What Is Payment Tokenization and How Does It Work?

In a fast-moving and digitally transforming world, security is always a cause of concern, especially with the rise of digital payment methods and advancements in the field. The concept of payment tokenization has come in like a ray of hope. It is a process through which sensitive information can be protected from those who are not authorized to access it. This blog will discuss what payment tokenization is and how it works. Read on!!

What Is Payment Tokenization?

In the face of the ongoing digital revolution, payments have also gone digital. As a result, the payment gateway market is thriving.

According to The Globe News Wire, the global payment gateway market is predicted to reach $132.24 billion by the year 2030, with an expansion in the Compound Annual Growth Rate (CAGR) of 22.1% from 2022 to 2030.

Safety and privacy have always been causes of concern in the digital world. With technology in play, digitalization comes with both pros and cons – breach of security and privacy being one of the biggest drawbacks. However, today, digital innovators have come up with several ways to keep private and sensitive information secure on digital platforms. Payment tokenization is one such way that helps immensely in the field of digital payments. 

Payment tokenization is a process in which sensitive information is usually replaced with a string of alpha-numeric, special characters code that protects the information from being exposed. The symbols using which the information is protected are known as tokens, and they enable safe and secure transactions without disclosing information.

Payment tokenization is a method of transaction that is carried out without breaching the individual’s financial and personal privacy and security. Simply put, tokenization in the payment vertical is substituting the 16-digital credit/debit/payment card number of the individual with the token so as to facilitate secure transactions.

Tokenization is often assumed to be the same as encryption. Encryption is the temporary process of protecting data from the starting point of the transaction to the end. Let’s understand the difference between the two – tokenization ‘replaces’ sensitive data with an exclusive code. Whereas encryption, on the other hand, encodes data so that it stays unexposed until the code is broken. Encrypted data is translated into a secret code which is then presented in the form of ciphertext, unreadable by the recipient.

In this blog, we will focus on payment tokenization, how it works, and its benefits. Stay with us!

How Does Tokenization Work?

Payment tokens can be of two types – (i) format-preserving and (ii) non-format preserving. 

(i) Format preserving tokens are ones that have the same format as the payment card’s 16-digit number. 

(ii) Non-format preserving tokens are tokens that do not necessarily come in the same 16-digit number format. They can be alphanumerical – a mixture of both alphabets and numerical characters. 

The tokenization process begins when the customer enters the data into the payment gateway. The tokens generated for customers’ payment card numbers are in no way related to the actual information of the card. They are just meaningless replacements for the original Primary Account Number (PAN). 

Tokenized payment data cannot be monetized at any point in time, thereby failing the attempts made by digital hackers and successfully tackling any internal problems encountered. 

Here is How a Tokenized Payment Transaction Works

The customer reaches the online payment gateway and enters their card number and other payment-related information in the respective fields. 

The payment card details reached the merchant’s bank in the form of either a format-preserving or non-format preserving token without disclosing the original card number.  

The details the merchant’s acquiring bank acquired is then transmitted to credit card networks for authorization. 

If authorized, the data is saved in virtual vaults of the bank. The token is then matched to the customer’s account number. 

The bank, after considering the available funds in the customer’s account, chooses to accept or decline the transaction. If the bank accepts the transaction, the token is then returned to the business merchant making the transaction. This token can either be used just for the current transaction or can also be saved for transactions that may happen in the future. 

The tokens are issued by the credit card networks and don’t have an expiration date. They expire only when the merchant chooses to delete the same. However, the same token will not be issued to multiple merchants. Each token is unique to just one card and merchant. 

Benefits of Payment Tokenization

As much as it is beneficial for the customer, the tokenization of payment cards comes with its own set of benefits for businesses. Tokenization assures and guarantees safety and security for customers’ information. The customer can be confident that their information is 100% secure in the case of making tokenized transactions. Read on for some of the advantages of payment tokenization.

1. Increased Customer Loyalty

Choosing to tokenize payments enables businesses to ensure safe and secure transactions for their customers. This increases confidence and the trust factors in the minds of the customers and provides them with a sense of security. This can result in higher customer loyalty. 

2. Compliance With the PCI DSS

The PCI DSS, short for Payment Card Industry Data Security Standard, is an information data standard for organizations that handle major credit card schemes. The council was founded with the collective aim of preventing card payment fraud.

If there is a case of data breach from the business’s end, there is a high chance of the company being fined heavily by the PCI DSS. This is where tokenization comes in handy and helps businesses to easily comply with the PCI DSS standards. 

3. Avoidance of Unwanted Penalties

On one hand, payment tokenization helps businesses comply with the PCI DSS standards. On the other, payment tokenization ensures that any transaction that happens between the business and the customer is secure. With tokenized payments, the business merchant will not be able to save any payment card related information. This means the business cannot get into any trouble with regard to the safety of transactions. Therefore, payment tokenization helps avoid penalties from governing bodies and more. 

4. Enhanced Internal Security

Because payment tokenization makes it impossible for any unauthorized party to access payment-related information, businesses who opt for tokenized payments end up offering a secure platform for customers to take part in monetary transactions with the business. Payment tokenization, therefore, offers a great deal of security within the organization. This also guarantees employees of the company security. 

These are some of the many benefits of payment tokenization for businesses. Payment tokenization has become a must for businesses in India today. The Reserve Bank of India (RBI) has laid a ban on the storage of customers’ card numbers by online merchants and payment aggregators. The bank has made Card-on-File (C-o-F) tokenization mandatory with effect from July 2022. (Source).

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