The rise of e-commerce has opened various payment options for Malaysian consumers. Today, customers...
'Tokenization' is currently the payments buzzword due to increased attention on digital wallets like Apple Pay, PayPal, and Gpay. This article will discuss how to implement payment tokenization, how it works, and the pros and cons of adopting it in your payment infrastructure. Let's dive in.
What is Payment Tokenization?
Tokens are encrypted, unique, and secure pieces of data that hold the payment data associated with them instead of being stored directly with the merchant, payment gateway, or processor. Payment tokenization offers many benefits to both the merchant and customers, such as increased security and reduced PCI compliance costs. But more on that later. Payment tokenization technology is used by leading card scheme networks and digital wallets.
How does Tokenization work?
Tokenization works like a placeholder for sensitive payment information. When you make a purchase, your card information is swapped out for a token. That token is what enables secure transactions. The PAN is not transmitted during the transaction, making the payment process secure. If a hacker breaks into one merchant's system, that data isn't linked to your other credit cards, making it harder for criminals to commit fraud.
Tokenized payments can happen both on and offline. To visualize how the tokenization process goes, here's how it looks step by step:
- A credit card is used at a POS machine or an online transaction.
- The credit card number is passed to the tokenization vault.
- The tokenization vault generates a 16 random character string to replace the original credit card number.
- The tokenization vault returns the new random string to the POS or eCommerce site and replaces the customer's payment information in their system. The string will be different for every merchant the customer uses their card.
What Do Tokens Look Like?
In a tokenized world, tokens – digital representations of value – travel from one party to another. To avoid confusion, these tokens look nothing like the real currency. Instead, they're entirely abstract representations of money that operate on a variety of unique blockchain platforms and networks.
There are two types of tokens:
Format preserving tokens: have the appearance and length of a 16-digit credit card number.
Non-format preserving tokens: do not look like a credit card number and can vary in length and include alpha and numeric characters.
Tokenization vs Encryption
Two of the most popular methods for protecting data are Tokenization and Encryption. In both cases, you convert sensitive data into a form that is not readable by human beings (for example, an ID number).
The key difference between encryption and tokenization is that encryption converts data into an unreadable form using a key (i.e., a password), while tokenization doesn't require any key or extra work on your part — instead, it uses a random series of numbers as a placeholder for the information you want to protect
Replaces sensitive data with a randomly generated token value
Transforms plaintext into ciphertext using an encryption algorithm and key
Structured data such as payment cards, social security numbers, etc.
Structured data such as payment cards, and unstructured data, such as entire files and emails.
Original sensitive data never leaves the Organization.
Original sensitive data leaves the organization, but in encrypted form.
Difficult to exchange data since it requires direct access to a token vault mapping token value
Data can be exchanged with those who have the encryption key.
Tokenization and encryption are popular ways to protect sensitive data in cloud storage and internal applications. Organisations will typically pick either Tokenization or encryption or a mix of both to secure data.
What are the Pros and Cons of Payment Tokenization?
Payment tokenization pros:
1.Reduced data breaches
With data breaches and cyber-attacks becoming more common, every financial institution is scrambling to find a better solution for storing and transmitting sensitive customer data. Payment tokenization has emerged as a secure alternative to traditional payment cards that protect customer data from criminals who might intercept it in transit.
Tokenization simplifies PCI-DSS compliance by removing credit card information from your environment. This data storage and transfer method eliminates any possibility of a third-party cyber-attack.
3.Facilitates trust with customers
Payment tokenization establishes an extra layer of trust between merchants and customers. Merchants know that sensitive data remains safe with them at all times, while customers can trust that their payment data cannot be compromised in case of an attack. However, merchants may need to educate customers on the advantages of payment tokenization and how it works.
4.Tokenization can be used for any type of sensitive information
Tokenization is an effective security measure against releasing sensitive personal data and can be used for protecting mediums such as financial statements, medical records, criminal records, driver's licenses, loan applications, stock trades, voter registrations, and more.
5.Reduces the responsibility and costs of handling customer data
Tokenization relieves the load of storing and encrypting cardholder data from your shoulders. As a result, PCI-DSS compliance becomes easier and cheaper as tokenization shifts most PCI compliance requirements from you to your token provider.
Payment tokenization cons:
1.Can complicate your payments infrastructure
As with any extra layer of security, if you employ your own tokenization vault, you can expect to see your payment infrastructure become more complex. For example, the customer's information must go through detokenization and retokenization systems to stay protected while authorized.
2.Not all payment processors offer Tokenization
Payment tokenization technology is relatively new. You will find a limited number of processors only support tokenization. You may have to integrate with a payment processing tool that may not be your first choice.
3.Tokenization doesn't eliminate all security risks
Tokenization eliminates many security risks, but not all, especially when working with third-party vaults. You will be reliant on the vendors you partner with to have appropriate systems in place to protect your customers' data.
How Can Merchants Take Advantage of Tokenized Payments?
1.Improves checkout conversions
Payment tokenization provides a seamless checkout experience for returning customers. As their payment data is already stored via a token, you can create a frictionless checkout, which reduces the number of steps the customer has to take to pay to just one click, which will only delight your customers and improve your conversion rates.
2.Facilitates an omnichannel strategy
A great omnichannel strategy gives customers everything they need to explore and transact on the channel of their choice. With omnichannel payment tokenization, customers can seamlessly buy goods and services on another channel after leaving the store. There's no need for customers to input their credit card data again into the merchant's website, as it was already captured at the retail store POS.
Does Payment Tokenization Make You PCI-DSS Compliant?
Tokenization doesn't immediately make you PCI-DSS compliant; however, tokenizing data does make compliance easier.
Here's how tokenization factors into compliance:
- Tokenization doesn't eliminate the need to keep PCI DSS compliance up-to-date
- Merchants must protect tokenization vaults, systems, and processes with strong security
- Verifying the effectiveness of a tokenization implementation is necessary to be compliant and includes confirming that payment data is not retrievable
How inai Can Help You Easily Tokenize Payments
The inai payment platform provides a single source of integration and connects to multiple payment gateways and numerous local payment methods at once. Merchants have immediate access to more than 300+ international payment methods and can tokenize the payment data no matter which methods a customer uses.
Apart from top-notch security, our platform helps business owners to improve their conversion rates during the checkout process by offering a localized checkout experience (be it payment methods, language, or currency). The tokenization payment data also helps merchants to create a frictionless checkout experience by facilitating one-click payments.
Karthik Narayanan is the Co-founder, CPO & CTO at inai, a global payment stack simplifying native payments with a single integration. He is a serial entrepreneur with over a decade of experience in product and engineering. Over the last 5 years, he has worked with 200+ businesses ranging from SMEs to Bigtechs.