EXPLAINED: What is tokenization and how it prevents fraud

The main aim of tokenization is to prevent fraud

tokenization

EXPLAINED: What is tokenization and how it prevents fraud. Source: shutterstock.com

Exposing your financial data today is the same red flag to fraudsters and thieves as taking out your wallet full of cash in a crowded public place. Countless shopping carts are left abandoned when e-shoppers are not sure about the security of their data during the transaction process.

Encryption used to be the ultimate solution, but it’s no longer the case. Tokenization is gaining greater popularity due to its affordability, simplicity, and a new level of security. Mastercard has already embraced this new technology for their payment processing. We’ll explain the basics of what this card protection means.

What is tokenization?

Tokenization in the payment industry means replacing sensitive data like a client’s PAN (primary account number) with a unique randomly generated string of numbers.

This string is called the token. It can be generated numerous times for the same bank card. This way each merchant that receives payment information from the cardholder gets a different token.

Unlike encryption, sensitive data is not decoded by the recipient. There is no decryption key. The actual data the token refers to is stored in highly secure token vaults.

How it works

tokenization

Tokens can be generated through mathematically reversible algorithms. Source: shutterstock.com

Tokens can be generated through mathematically reversible algorithms, one-way non-reversible cryptographic functions, or static tables mapped to randomly generated token values.

A data system like an e-wallet or e-store receives your data and turns it into a token. This token can then be stored electronically. With mobile wallets, you download the card information which may be coded directly in-app (Android Pay) or is sent to the bank for tokenization and later stored in your phone as a token (Apple Pay).

Purpose

The main aim of tokenization is to prevent fraud. If fraudsters get your phone or hack a financial database, all they get is a random number that isn’t connected to your PAN. They can’t use it to duplicate your card.

Not storing actual sensitive data is good for businesses too. Their servers become less prone to hacker attacks. Fraudsters don’t need the data they can’t use. According to a recent study, 59% of consumers consider a data breach a good reason to lose trust in the affected company. Hence, uncompromised databases are essential for business reputation and clients’ loyalty.

tokenization

The main aim of tokenization is to prevent fraud. Source: shutterstock.com

Merchants and retailers prefer to store sensitive information within a payment provider’s secure and PCI compliant infrastructure, so that they never have to transmit sensitive information through their own systems. It allows them to cut costs on digital security significantly. Furthermore, it makes certification easier. Even startups can now quickly reach compliance with industry standards and government regulations. All they need is to choose a payment processor with tokenization.

Implementing tokenization can be a seamless and cost-effective process, as there is little impact on the issuer’s back-end technology, and for merchants, no new hardware or software is needed. This added layer of security complements end-to-end encryption. For instance, Mastercard stores all issued tokens along with the card details in their secure, encrypted database. Hence, sensitive data is carefully wrapped in a double-layer security blanket.

At the same time, the organisation’s clients can benefit from one-click transactions. Loyal customers shouldn’t enter their data every time they make a purchase. It is already stored as a token. The speed of transactions is one of the main competitive factors in modern shopping. Such transactions gain special importance for those companies that bill periodically for goods, services, memberships, subscriptions or instalment payments. Their payments can be automated without security concerns.

SEE ALSO: 

facebook