Smooth and secure payment processing is the backbone of any e-commerce transaction.
However, one of the biggest challenges with e-commerce traditional payment methods is data breaches and fraud.
A research report says that money lost to fraud will rise from $44 billion in 2024 to $107 billion in 2029. That’s an increase of 141%.
The scene in the UAE is not so different either.
Around 4 in 10 customers in the UAE reported fraud transaction attempts as per the Visa-Dubai Police DED survey. Identity theft is another threat that concerns UAE-based customers.
This is where tokenized payments come in to secure digital payments in e-commerce.
In this article, we’ll understand how tokenized payments can enhance security, why they’re the future of e-commerce, and how you can implement them in your payment system.
What is tokenization?
Payment tokenization is a secured transaction process where all the sensitive payment-related information is replaced by a unique random set of characters known as tokens. Tokens are often randomly generated strings of text.
So, instead of exposing the credit card number of the customer, it replaces it with unique characters or random digital identities also known as token numbers.
Tokenization can be used across any form of online transaction, including QR code payments, point-of-sale transactions, website payments, and in-app payments.
The biggest advantage of tokenized payment is that it cannot be reversed, unlike data encryption, and hence, it works best in securing e-commerce transactions.
Further tokens can be of two types — Single-use tokens and multi-use tokens.
Single-use tokens are meant for a single usage. So, once the token is used and the payment transaction is completed, the token becomes redundant. So even if the tokens are hacked, it would be useless to the hackers.
The multi-use tokens come in handy for recurring transactions. Since they have multi-use validity, the tokens can be retrieved and used every time a transaction request comes. For example, subscription-based transactions benefit from multi-use tokens where recurrent transactions happen.
How tokenization works for e-commerce transactions
The core principle of tokenization is to change the sensitive transaction data with tokens that can be saved and transmitted without exposing the actual data. Here’s how it works:
Token generation
It starts with data collection when the customer enters their payment information to make a transaction.
The merchant’s payment system then sends the data to a third-party tokenization service provider (if they’re using one) to secure the tokenization service.
However, tokenization happens automatically if you’re using a tokenization-enabled service like Payby.
In the next step, tokens are generated using a combination of encryption, secure storage, and complex algorithms.
Once the token is generated, it's stored in the merchant’s payment system. The actual card information is stored in a secured token vault with encryption to prevent any unauthorized access.
The tokens themselves are of no use and can't be linked back to any person or account.
Preventing data breaches
Hackers target merchants/ brands that use credit/debit cards because once they have access to the sensitive details in the card, they can gain insights about the card user.
While vulnerable payment processing systems can easily fall prey to hackers, tokenization prevents data breaches and safeguards organizations from the potential financial impact of data theft.
As tokens replace data irreversibly, tokenization helps organizations reduce data footprint. Thus, tokenization helps to achieve PCI DSS compliance more easily.
Benefits of Tokenized Payments in E-Commerce transactions
Tokenization has several benefits in e-commerce apart from securing payment transactions. Some of them include:
1. Reduced fraud risk
Since tokenization uses a unique character set or tokens in place of actual payment information, it limits access to the payment data. Thus, tokenization protects transaction information and effectively mitigates risks like phishing and card-not-present (CNP) fraud.
2. Enhanced customer trust
The biggest hesitation of online customers is data breaches and theft. But when brands integrate tokenized payment processes in their transaction system and ensure a secure transaction, it helps build confidence.
Further, when customers realize that their sensitive payment information is in safe custody, it impacts their loyalty in a positive way. This boosts customer loyalty and repeat purchases.
3. Simplified payment processes
Tokenization can save your credit card/debit card information on mobile wallets, apps, or payment websites. This makes it convenient for repeated payments like subscription payments or one-click checkouts, where you don't need to enter your payment details every time you need to do a transaction.
Such a seamless yet secure payment process improves customer experience, too.
4. Cost savings for businesses
Tokenization helps merchants to stay PCI DSS compliant. As with tokens, they don't need to store or process the card details ( they only need to secure the key and the token), reducing liability and cost of compliance with security regulations.
As tokenizations reduce the risk of data breaches, merchants can significantly minimize the financial loss resulting from theft and breaches.
Real-world examples of tokenized payments in action
Here are some real-world examples where tokenized payments keep every transaction safe:
Apple Pay: Apps and websites that offer Apple Pay benefit from the Apple Pay merchant tokens, which ensure all payment transactions are secured across the user’s devices.
For example, when a user adds their card details on Apple Pay, it identifies the issuing bank and sends a request for a payment token from the token service provider. The token is then securely stored and used for transactions while the actual card details never get exposed.
Amazon: Tokenization is also used by the Amazon payment system for quick and secure checkouts. So when a server needs to do a transaction using a customer’s credit/debit card, it sends a token ID to Amazon Payment Services.
The Amazon Payment Services server searches for the token ID that matches the card details and completes the transaction when the tokenized card details are used.
Target: In 2013, Target stores saw one of the biggest data breaches in the US, where credit card information of 40 million customers was stolen from 2000 Target stores accessing the POS system. After this massive data breach, Target introduced tokenization to keep customers' vulnerable information safe.
Tokenization vs. traditional payment security measures for e-commerce
Although tokenization and traditional payment security measures like encryption are both meant to keep payment data safe and achieve PCI DSS compliance, each follows a different approach.
Encryption transforms the data into an unreadable version, which can be reversed with the decryption key. Encryption is based on data transformation.
Tokenization replaces the sensitive customer data with a unique random string of texts or tokens. It’s irreversible, unlike encryption. Tokenization focuses on data substitution.
However, tokenization and encryption can work together complementing each other to create a layered security approach.
Think of an e-commerce company that stores the card information of its customers. Instead of storing the actual card number, it can use tokens for safe transactions. The actual card number can be stored in a token vault and encrypted which gives an added layer of protection.
The future of tokenized payments in e-commerce
E-Commerce businesses operate in a payment ecosystem where users regularly need to share their card details, CVV, and the expiry date.
But if these details get leaked or hacked, there can be severe consequences that we are already aware of. But e-commerce is here to stay and shoppers will continue to shop from their favorite e-commerce platforms.
That’s where tokenization can be a win-win situation for all users across the payment ecosystem.
As digitization is enabling businesses to explore new markets in new territories, tokenization will play a pivotal role in establishing a safe, secure, and compliant global payment ecosystem.
A recent report highlights that the tokenization market is expected to reach $5.6 billion by 2025. As automation comes in, certain intermediaries will be eliminated while emerging new technologies like AI for fraud detection will further improve its efficiency.
Steps to implement tokenized payments for your e-commerce business
If you’re ready to implement tokenized payments for your e-commerce business, here’s how you can get started.
Choose a payment gateway
Choosing a payment gateway that has tokenized capabilities means every transaction automatically happens through tokens while all payment information stays safe.
For example, Payby comes with tokenization capabilities, so when you partner with Payby for your payment gateway, the chances of a data breach are minimized.
Spread awareness
Implementing tokenization in your payment gateway is not enough. To build customers' trust, it's important to educate your customers about tokenized payments and how they keep their data safe. Talk about it on your payment page, emailers, and social channels to spread awareness.
Monitoring and updating tokenization systems
Finally, monitor your payment system regularly and ensure it's updated with the latest tokenization systems. Constant monitoring will help you detect a vulnerability and fix it on time.
Implementing tokenization for e-commerce transactions with Payby
Tokenized payments ensure customers have a safe transaction experience and help boost the customer's lifetime value by building trust. Payby offers a robust fraud detection and prevention mechanism integrated into its payment gateway.
So when you partner with Payby for your payment processing, all transactions happen through tokens while the actual payment data stays secure.
Additionally, Payby also offers different safety features like AI-based fraud monitoring, 3D secure authentication, and transaction risk analysis to ensure all payment transactions are secured, and no sensitive information ever gets exposed.
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 like Almaya, Lulu’s and others.
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