This quick guide delves into payment tokenization, an important component of preventing payment fraud and crafting an exceptional customer experience. We’ll explore the relevance and benefits of tokenization 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 tokenization, and the unique benefits it holds for different types of businesses.
What’s in this article?
- What is payment tokenization?
- How does tokenization work?
- Which types of businesses need to use tokenization for payments?
- Benefits of payment tokenization
What is payment tokenization?
Payment tokenization 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 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 since 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 tokenization work?
Tokenization transforms sensitive payment data into a nonsensitive equivalent, which can be safely stored and transmitted without exposing the original data to potential security threats. In the context of payment processing, tokenization works as follows:
Data collection: When a customer initiates a transaction, they provide their payment information, such as credit card details, to the business.
Tokenization request: Depending on how the business’s payment system is set up, they may send the sensitive data to a secure tokenization service, typically provided by a payment processor or a third-party tokenization vendor. If the business is using tokenization-enabled payment hardware or software like Stripe Terminal, tokenization happens automatically as a basic part of payment processing.
Token generation: The tokenization 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 with no inherent value or meaning outside 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 securely stored in the tokenization service’s secure vault, which is designed to protect it from unauthorized access and data breaches.
Token usage: When the business needs to process the transaction, they can send the token to the payment processor or tokenization service. The service then securely maps the token back to the original payment data, 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 tokenization for payments?
Tokenization offers significant advantages for various types of businesses that handle sensitive payment data. These include:
Tokenization helps safeguard customer payment data and reduce the risk of breaches or fraud in online transactions.
Companies offering recurring billing can use tokenization to securely handle customer payment data for ongoing transactions.
Although more common in online transactions, tokenization can benefit physical stores using point-of-sale (POS) systems or mobile payment solutions, by providing an extra layer of security.
Platforms and marketplaces
Payment tokenization enhances security and streamlines management of sensitive payment data for multiple parties involved in complex transactions, fostering trust and scalability in the operations of platform businesses.
Benefits of payment tokenization
Payment tokenization 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 tokenization. The advantages of tokenization include:
Tokenization reduces the risk of data breaches and fraud by replacing sensitive payment data with nonsensitive tokens. This ensures that actual payment data is not exposed during transactions, minimizing the likelihood of unauthorized access or misuse.
PCI DSS compliance
By minimizing the storage and processing of sensitive payment data, tokenization helps businesses adhere to industry standards like 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
Tokenization 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, tokenization limits the potential damage by ensuring that any compromised data is nonsensitive and cannot be used for fraudulent transactions. This mitigates the negative impact on your business and customers—and preserves the integrity of your brand’s reputation.
Tokenization allows businesses to securely manage payment data across multiple channels, such as online and offline stores or customer loyalty programs. 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, tokenization 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.
Ecommerce retailers, subscription-based businesses, and brick-and-mortar retailers can particularly benefit from payment tokenization due to the specific challenges and opportunities associated with their business models. Here’s a closer look at the reasons why tokenization is especially advantageous for these businesses:
There are a handful of benefits to using tokenization that are particularly beneficial for ecommerce businesses, including:
Since online transactions involve transmitting sensitive payment data over the internet, ecommerce retailers face a higher risk of data breaches and cyberattacks. Tokenization significantly reduces this risk by replacing sensitive information with nonsensitive tokens, ensuring that actual payment data is not exposed during transactions.
Online retailers need to adhere to industry standards like PCI DSS to maintain customer trust and avoid penalties. Tokenization helps ecommerce businesses achieve compliance by minimizing 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. Tokenization can also simplify the checkout process for returning customers, since tokens can be reused for future transactions without requiring customers to re-enter their payment details.
Here are some of the advantages of tokenization for subscription-based businesses:
Subscription-based businesses rely on recurring billing, which requires the secure storage and processing of customer payment data for ongoing transactions. Tokenization ensures that sensitive information is replaced with tokens, mitigating the risks associated with storing actual payment data over an extended period of time.
Optimization for retention
Tokenization 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, plan upgrades or downgrades, and cancellations. Tokenization simplifies account management by allowing the same token to be used for various transactions and accommodating changes without exposing sensitive data.
Important benefits of tokenization for brick-and-mortar retailers include:
Although card-present transactions are generally considered more secure, physical stores can still be targeted by fraudulent actors who attempt to compromise POS systems. Tokenization enhances security by ensuring that sensitive payment data is not stored within the POS system, reducing the risk of breaches or unauthorized access.
Mobile payment solutions
As brick-and-mortar retailers increasingly adopt mobile payment options, tokenization is important for ensuring secure, easy transactions. Tokenization 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 stores or offer customer loyalty programs that require them to manage payment data across multiple channels. Tokenization 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 tokenization for platform businesses:
Facilitated multiparty transactions
Platforms often involve transactions between multiple parties, requiring the secure processing and storage of sensitive payment data for all users. Tokenization replaces this sensitive data with nonsensitive 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. Tokenization enables secure and easy payout management by reusing tokens for recurring payments, reducing the need for users to provide their payment details repeatedly.
As platform businesses grow and expand into new markets, they need to adapt their payments infrastructure to accommodate new users, currencies, and payment methods. Tokenization allows for seamless integration of new payment technologies and methods, ensuring a secure and consistent payment experience across all markets.
Customization and flexibility
Platforms often require unique payment flows to accommodate specific business models or user needs. Tokenization enables secure and flexible payment processing, allowing platforms to design and implement custom payment flows without compromising data security.
By implementing tokenization, platforms reduce their exposure to sensitive payment data, effectively limiting their liability in the event of a data breach. This can protect the platform from potential financial and reputational damage.
For more information about how tokenization operates within Stripe’s suite of payment solutions, read more here.