a costlier technology as it sounds. Any organization can adopt it irrespective of the structure and size. It is ideal for organizations that cannot afford to spend more on sophisticated encryption algorithms or infrastructure to secure the data.

Let’s see an example,

  • Sara orders a pair of sports shoes on Amazon. After choosing all her preferences, she reaches the payment section.
  • She enters the sensitive data on the portal (credit card number, cardholder name, etc.)
  • This goes straight to the tokenization server without storing any data in the amazon application’s server
  • There are many tokenization providers in the market like Fiserv, Mastercard, American Express, TokenEx, 3D Delta Systems, Meawallet, etc.
  • Then it reaches the token vault, where the original data is secure. It, in turn, returns a token of randomized alphanumeric representation of the same length.
  • This has no relation to the original data, like in the typical ‘data encryption process. The actual data is contained within the ciphered text. Tokens are, in general, generated by mathematical algorithms.
  • This token is now passed to the merchant’s acquirer bank, and this bank passes the token to the credit card network.
  • Then the card network processes the token and maps it to the customer’s account number, authorizes and passes it to the issuing bank.
  • The issuer bank now authorizes or denies the transaction based on the fund balance.
  • After the successful transaction, a unique token returns to the merchant.
  • Amazon now has no record of Sara’s sensitive original information but her tokens. In this way, Amazon can enable Sara to make one-click payments the next time she shops.

It is evident that tokenization checks all the mandates of refined digital transactions. Sara is now happy with her brand new sports shoes while securing her data in the vault. Getting the data from the vault is not an easy piece of cake. It requires multiple authentication levels, service charges, etc., to verify if a trusted party raised it.

Then it also brings forth the question is Tokenization and Encryption one and the same?

The answer is definitely no.

The tokenized data cannot be reversed to reveal the original card number. In contrast, encryption takes a card number, transforms it into ciphertext by running it through an algorithm. To unlock the ciphertext, it has to be decrypted using an encryption key.

On the other hand, tokenization uses no algorithm or requires a key to unlock the original data.

Does Credit Card Tokenization impact a change in the payment process?

No.

The end-user will not find any difference in their transactions even after the implementation of tokenization. The entire process happens at the backend without intervening in the user experience. Tokens are generated online and eliminate the need to wait.

Why is Payment Tokenization a ‘Fintech Asset’?

The boom of technology in the Financial services domain has been rapid in the past decade. Card-less transactions, UPI payments, Payment Gateways, etc., increases online consumers each day. As we enjoy the perks of digital banking with one-click transactions, we cannot deny the fact that our data is vulnerable to “Social Engineering.”

Social Engineering is everywhere. We may fall into the trap of hackers and leave a lot of confidential information during digital transactions. There are multiple intrusion points for the hackers to lure in when the transactions float over the network and wipe away our savings.

Given this scenario, tokenization is indeed an asset to Fintech. Because even if a hacker tries to sneak into the network, all he can find is randomized alphanumeric and characters with no relation to the original data (PAN number, credit card number, etc.)

It is expensive for merchants to become PCI DSS compliant and qualify themselves as a trustworthy eCommerce merchant for the consumers. They have to undergo a lengthy auditing process, and it is an ongoing process. With the help of ‘Tokenization,’ merchants can save a hefty amount of money as the scope of PCI DSS compliance is reduced in storing the user’s confidential information.

Apart from banking, ‘credit card tokenization’ builds confidence among the investors as it secures the money with ease. We could see the boom of Blockchain technology-based fintech solutions gaining momentum across the nations. “Tokenization” is also seen as the key to drive blockchain implementation in the future by accompanying cryptocurrency transactions.

Finally, it also offers substantial benefits to all stakeholders involved in the transaction:

  • Issuers witness a notable decrease in payment fraud in both channels of online and mobile transactions.
  • Acquirers, merchants, and processors experience a lower risk of accessible, sensitive cardholder data if compromised by cyber attacks.
  • Merchants will wield a powerful mechanism that lets them innovate better retail experiences minus the responsibility of storing and handling sensitive data.
  • Customers need not enter their details every time they make an online purchase from smartphones, tablets, or PCs.

Payments tokenization makes all the parties — consumers; merchants; payment gateway providers, banking institutions, regulatory bodies feel safe, secure, and happy with their buying and selling processes.

Tokenizing confidential data makes way for turbulence-free secure digital transactions!

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We help every business become a fintech. Providing a highly scalable, secure, nimble tech stack at the intersection of Mobility, Commerce, and Payments, we are the trusted partner of 500+ banks, fintechs, and businesses around the world.

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M2P's fintech blog

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Transforming the financial eco-system with turbulence-free flows

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