The Role of Tokenization in Securing Digital Payments

Lately, we have noticed a trend in the payment industry, especially in the post-COVID period: the steady and fast growth of digital payment systems worldwide. Businesses across industries are embracing this new way of payment as customer demand grows.

However, with the fast adoption of digital payments, data breaches and theft are becoming prime concerns. In a survey, 4 in 10 UAE customers reported experiencing fraud attempts, and this trend continues. Identity theft is another area of concern.

Does this mean customers and businesses should avoid digital payments? Or is there any other way out?

The good news is that today, we have strong security measures, such as tokenization, in place that make digital payments secure.

In this article, we’ll explore the role of tokenization in securing digital payments and how businesses can use it in their payment systems.

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What is tokenization in payments?

Payment tokenization is a security measure that replaces sensitive transaction information with a unique random set of characters known as a ‘token.’

A token is a unique combination of a card, token requestor, and device. For example, sensitive payment information like credit card numbers is replaced with a random digital identifier or token number.

Tokens work in any form of online transaction, such as website payment, QR codes, in-app payment, point-of-sale transaction, etc., and ensure the data is kept safe during any online transaction. Thus, the token keeps the actual card number safe and ensures it cannot be accessed, used, or stored.

Unlike data encryption, which can be reversed, tokenization is irreversible and cannot be decrypted.

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Types of tokens in digital payments

Tokens are of two types - single-use tokens and multi-use tokens. 

Single-use tokens

As the name suggests, a single-use token is used only once. Once used, tokens become redundant. Thus, once the payment is over, they are of no use. So, even if hackers access it, they can’t cause any harm.

Multi-use tokens

Multi-use tokens are useful in recurring transactions. They have multi-use validity, so every time a transaction needs to happen, the token can be retrieved, and the payment can be processed without revealing sensitive information. For example, subscription-based businesses use multi-use tokens.

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Benefits of tokenization

Tokenization has many benefits. Some of these include:

Payment safety

Tokenization helps protect sensitive transaction information, thus preventing data breaches. Because it doesn't involve mathematical operations, tokenization requires fewer resources than data encryption. Third-party service providers like PayBy can easily perform tokenization.

Payment convenience

Tokenization securely stores your credit/debit card information on websites, mobile wallets, or e-commerce apps. This makes your payment experience convenient without worrying about payment security.

Innovation of new solution

Tokenization facilitates the innovation of new payment solutions, such as mobile wallets, cryptocurrencies, and one-wallet payments, thus improving consumer convenience and payment safety.

Reducing the risk of breach

Tokenization has significantly reduced data breaches because tokens are random numbers that cannot be used to retrieve the original credit card number without the key.

Staying compliant

Tokenization helps merchants stay PCI DSS compliant. With tokens, they don't need to store or process sensitive card details; they only need to secure the token and the key. This, in turn, helps save costs in compliance audits.

Scalability and flexibility

Since the tokenization platform can be adapted to any online payment method, it can help you scale up your journey.

Improves brand reputation

By leveraging tokenization in your payment system, you demonstrate your concern about data theft and security, which improves your brand reputation.

Build customer trust

One of the greatest fears of online consumers is data theft. You can earn their trust by offering secure payment options that can build trust and improve sales. Tokenization can help you achieve that goal.

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How payment tokenization works

The core principle of tokenization is changing sensitive payment information to a non-sensitive equivalent that can be stored and transmitted safely without exposing the actual data. Here’s how payment tokenization works.

Data collection

In this first step, data collection happens when a consumer enters their payment information to make a transaction.

Tokenization request

If the business’s payment system uses a third-party tokenization vendor, it will send the sensitive data to the secure tokenization service. However, tokenization happens automatically if the business uses a tokenization-enabled solution like PayBy.

Token generation

The token generation happens in the next step, which combines encryption, algorithms, and secure storage. Together, they generate a unique token, which is a random string of characters and numbers that represent the original data without actually leaving it.

Token storage

The next step is token storage. Here, the merchant's payment system stores the token information while the sensitive card details are stored in a secure token vault designed to protect the data from unauthorized access.

Token usage

When a merchant needs to process a transaction, a token is sent to the payment processor or tokenization service. The token is then securely mapped back to the original data. Thus the transaction is completed without exposing sensitive data at any time.

Token reusability

Token reusability is a feature that enables stored token information to be used for recurring transactions. This is handy for paying subscriptions or repeated purchases on an e-commerce site. It eases the payment process, enhances the user experience, and keeps it secure throughout.

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Who can use tokenization?

Tokenization is useful for any business. For example, e-commerce merchants can facilitate safe transactions by securing customer information.

Tokenization is also useful in brick-and-mortar shops when using a point-of-sale system or mobile payment. In such transactions, tokenization offers an extra layer of protection to keep customer information safe.

Merchants with subscription-based business models can use tokenization to keep customer information safe by storing the token details and mapping them back every time a transaction needs to occur.

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How can I implement payment tokenization?

You can implement payment tokenization with PayBy. PayBy offers a robust fraud detection and prevention mechanism integrated into the payment gateway, like tokenization. It also offers AI-based fraud monitoring, 3D secure authentication, and transaction risk analysis to ensure all payment transactions are secured and no sensitive information is breached. 

PayBy is licensed by the Central Bank of the UAE and has received the highest financial service approvals to conduct Stored Value Facility (SVF) and Retail Payment Services (RPS) operations. It is also trusted by some of the UAE's leading brands. 

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