Selling online comes with numerous challenges, such as handling customers’ data. It can be a nerve-wracking experience if you are not careful, especially when taking recurring payments. As a business owner, it is your responsibility to ensure your customer’s information is secure. However, deciding which data security method to implement in your eCommerce platform can also be a challenging and confusing issue.
Today’s guide will discuss payment tokenization and why it’s a popular method preferred by merchants to protect online payment information.
What is payment tokenization?
The term “tokenize” means substituting something or turning it into something else. Think about like how casinos work. When you go into a casino, you exchange money for chips which you use to play the different games. You are exchanging money for something that has no value outside the casino. The same concept is used in the world of online payments.
Credit card tokens are essentially created to protect customers’ sensitive data. For instance, credit card number, account number address, etc., they replace the actual details with a series of algorithm-generated numbers and letters that are useless to a hacker.
Credit card tokenization can help merchants move data between networks without exposing your customer’s authentic details.
How does credit card tokenization work?
Tokenization ensures that credit card data can be authorized for fast payment processing by the card issuer. Credit card tokenization works by replacing the customer’s credit card details with a one-time unique identifier. The tokenized data is shown in place of the sensitive information that shows where the payment request originates.
Merchant systems are usually the weakest link in the chain of computer networks in the payment processing flow. The many data breaches you’ve probably heard stem from merchants that usually store credit card data, never the payment networks or banks that handle the credit card transactions.
With tokenization, the only data shared on the payment network is the token, and there is not much a hacker can do with such information. It’s just a sequence of jumbled-up numbers. The real credit card information is stored in the server with higher security protection.
Here is a real-time rundown of what a tokenized credit card payment may look like;
Step one– the customer buys something from your website and then pays using their credit card at checkout.
Step two – the credit card details they filled at checkout are tokenized through a token service provider and then sent to the acquiring bank – the merchant’s bank- hiding the real payment information.
Step 3- the acquirer uses the token number to request authorization from the relevant credit card companies, for example, Master Card or Visa.
Step 4 – The customer’s bank holds the customer’s actual information within a secure token vault. Once the card issuer’s token number is issued and matched to the relevant account number, the bank verifies the transaction.
Step 5 – Once the payment is successful, the token is returned to the merchant. If the same customer makes another purchase from the store, they will not use the same token number.
Different examples where payment tokenization has been utilized
Tokenization in eCommerce
Tokenization has enabled personalized payment experiences by allowing customers to save their payment preferences for future purchases. Because the tokenized card information is usually stored in their account, no sensitive data is at risk of data breaches or fraud.
Additionally, every merchant uses a different token, often keeping their customer’s detail secure. There is no way of any data leaks that would require them to cancel their cards completely.
The increased popularity of mobile payment wallets such as Apple pay for contactless and online payments has helped bring tokenization into the mainstream.
When your credit card details are saved into a mobile wallet, the card number is replaced with a token number sent to the issuing bank. No credit card details are at risk if your smartphone is stolen or lost as the real payment information isn’t stored in the device.
In-app payment tokenization
Most retailers, including Best Buy or Amazon, have launched their app stores for the customers who wish to shop on the go. With around 10% of retail sales in the US expected to be generated via mobile by 2025, swift payment processing will be a must-have for most eCommerce stores to ensure customer satisfaction.
If a device stores tokenized payment information through the mobile wallet, shopping apps could integrate directly to avoid customers needing to fill in their credit card information.
Payment Tokenization Versus Encryption
Tokenization may appear similar to encryption, especially when researching data protection. However, there are a few differences between the two terms.
Encryption uses a key to protect consumer data. This is different from tokenization. Instead of changing information with a placeholder of no value, encryption encodes the real payment details using an algorithm with the correct key or a decryption solution. You can switch the information to its original form. The difference here is that encryption is reversible while tokenization is not.
However, the more sophisticated the algorithm, the more difficult it will be to crack the code with encryption. But even the strongest encryption code can never be entirely foolproof. If credit information is stored in a network using recurring payments, it provides enough time for hackers to decode sensitive information. That’s why the PCI DSS considers encryption as insecure when used on its own.
Why you should invest in payment tokenization
Ensures your business is PCI compliant – ensuring your business is PCI compliant is vital to avoid fines and reduce liability in case of a data breach. Tokenization reduces the risk of a data breach because the real payment information is not stored in your servers.
Protects different payment solutions – consumers today have numerous options for paying for items online, and they expect merchants to provide them with the flexibility and choice. Tokenization will enable you to offer security across different payment solutions. If you offer different payment methods, you don’t have to worry about paying for extra payment protection systems.
It also enables one-click payments for recurring billings. This gives customers a more effortless shopping experience, plus they feel safe shopping on your site. They will always keep coming back to buy.