Payment Tokenization: How It Protects Your Business and Enhances Customer Experience
Article Update 01/04/2024
Tokenization is a powerful tool for merchants looking to securely process payments efficiently. Among other security features of a payment gateway, it offers many advantages such as reduced fraud, quicker payments, and reduced PCI compliance costs. As tokenization continues to become more popular and readily available, it’s expected that more merchants will begin using tokenized payment methods as an alternative to traditional payment processing.
In this article, we will explore payment tokenization: what it is and why businesses are increasingly implementing this method to safeguard digital payment data.
- What is Payment Tokenization?
- How Does Payment tokenization Work?
- Use Cases (PLUS FREE PDF DOWNLOAD)
- Benefits of Payment tokenization for Merchants
- How Can a Merchant Implement Tokenization?
What is Payment Tokenization?
Payments Tokenization is the process of replacing a customer's credit card number with a one-time unique identifier, or "token." A token is usually an item that can be used to represent something else of value, like those plastic chips you get at casinos that stand in for real money. Tokens don’t have extrinsic or intrinsic value.
Tokenization effectively reduces the size and scope of data that must be protected, making it more difficult for unauthorized individuals to gain access to sensitive information. In payments, tokenization replaces primary account number (PAN) data with a token that can be used to process payments without exposing the PAN.
Rather than information being openly passed between networks, it is tokenized by substituting credit card numbers and cardholder information with randomly generated strings of digits. This means that during the payment process, cardholder data and card details are never exposed, guarding against data breaches.
What is the difference between tokenization and encryption?
Tokenization and encryption are two different security measures. With tokenization, the data is replaced with a token that cannot be reversed back to its original form. Encryption, on the other hand, scrambles credit card numbers so they are unreadable by unauthorised parties. However, encrypted data can still be decrypted with the right key.
Is tokenization safer than encryption?
Tokenization is considered to be more secure than encryption because tokenized data cannot be reversed back to its original form. This makes it even harder for criminals to access sensitive information and steal credit card numbers, passwords, and other pieces of personal data.
How Does Payment Tokenization Work?
Payment or credit card tokenization works by taking a customer's Primary Account Number (PAN) and replacing it with a one-time unique identifier. This step protects the data so that only authorised individuals can access credit card information. It also helps to ensure that payment requests are processed quickly and efficiently by the card issuer.
For example, here is what a real-time tokenized credit card transaction might look like:
- Step 1: The customer enters their debit or credit card information on the website.
- Step 2: This data is tokenized, replacing the actual payment information with a one-time token provided by a payment service provider.
- Step 3: The token is sent to the acquiring bank (the merchant’s bank) for authorization.
- Step 4: The token is verified by the customer’s bank, which holds their payment information in a secure token vault.
- Step 5: Once the transaction is successful, the payment token will be returned to the merchant and used for future transactions with that customer.
- Step 6: The token can also be used for recurring payments; each token will be associated with the customer’s account and payment information, allowing for quick and secure automatic payments.
- Step 7: Finally, once the token is no longer needed, it will be securely destroyed.
Use Cases of Payment Tokenization
Tokenization helps multiple types of businesses to streamline payment processes in a way that’s both secure and easy for customers.
Curious if it’s something you can leverage in your own business? There are plenty of use cases for tokenization regardless of your business model, and you can find the most common ones below:
Free to download as PDF from here.
Benefits Of Payment Tokenization For Merchants
The use of tokenization provides merchants with improved security and streamlined payment processing. In addition, tokenized payments offer the following benefits:
- Increased security: Since tokenized data cannot be reversed back to its original form, tokenization reduces the risk of data breaches and unauthorised access.
- Reduced fraud: Tokenized payments are virtually impossible to counterfeit or replicate, which significantly reduces fraud risk for merchants, including reduction of chargebacks.
- Enhanced customer experience: By tokenizing payment information, customers no longer have to re-enter their credit card details each time they make a purchase, making the checkout process more convenient.
- Simplified PCI compliance: Tokenization eliminates the need to store customer payment information, which reduces a merchant’s scope of PCI compliance and makes it easier to adhere to security standards.
How Can a Merchant Implement Tokenization?
Implementing tokenization is not a complex process, but it does require the merchant to partner with a payment service provider that supports that functionality. Once the merchant has signed up for tokenization services, they will be able to tokenize their customer’s credit card information and begin processing tokenized transactions.
To tokenize customer data, payment service providers use tokenization engines that encrypt and store customer data in a secure token vault. This token vault securely stores all tokenized payments, and only authorised users can access the tokenized information.
Tokenization is being used by many merchants today, from small businesses to large enterprises. Online e-commerce stores, mobile commerce apps, and point-of-sale systems all use tokenization for secure payment processing. Apple Pay and Google Pay are popular examples of tokenized payment methods, allowing customers to make tokenized payments with their devices.
Closing Words
In conclusion, tokenization is a valuable tool for merchants that want to securely process payments and protect customer data. Tokenization simplifies the payment process for customers, making it faster and more convenient. It also helps reduce risks associated with data breaches and reduces merchants' PCI compliance costs. To tokenize customer data, merchants need to partner with a payment service provider and use tokenization engines to securely store tokenized payments.