credit card tokenization

Payments Tokenization Explained: How It Works and Key Benefits for Merchants

According to Nilson Report, credit card fraud losses reached $28.65 billion worldwide in 2019. On top of that, the U.S. is the most card fraud-prone country in the world, accounting for more than a third of the total global loss alone.

To combat credit card fraud, merchants need a foolproof way to make payments secure and protect cardholder data. They need to ensure that the data is never captured or transmitted within the systems in a human-readable format, no matter the payment method.

A payments tokenization system can address these challenges, safeguarding businesses and limiting exposure to hackers. With tokenization, merchants can use unique identifiers to store payments data without compromising security.

There are several key benefits to using tokenization and it’s a necessary step to securing sensitive data.

What Is Payments Tokenization?

Payments tokenization is the process of switching out sensitive payment information with randomized data that has no intrinsic value, and storing the original information that has been transposed within a secure vault. With tokenization, businesses replace credit card data with a unique identifier known as a token. This token provides access to customer and payment activity without compromising security.

There are several types of tokenization that offer flexible formats, including:

  • Transaction-based tokenization: Providing a unique token per each transaction.
  • Card-based tokenization: Generating a unique token per payment card.
  • Format-preserving: Using tokens that have the same first six digits and last four digits as the regular data.
  • Numeric and alphanumeric card schemes: Linking payment networks with payment cards using letters, numerals or both.

How Does Payments Tokenization Work?

The tokenization process begins when a remote application sends a registration or authorization request that includes encrypted consumer account data. The data gets decrypted, and the system processes the registration or authorization request using clear text data. Prior to sending a response, the system creates a token (substitute value) and stores the clear text account number in a secure vault after the data has been transposed. Then, the system sends a response containing the token and masked account information.

Unlike encryption, which uses algorithms to generate incomprehensible characters, tokenization is irreversible, making it impossible to hack. The data is also stored in a third-party tokenization providers’ database instead of a merchant’s, relieving the burden for the merchant.

What Are the Benefits of Tokenization?

Tokenization not only enables merchants to secure sensitive data, but it also helps save time and resources across the business by reducing the cost spent on the compliance activities.

Enhance the security of data

As mentioned before, tokenization is a powerful and flexible way for businesses to protect and remove cardholder data from their systems. By replacing customers’ data with tokens, merchants don’t need to store sensitive information. Tokenization improves end-to-end security, diminishes the risk of breaches and in turn, increases customer trust.

Reduce the overhead of annual PCI assessment requirements

Tokenization can be coupled with encryption and vaulting, which help reduce the steps involved in complying to various regulations that protect cardholders against theft. The introduction of encryption and tokenization in a payments ecosystem will not only enhance the security of the data, but it will also significantly reduce the overhead of the annual Payment Card Industry Data Security Standard (PCI DDS) assessment requirements.

Create a true omnichannel experience

Merchants need visibility into each customer’s buying habits across the digital and physical landscape. That’s why it’s important that payments processors across every channel share the same tokenization format. At the same time, merchants should have access to a shared token vault.

Make new payment methods frictionless

These days, consumers are looking for more payment options. Whether they choose to use loyalty cards, mobile wallets, or subscriptions and recurring billing, merchants can use tokenization to mitigate risks across these applications, while futureproofing their businesses for emerging payment methods.

OLS Payments Can Help Merchants With Payment Tokenization Needs

Tokenization has become a highly useful tool for merchants looking to secure their payments processes. With benefits that go beyond security, merchants have an opportunity to implement a tokenization system that protects both consumers and the bottom line.

OLS Payments employs advanced data encryption and tokenization to ensure the highest security for business transactions. With OLS, merchants can gain insight into the overall consumer journey and enable customers to securely register payment accounts across all digital channels.   Whether you need to deploy tokenization or migrate from an existing service, OLS Payments can help. Contact us today to learn more.