Payment Tokenization Explained: The End-to-End Process Of Safeguarding Digital Payments

Payment tokenization

There’s no shortage of payment options. Tap to pay, mobile payments, and now even contactless payments are possible due to the latest developments in technology. 

However, what isn’t as apparent is what makes these payment options possible. Enter payment tokenization. 

Whether it sounds like something straight out of a video game or conjures up images of complicated code, getting familiar with the extra level of security tokenization lends to millions of transactions is key to understanding the revenue-boosting benefits that come with it. 

With an increasingly digitized world, the need for higher security measures follows suit. It’s probably why the tokenization market is forecasted to grow to $2.7 billion by 2028.

What is payment tokenization?

Tokenization is a process that protects vulnerable data by replacing it with a temporary value generated as a series of numbers called a token. The term “tokenize” means to substitute or convert one thing into something else. 

The act of tokenizing means replacing sensitive data with non-sensitive data. It’s an effective way to ensure payment data is protected from criminal attempts like payment fraud, cyber attacks, or data breaches, as it’s processed digitally. 

For example, when you purchase a pair of socks with a credit card, your PAN (primary account number) gets replaced with a randomly generated token that enables a safe transaction. Meanwhile, your real credit card data stays unexposed and stored away safely. 

How does tokenization work

  1. Collect payment details
  2. Generate a token
  3. Send token to the payment processor
  4. Encrypt the token and send to ACH network
  5. Authorize and notify relevant parties

The good news is that with the right systems in place tokenization hardly requires additional resources to execute a secure payment process for thousands if not millions of transactions. With today’s innovations in the payments space, tokenization can be broken down into a general five-step process:

1. Collect payment details

At the first step of the tokenization process, the customer provides their payment details. This can either happen through an online checkout process or a POS system

The process is the same whether the transaction is happening online, through an ecommerce payment gateway, or in person through a point-of-sale system.

2. Generate a token

Once payment data is entered, the checkout platform generates the corresponding alphanumeric ID or “token.” 

So instead of John Doe’s data being processed as 123 456 789, the tokenization process turns it into something along the lines of HF6223785T7. The latter is a sort of representation of John Doe’s real data, which is what’s used to verify and finalize a transaction.

3. Send token to the payment processor

The token is encrypted and sent to the merchant’s payment processor. Meanwhile, the real payment information is stored in the payment gateway’s “vault” for safekeeping. It’s also the way a payments processor can match the token back to the original payment data. 

In the midst of this process, other relevant information is attached to the token. This can be things like the type of payment wallet used or who the holder of that wallet is.

4. Encrypt the token and send to ACH network

Once the encrypted token is received by the merchant’s payment provider, the information is once again encrypted before being sent to the corresponding ACH network for verification.

5. Authorize and notify relevant parties

If the payment is authorized, confirmation of the completed transaction is sent to all parties involved in the process. This includes the merchant, the payment processor, and the customer. 

At this point, the customer’s purchase goes through and they can move on to the next steps of the purchasing process, if any. This five-step process happens instantly, which ups the convenience factor that tokenization offers.


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Tokenization vs. encryption

Tokenization replaces vulnerable data like credit card numbers, bank account numbers, routing numbers, or even social security numbers with a temporary randomly generated alphanumeric ID as a way to safeguard that data. 

Encryption translates data into ciphertext with the use of a key and an encryption algorithm. It’s a way to cloak the data so that only authorized parties have access to it. Despite the difference in each approach, both methods can be effective in safeguarding data through digital transactions. 

Benefits of payment tokenization

  • Security
  • Convenience
  • Speed

The benefits of payment tokenization are plenty. Security, convenience, and speed are the overarching themes around the adoption of payment tokenization. 

Cashier helping customer

Security

Network tokenization can reduce fraud by 26%. The added security benefit goes both ways as both customers and merchants can have peace of mind knowing payment information is handled with the steps necessary to ensure secure transactions. As a merchant, the more transactions your payment processor handles, the more a need for proper payment tokenization or encryption becomes a priority.

This is especially true because merchants tend to be the most vulnerable points of attack for fraud—even more so than the banking institutions being used in the process.

I find payment tokenization to be the safest option when conducting my business. Especially, when dealing with not-so-popular payment gateways or apps who need to have my payment information on file. It gives me peace of mind knowing that my personal information is safe if there was a security breach.

Convenience

Tokenization also adds an element of convenience. You eliminate drawn-out security measures and can confirm more transactions with ease. Refunds may also be easier to process. 

Plus, checking out by using a tokenization process can eliminate the need to enter additional details like shipping information, since it’s already safely associated with your token and is automatically entered when making an online purchase. 

Using mobile payment is actually more secure than my actual debit card due to the tokenization, and it also allows me to travel with less in my wallet and peace of mind of not losing my actual card!

Waqas Ahmed, Marketer, Shopify

Speed

These days, speed is of the essence. This is yet another reason why tokenization is so effective: it’s generated instantly, in real-time. 

One-click checkouts offer tremendous benefits to merchants and customers. Not only does it increase conversions but it also helps build more customer loyalty by giving the customer a lightning-fast way to check out and peace of mind when it comes to security!

Waqas Ahmed, Marketer, Shopify

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Examples of payment tokenization

  • Mobile wallets
  • Recurring payments
  • One-click checkouts
  • Contactless transactions

Here is a list of different instances where payment tokenization comes to life.

Mobile wallets

Mobile wallets like Apple Pay, Samsung Pay, Google Pay, and Android Pay use tokenization to safeguard transactions. Once your personal credit card information is uploaded, Apple sends the data to your card’s network. It’s then in charge of replacing that card data with a token. That token is sent back to your mobile wallet so it can be used to conduct transactions.

If cybercriminals were to get their hands on your tokenized data, it would be useless to them, because it can’t be used for theft or cyberattacks. This is one of the reasons why mobile wallets are so convenient. They make the payment process faster, whether online or in person, without compromising your data.

Recurring payments

It’s easy to see how a recurring payment business model, like a membership, can be exploited for data to be used in criminal activity. Yet the tokenization process makes recurring payments safe and convenient.

Tokenization helps merchants securely store customers’ payment data for recurring billing without running into security issues. This enables merchants to establish consistent cash flow without the interruption of payment issues. 

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One-click checkouts

Today, one-click checkouts are becoming the norm, thanks in part to tokenization technology. Ecommerce and brick-and-mortar businesses alike can use the convenience of one-click checkouts to their advantage by safely storing a returning customer’s data and enabling them to finalize a transaction with one click.

If you’ve ever shopped at stores like Amazon, you’re probably familiar with their one-click function. It eases the purchasing process, which leads to more sales, a better basket size, and fewer abandoned carts.

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Contactless transactions

Have you ever completed a purchase at a contactless payment terminal? You were likely using tokenization as part of the transaction process. Contactless payment options made possible by the creation of mobile wallets are other scenarios where tokenization ensures a safe transaction with minimal hassle and added convenience. 

The tokenization process, and all the less-sensitive data appended to it, is used to instantly pay for purchases without the need for chip technology.

Is payment tokenization right for your retail store?

Payment tokenization is right for any retail store that wants to add an extra level of security to their transactions, whether they’re processed online or in real life. It’s an effective way to increase trust with your customer base and ensure costly data breaches or cybersecurity issues don’t become a problem.

Through the use of tokenization, it’s easier for repeat customers to purchase from you. It’s also a proactive way to establish trust and create a streamlined checkout process customers can count on for safe transactions.

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