Tokenization replaces sensitive card data with jumbled letters and numbers that will be of no use to cybercriminals if they discover them. Hackers break into business computer systems, steal credit card information and use it to extort thousands of dollars. What if hackers end up with meaningless numbers and letters instead of your name, card number, expiration date, and other valuable information? The loss of confidential data is ensured by payment security tools and credit card tokenization, this is an important and most effective way for payment systems to reliably protect confidential bank card data.

What is tokenization and what does it mean?

To tokenize something usually means replacing it with something that represents the original but is useless outside of a certain context. For a better understanding, it is worth giving an example. You went to a carnival and got special coins to play with. Each coin is worth a certain amount while you are in the carnival, you can use coins as money, and with these coins, you can buy balls, video games, or some interesting accessories. But once you leave the carnival venue, these coins can no longer be used. They have no value. How does credit card tokenization work? You buy something from a seller that uses tokenization. In the tokenization system, card data is recorded and replaced with a random string of numbers and letters.

Merchant systems are often the weakest link in the chain of computer networks associated with credit card purchases. The large-scale data breaches that everyone hears about in the news often occur at merchants who store credit card data, not at the banks or payment networks that process bank card transactions. The confidential card data itself is stored on servers with much greater security. A token is a reference to that data. A hacker who steals parts of information that is tokenized is wasting time, credit card tokenization providers provide an adequate level of security during online payments, and customers are reliably protected and can be exposed to hacker cyber attacks.

EMV technology and its application

The EMV chips embedded in modern credit cards work on the same principle. For each purchase, the chip generates a one-time code. It’s worth noting that EMV chips only work for face-to-face transactions. When an online merchant uses tokenization, card data benefits from the protection provided by EMV chips. Think of your smartphone as a system that actively uses the principles of tokenization. Apple Pay, Google Pay, and other digital wallets work with tokenization systems. Your credit card is not actually “stored” in your digital wallet. Token associated with card data. These tokens do not work as trading tokens, but the concept is the same.

Forms of payment tokens

There are three key forms of payment tokenization, each suitable for different use cases. The payment card number is converted into a unique code and stored in the secure environment of the merchant or payment processor. This type of tokenization is mainly actively used for recurring payments and subscription billing. Pay in one click. Merchants and payment systems trade tokens that are created when users link their bank accounts to merchant accounts. These tokens allow the user to identify himself in the payment processing system. E-commerce companies that cater to repeat customers have enabled and prefer one-click payment tokenization. Mobile payment. With the help of tokens, a payment card can be converted into several independent payments. For example, a physical card may have separate labels for different devices. Tokenization is primarily used in NFC mobile wallets such as Apple Pay and Android Pay.

Who benefits from credit card tokenization?

Everyone except hackers. Let’s start with the user. A data breach may be inevitable, but if there is a data breach at the merchant you use your card with, tokenization will greatly reduce the problem. For merchants, credit card issuers, and payment networks, tokenization significantly reduces fraud and significantly lowers the cost of doing business. Blockchain fans and marketers continue to actively support the enthusiasm for tokenization, the active growth of which is well-known to everyone. The phenomenon of tokenization provides an appropriate level of security to every customer who actively buys and sells online.

Various data breaches and cyber-attacks are common threats to online businesses. Vulnerability to these risks increases when it comes to digital payments. However, tokens can be a key solution to significantly reduce the risk of any online payment fraud. Tokenization of payments can greatly benefit various business companies in ensuring proper security. Payment tokenization replaces confidential information with non-confidential information. Payment companies actively use tokens to securely transmit confidential data, replacing them with a unique sequence of numbers and letters. These combinations are stored separately from the token and cannot be restored to the original data without special keys that cannot be accessed by outsiders.

Payment tokens help securely identify customers and are used by e-commerce merchants and other businesses that need to share sensitive customer data. Note that the token itself contains absolutely no sensitive user information. Use secure web tokens to provide bank details to merchants in open banking services. Instead of sharing confidential information, merchants are provided with completely secure tokens that are used to identify users and share information necessary for successful online payments. Users can link their bank accounts to the trading platform and pay for goods and services in one click. After this process, merchants and payment initiation service providers exchange secure tokens to initiate payments based on confidential data. Tokens allow merchants to identify customers without repeatedly requesting the same payment information for each payment. Various payment service providers are also actively using tokens for the secure transfer of card data for successful online payment. A debit card token transaction looks like this:

• The owner of the bank card initiates the purchase and provides card data on the seller’s website;
• Bank card data is exchanged for a series of random numbers (tokens) and sent to the receiving bank;
• The receiving bank sends the token to the card security system;
• After successful authorization, the cardholder’s data is stored in the bank’s virtual safe. The token is tied to the cardholder’s bank account number;
• The bank carefully checks the availability of the necessary funds and approves or rejects the operation;
• Once the transaction is confirmed, the unique tokens of the current and future transactions are returned to the merchant.

All this happens in the background, so the tokenization process does not affect the user interaction.

Tokenization – where does it come from and where does it go?

The popularity of cryptocurrencies is due to two key factors: their functionality and speculation. A key feature is that with the advent of blockchain, it has become possible to verify transactions across a network of distributed computers. Of course, some coins reward miners whose transactions have been approved by the network, and the miners sell these coins to users who want to use the network. Today, when you create a token or tokenize something, you create it on a blockchain (usually Ethereum) and thus pay for the cryptocurrency of the blockchain. Then came the second factor that made cryptocurrencies so popular: speculation. Blockchain works very well when people understand that the world economy will be built on blockchain in the future, or see the demand in this field and understand how tokenization processes are happening in this field. Of course, the demand is high and the market attracts them.

Now that you know what drives the demand for cryptocurrencies, it is worth answering the following basic questions: What is the need for and why is tokenization being actively used now? Tokenization is a form of corporate digitization based on decentralized technology. It consists of its creation or strict distribution for specific projects, companies, or (specific) individuals. The development and adaptation of blockchain technology through smart contracts have increased the possibility of tokenization, which can be actively used to create all types of assets, which allows and at the same time reduces the costs of their further transfer. Tokenization shares several key features with crowdfunding. You also need to understand what a smart contract is. Tokens are like money in computer games, not just virtual numbers in a virtual wallet. A smart contract is a self-executing contract that an issuer can enter into with a token holder.

B2C companies have more potential than B2B companies. A booming industry is a good sign. It may not be solar energy or artificial intelligence, but the more profitable it seems to investors, the more willing they will be to invest in this field and tokenization in general. The company must make a profit. You must make attractive offers to investors. For example, if your company rents office space, investors may not be comfortable with a 3% annual return on investment. The most important thing is the company’s brand and the owner’s brand. Business scalability. There should be a large market for products and services. If you are running a niche business, scaling your business may be difficult (in some cases), in which case tokenization and its successful implementation may not make sense. Tokenization remains a capital market based on the same principles as the active management of various business processes.

Why is tokenization important for online payments?

One of the key reasons why tokenization is important for online payments is the proper level of security. Tokenization adds a layer of security to digital transactions. This is a common problem in the digital world that online sellers often fall victim to. Another key benefit is a hassle-free online payment process for customers. Businesses with repeat customers can enhance their experience with account-linking features. Customers can purchase with just one click, ensuring a smooth and efficient checkout process without compromising data security. Active exchange of data using tokens has much more benefits than the obvious security advantage.

Key benefits of tokenization for various businesses and their customers include that tokenization significantly increases conversion rates. Account linking is supported by tokens that securely store user data for future purchases. This feature allows users to securely link their bank account to a retailer’s online store and pay for their order with a single click. It provides users with a simple checkout process and keeps their data safe, which increases conversion. Tokenization ensures compliance with current business rules.

The use of tokens ensures the level of compliance with the current standard PCI DSS (Payment Card Industry Data Security Standard). This is because merchants and third parties do not store confidential information about cardholders, only tokens. PCI compliance can be expensive for businesses, so working with a secure payment processor can reduce compliance costs. Tokenization provides a high level of security. As mentioned earlier, tokens are one of the most important security elements in the payments industry. If a fraudster steals your token, it is securely stored on another server and cannot be linked to any valuable information.

What is the key difference between tokenization and encryption?

The key difference between tokens and encrypted data is that tokens exchange data for an unrelated code, while data encryption uses algorithms to temporarily encode data. Encryption is actively used to protect confidential information. Each character is replaced by another character using an encryption algorithm. When the data reaches its destination, it is decrypted using a password or key. The encrypted code can be changed, but the algorithm cannot be traced back to the initial location of the token. The PCI Security Standards Council recognizes encryption as a sensitive issue and imposes stricter compliance obligations on companies that prefer encryption over tokenization. If you use a physical card for a variety of transactions, encryption is one of the most reliable ways to protect your card data. Tokenization is a more secure option for cardless payments. Some companies use both encryption and tokenization for maximum security.