The Why’s and How’s of Payment Tokenization
- All, Insights
Digital payments initially aim to improve user experiences, accelerate business cash flows, and optimize operational costs. However, this is in theory, while in practice, electronic payment transactions face multiple hurdles preventing those benefits.
Additionally, risks related to attackers’ ability to gain access to the customer’s payment data are another problem of electronic payment transactions. If this happens, the customer will lose their money, and the company processing the payment will lose the customer. Given this, protecting sensitive financial information is crucial for businesses involved in payment transactions.
One of the best methods to address those challenges is payment tokenization. This article will answer the main question: what is tokenization in payments? Plus, we will consider how tokenization works and how businesses can benefit from it.
The next level of payment protection: tokenization payment meaning
First things first: what is payment tokenization? Tokenization replaces vulnerable card payment data with a unique set of characters called a token. Essentially, it is a type of encryption.
The token can be transferred between software systems and used for transactions without disclosing sensitive data. Even if someone gains access to the token, they cannot use it since it does not contain real payment information.
The data, being tokenized during the payment transaction process, is typically as follows:
- Card number
- Owner’s name
- Expiration date
- Bank account number
Tokenization is one of the most reliable ways to protect data. It securely hides payment card details, preventing criminals from accessing it and causing fraud.
Payment tokenization vs. RWA tokenization
Tokenization technology is used not only in online payments but also in other business areas. It can be used to protect personal data and user rights to possession of assets.
Given this, it is necessary to distinguish the concepts of online payment tokenization and RWA (real-world assets) tokenization.
Tokenization of real-world assets means digitization of actual assets. The latter is represented in the form of digital tokens in distributed ledgers, blockchains, and other asset tokenization platforms. The assets can be the objects of real estate, art, commercial enterprises, luxury goods, etc. Each token represents a fractional ownership of the specific asset. This provides greater liquidity and accessibility to a broader range of investors.
Thus, tokenization is used in payment transactions to encrypt and protect payment card data. In asset management, it is used to fix rights to assets and simplify the investment process.
Although payment tokenization and RWA tokenization have similarities, they are different concepts that should not be used interchangeably.
How does payment tokenization work?
Imagine that you are making a purchase in an online store. To pay for a product or service, you need to enter your card details on the store’s website. If such a site cooperates with a payment provider that supports payment tokenisation, you have nothing to worry about because your data is reliably protected. However, if card tokenization is unavailable, there is a risk that third parties will access your payment data.
Below, we will analyze how tokenization in payments works:
- A customer enters card details into the payment gateway on the merchant’s website.
- The payment gateway redirects the payment card data to the payment provider.
- The payment provider converts the card data into a token.
- The payment provider returns the generated token to the merchant and creates a reference of this token with real payment data on its side.
- The merchant’s payment gateway requests that the payment system generate a network token.
- The system requests permission to generate the network token from the bank that issued the customer’s card.
- The issuing bank verifies the request for payment network tokenization and returns a response along with the actual payment data.
- A unique network token is generated and linked with actual payment data.
- When a merchant needs to withdraw money from a card associated with a specific token, they send a request to the payment provider.
- The payment provider matches its token and the network token. At this moment, the network requests permission from the issuing bank. When the issuing bank gives a positive response, the money is debited from the customer’s card using the token.
Top 5 benefits of tokenization in payments
Fintech is the driving force behind the development of the financial sector. Modern fintech companies are actively introducing new products to the financial market and breathing new life into traditional financial transactions, including cross-border payments.
Thanks to fintech companies, consumers get a new experience of sending and receiving money and tangible benefits of cross-border operations, such as:
Types of payments where tokenization is used
If you think payment tokenization benefits e-commerce businesses only, you are wrong. The technology is used in various payment types, namely:
1. Purchases on e-commerce platforms
Obviously, online shopping tops the list of tokenization use cases. The technology is utilized for secure and convenient transactions on ecommerce websites and mobile applications.
During the transaction, information about the customer’s bank card is submitted through a network gateway and a special technology that transforms card data into a token. After that, the payment service transmits the token further to complete the transaction.
The online store where the purchase is made cannot access the card data. It only knows the token. Even if third parties access this token, they cannot perform any operation with it.
2. Recurring payments
Tokens are actively used in online services that operate on a subscription model.
The user only needs to enter card details once and agree that next payments will be processed automatically without their involvement. By doing so, users do not have to worry about subsequent payments. Their subscriptions will be renewed immediately. This is convenient for both the business and the customer.
Examples of online platforms that use tokens to proactively debit money from the card are Netflix, Amazon Prime, Apple Music, and others.
3. Payments in one click
About 70% of online carts are abandoned. It is important to note that the tokenization of payments allows you to address many reasons for these statistics.
Tokenization helps you set up payments in one click without compromising data privacy and security. By saving the card after the first purchase, the user does not need to re-enter payment information in the future. They simply need to select a saved card on the payment page and click the pay button.
4. Payments in brick-and-mortar stores
Such payments usually include contactless payments using cards, mobile wallets, and NFC technology.
When a user taps a card on a POS terminal, the card data is tokenized and securely processed to complete the transaction. When a user adds a card to a mobile wallet, such as Apple Pay or Google Pay, the card information is replaced with a token. During an NFC transaction, a token is transmitted instead of the actual card number. In all cases, consumers can be confident in the highest level of data security.
5. P2P transfers
Tokenization can be used to transfer funds securely between participants. This includes both domestic and cross-border transactions.
When a user initiates a transaction, the card data is converted into a token. This token is further used to ensure a secure transfer of money between accounts.
What business sectors may benefit from payment tokenization?
In fact, any business involved in payment transactions will benefit from tokenization. Examples of such businesses are the following:
Tokenizing payments with DCM
Any business that prioritizes the security of web and mobile payments should implement payment tokenization.
Payment tokenization is what you need if you accept, process, or verify monetary transactions. It is also crucial for tokenization platforms that turn physical assets into digital tokens.
At DCM, we are at the forefront of utilizing tokenization technology in the payment sector. Our SaaS platform connects traditional financial systems with modern technologies, eliminating the need for lengthy and expensive custom developments and legacy modernization. We empower regulated institutions to unlock new business models, offer next-gen customer experiences, and operate more efficiently with instant transactions and better asset liquidity. Contact us to learn more about our product and how it will benefit your business.
info@dcm.systems
20 Wenlock Road,