Payment tokenisation – the basics: What it is and how it benefits businesses

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  1. Introduction
  2. What is payment tokenisation?
  3. How does tokenisation work?
  4. Which types of businesses need to use tokenisation for payments?
  5. Benefits of payment tokenisation
    1. E-commerce retailers
    2. Subscription-based businesses
    3. Brick-and-mortar retailers
    4. Platforms and marketplaces

This quick guide delves into payment tokenisation, an important component of preventing payment fraud and crafting an exceptional customer experience. We'll explore the relevance and benefits of tokenisation for various business models, such as online retailers, subscription-based services, platform businesses and brick-and-mortar retailers. Here's what businesses need to know about the fundamentals of tokenisation, as well as the unique benefits it offers for different types of businesses.

What's in this article?

  • What is payment tokenisation?
  • How does tokenisation work?
  • Which types of businesses need to use tokenisation for payments?
  • Benefits of payment tokenisation

What is payment tokenisation?

Payment tokenisation is a security technique that replaces sensitive payment information, such as credit card numbers, with a unique, random set of characters called a "token". This process helps to keep payment data safe during transactions because the actual card information is not being used or stored. If someone were to access the token, they wouldn't be able to use it to make fraudulent purchases as it doesn't contain the real payment details. By using tokens instead of actual card information, businesses can provide a secure and seamless payment experience for their customers, while reducing the risk of data breaches and fraud.

How does tokenisation work?

Tokenisation transforms sensitive payment data into a non-sensitive equivalent, which can be stored and transmitted safely without exposing the original data to potential security threats. In the context of payment processing, tokenisation works as follows:

  • Data collection: When a customer initiates a transaction, they provide their payment information, such as their credit card details, to the business.

  • Tokenisation request: Depending on how the business's payment system is set up, they may send the sensitive data to a secure tokenisation service, typically provided by a payment processor or a third-party tokenisation vendor. If the business is using tokenisation-enabled payment hardware or software such as Stripe Terminal, tokenisation happens automatically as a basic part of payment processing.

  • Token generation: The tokenisation process uses a combination of algorithms, encryption methods and secure storage to generate a unique token that represents the original payment data. This token is typically a random string of characters or numbers that has no inherent value or meaning outside of the specific payment system.

  • Token storage: The token is stored in the business's system, replacing the sensitive payment data. The original payment data is stored securely in the tokenisation service's secure vault, which is designed to protect it against unauthorised access and data breaches.

  • Token usage: When the business needs to process the transaction, they can send the token to the payment processor or tokenisation service. The service then maps the token back to the original payment data securely, allowing the transaction to be completed without exposing the sensitive information to the business or other intermediaries.

  • Token reusability: For recurring transactions, such as subscriptions or stored customer profiles, the same token can be used multiple times without collecting sensitive payment data again. This simplifies the payment process while maintaining security.

Which types of businesses need to use tokenisation for payments?

Tokenisation offers significant advantages for various types of businesses that handle sensitive payment data. These include:

  • E-commerce retailers
    Tokenisation helps to safeguard customer payment data and reduce the risk of breaches or fraud in online transactions.

  • Subscription-based services
    Companies offering recurring billing can use tokenisation to handle customer payment data for ongoing transactions securely.

  • Brick-and-mortar retailers
    Although more common in online transactions, tokenisation can benefit physical shops using point-of-sale (POS) systems or mobile payment solutions, by providing an extra layer of security.

  • Platforms and marketplaces
    Payment tokenisation enhances security and streamlines the management of sensitive payment data when multiple parties are involved in complex transactions, fostering trust and scalability in the operations of platform businesses.

Benefits of payment tokenisation

Payment tokenisation offers a range of benefits that extend across various industries and business models. Most businesses that accept credit or debit card payments from customers would benefit by incorporating tokenisation. The advantages of tokenisation include:

  • Enhanced security
    Tokenisation reduces the risk of data breaches and fraud by replacing sensitive payment data with non-sensitive tokens. This ensures that actual payment data is not exposed during transactions, minimising the likelihood of unauthorised access or misuse.

  • PCI DSS compliance
    By minimising the storage and processing of sensitive payment data, tokenisation helps businesses adhere to industry standards such as the Payment Card Industry Data Security Standard (PCI DSS). Compliance with PCI DSS is important for maintaining customer trust and avoiding penalties.

  • Simplified data management
    Tokenisation allows businesses to manage customer payment information more efficiently. Tokens can be reused for future transactions, streamlining the payment process and reducing the need to collect and store sensitive data repeatedly. This simplification reduces the complexity of data management and lowers the associated costs.

  • Improved customer experience
    Reducing the likelihood of fraud isn't just an investment in protecting your customers' data – it creates a smoother experience at checkout and builds trust in your company. A simple payment experience, including the reuse of tokens for returning customers, can increase customer loyalty and drive repeat purchases.

  • Reduced scope of data breaches
    In the event of a data breach, tokenisation limits the potential damage by ensuring that any compromised data is non-sensitive and cannot be used for fraudulent transactions. This mitigates the negative impact on your business and customers, while preserving the integrity of your brand's reputation.

  • Unified commerce
    Tokenisation allows businesses to manage payment data securely across multiple channels, such as online and offline shops or customer loyalty programmes. This seamless integration promotes a consistent and secure customer experience, as well as back-end data convergence, regardless of the channel used for transactions.

  • Support for emerging payment technologies
    As payment methods continue to evolve, tokenisation can be applied to new technologies, such as digital wallets and contactless payments. This enables businesses to adopt innovative payment solutions while maintaining a high level of security.

In particular, e-commerce retailers, subscription-based businesses and brick-and-mortar retailers can benefit from payment tokenisation, due to the specific challenges and opportunities associated with their business models. Let's take a closer look at the reasons why tokenisation is especially advantageous for these businesses:

E-commerce retailers

Using tokenisation offers a handful of benefits that are particularly useful for e-commerce businesses, including:

  • Enhanced security
    As online transactions involve transmitting sensitive payment data over the internet, e-commerce retailers face a higher risk of data breaches and cyberattacks. Tokenisation significantly reduces this risk by replacing sensitive information with non-sensitive tokens, ensuring that actual payment data is not exposed during transactions.

  • Compliance
    Online retailers need to adhere to industry standards such as PCI DSS to maintain customer trust and avoid penalties. Tokenisation helps e-commerce businesses to achieve compliance by minimising the storage and processing of sensitive data within their systems.

  • Elevated customer experience
    Secure transactions and the reduced risk of data breaches foster customer trust, leading to increased customer loyalty and repeat purchases. Tokenisation can also simplify the checkout process for returning customers, as tokens can be reused for future transactions without requiring customers to enter their payment details again.

Subscription-based businesses

Here are some of the advantages of tokenisation for subscription-based businesses:

  • Recurring transactions
    Subscription-based businesses rely on recurring billing, which requires the secure storage and processing of customer payment data for ongoing transactions. Tokenisation ensures that sensitive information is replaced with tokens, mitigating the risks associated with storing actual payment data over an extended period of time.

  • Optimisation for retention
    Tokenisation enables the smooth processing of recurring payments without requiring customers to provide their payment details repeatedly. This creates a frictionless customer experience, leading to higher customer retention rates.

  • Streamlined account management
    Subscription businesses often have to handle changes in customer payment preferences and plan upgrades or downgrades, in addition to managing cancellations. Tokenisation simplifies account management by allowing the same token to be used for various transactions and accommodating changes without exposing sensitive data.

Brick-and-mortar retailers

Important benefits of tokenisation for brick-and-mortar retailers include:

  • Point-of-sale security
    Although card-present transactions are generally considered to be more secure, physical shops can still be targeted by fraudulent actors who attempt to compromise POS systems. Tokenisation enhances security by ensuring that sensitive payment data is not stored within the POS system, reducing the risk of breaches or unauthorised access.

  • Mobile payment solutions
    As brick-and-mortar retailers increasingly adopt mobile payment options, tokenisation is important for ensuring that transactions are simple and secure. Tokenisation works with digital wallets and contactless payment methods, providing an extra layer of security while supporting the adoption of new payment technologies.

  • Omnichannel payment convergence
    Brick-and-mortar retailers often operate online shops or offer customer loyalty programmes that require them to manage payment data across multiple channels. Tokenisation allows for seamless integration of payment data between online and offline channels while maintaining security and compliance.

Platforms and marketplaces

These are a few of the unique advantages of tokenisation for platform businesses:

  • Facilitated multi-party transactions
    Platforms often involve transactions between multiple parties, requiring sensitive payment data to be processed and stored securely for all users. Tokenisation replaces this sensitive data with non-sensitive tokens, ensuring a secure and seamless experience for all parties involved while reducing the risk of data breaches.

  • Simplified payout management
    Platforms need to manage payouts to sellers, service providers and app developers, which can be complex due to varying commission structures and payout schedules. Tokenisation enables secure and easy payout management by reusing tokens for recurring payments, reducing the need for users to provide their payment details repeatedly.

  • Scalability
    As platform businesses grow and expand into new markets, they need to adapt their payments infrastructure to accommodate new users, currencies and payment methods. Tokenisation allows for the seamless integration of new payment technologies and methods, ensuring a secure and consistent payment experience across all markets.

  • Customisation and flexibility
    Platforms often require unique payment flows to accommodate specific business models or user needs. Tokenisation enables secure and flexible payment processing, allowing platforms to design and implement custom payment flows without compromising data security.

  • Reduced liability
    By implementing tokenisation, platforms reduce their exposure to sensitive payment data, effectively limiting their liability in the event of a data breach. This can protect the platform against potential financial and reputational damage.

For more information about how tokenisation operates within Stripe's suite of payment solutions, you can read more here.

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