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Enhancing Payment Processing Security with Tokenization Technology

William DawseyBy: William Dawsey

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The increased use of mobile and online payments has challenged the credit card industry. Consumers appreciate the convenience of paying remotely, but the process opens several security risks. Without significant safety measures, criminals only need to steal a cardholder’s information to make fraudulent purchases.

Tokenization is a security technology that can prevent card-not-present fraud. It minimizes the exposure of raw card data during the payment process. The card issuer or a third-party tokenization service holds sensitive card information in a database. Merchants store a digital token linked to the cardholder’s account. Unlike encryption, the token information is not directly related to the card data. Even if criminals hack a merchant’s customer database, they will not gain access to either raw or encrypted card numbers.

How Tokenization Works in Digital Wallets

A digital wallet is a tool for storing sensitive financial information on a mobile device. Point-of-sale hardware with NFC-enabled technology can accept contactless payments with a wave of a mobile phone. The wallet automatically transfers any necessary information.

Digital wallets have several layers of security. A passcode or biometric security measure to open the device serves as the first layer of defense. Two-factor authentication for wallet access provides another layer. Tokenization in mobile payment processing increases the safety of the information itself.

With this technology, the wallet holds a token issued by the credit card company instead of the actual credit card data. This token travels to the card issuer or tokenization service for approval when the user makes a purchase. The card company can approve the transaction without transferring card data over a network or releasing it to the merchant.

Staying Compliant While Adopting Tokenization

Staying Compliant While Adopting Tokenization

As e-commerce expanded in the early 2000s, credit card companies realized that these transactions were vulnerable. Security standards were not strong enough to prevent stolen numbers or fraudulent purchases. To remedy this situation, several card companies worked together to produce the first version of the Payment Card Industry Data Security Standard in 2004.

Merchants must adopt practices that maintain PCI DSS compliance if they want to take card payments. The primary concern of this standard is the protection of cardholder data. One of the advantages of including credit card tokenization in payment processing services is that it removes the security burden on the merchant.

By implementing tokenization, merchants have distance from sensitive information. Their payment processing solution will store tokenized transaction information instead of sensitive data. The tokenization provider is responsible for keeping the raw credit card data secure.

How Tokenization Technology Improves Authorization Rates

With tokenization-secured payments, credit card companies are more likely to approve transactions, providing a smoother payment process.

Card companies use several security protocols to keep cardholder data safe. Machine logic tools examine every transaction for signs of fraud. An AI-powered analysis will look at factors such as purchase histories, IP addresses, and the physical location of the purchase. A few risk factors may trigger a request for additional authorization. If the purchase qualifies as a higher risk, the card company may reject it altogether.

Tokenization significantly reduces the perceived risk of a transaction. The card company knows that several verification steps happen before they receive a cardholder’s token. Using this system promotes a painless payment process for merchants and customers.

Benefits of Implementing Tokenization

The Benefits of Implementing Tokenization

It makes sense for software vendors to consider adding tokenization during the development of a payment processor. POS products for merchants that employ this technology will enhance many aspects of the payment process for all parties involved. Consumer-focused products like digital wallets will benefit from improved security and data safety.

Data breaches are a constant threat. Cybercriminals are likely to target merchant databases that have weak spots in their security. Tokenization reduces the damage of a cyberattack because the tokens do not have value by themselves. A successful attack will not release sensitive information.

Incorporating tokenization technology also prevents fraudulent purchases. Tokens are device-specific. A single cardholder account may have tokens attached to several devices or merchant accounts. A lost device does not mean closing down the full account. Instead, the card company can disable the token for the device in question.

Making a Seamless Transition to Tokenized Payments

Tokenization is quickly becoming a standard security precaution in the payment processing industry. Financial software products like mobile wallets and payment platforms must include this technology to stay relevant, competitive, and PCI compliant.

Incorporating a tokenization feature requires working with developers who have a comprehensive understanding of the technology. Upgrading a system to a tokenized model can create problems if not executed well. Procedures that used to work with raw or encrypted data will all require updates to maintain interoperability. An experienced development team will help software vendors provide payment solutions that transition smoothly to a tokenized model.

Disclaimer:

Chetu, Inc. does not affect the opinion of this article. Any mention of specific names for software, companies or individuals does not constitute an endorsement from either party unless otherwise specified. All case studies and blogs are written with the full cooperation, knowledge and participation of the individuals mentioned. This blog should not be construed as legal advice.

Chetu was incorporated in 2000 and is headquartered in Florida. We deliver World-Class Software Development Solutions serving entrepreneurs to Fortune 500 clients. Our services include process and systems design, package implementation, custom development, business intelligence and reporting, systems integration, as well as testing, maintenance and support. Chetu's expertise spans across the entire IT spectrum.

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