Thursday, May 19, 2022

How do tokenization and encryption secure the payment?

When everything went digital in 2020, the threat of data breaches and virtual frauds increased.

This is why the security of our digital transactions matters more than ever now. This is more needed with the security of payment data.

Payments are becoming faster than ever. It is because they are digitised as consumers want convenience as well as choice. With this, tokenization and encryption are emerging as the key tools to secure our sensitive information. It is also done in a cost-effective and protective way.

If you have ever made a purchase online through e-commerce platforms like Amazon or Flipkart, you will notice how easy their payment mechanism is. One would like to purchase things the same way in the future as well. This is solid proof that digital payments are here to stay and that you will need to secure them.

Consumers and businesses depend upon technologies like tokenization and encryption to secure the transactions done every day. Let us understand the various aspects of this and why they matter to the various stakeholders involved.

What is Payment Tokenization?


In simple words, tokenization means to substitute or replace one thing with something different. Similarly, tokenization is the simple process of replacing sensitive data with non-sensitive token data.

The real data is stored in vaults. These vaults are purpose-built secured tokens. The tokenization of payment is a mechanism to replace sensitive and personal data like credit card numbers and PINs with a unique identifier. This can only be authenticated, decrypted, and translated by the token provider. The process of tokenization lets businesses and their users safely undertake payment transactions. At the same time, they make sure the important transaction data is of ‘no cash value’ to hackers and criminals.

Tokenization is a primary and standard technology that secures the data of a cardholder in a digital transaction. However, one thing should be noted that this transaction need not be online only. It applies equally to in-store purchases as well as the payment of utility bills that are recurring in nature. It is applicable to every type of transaction done online using cards.

How does end-to-end encryption work?

End-to-end encryption has become quite popular in the last decade. It was firstly used in messaging services like Telegram, iMessage and WhatsApp.

End-to-end encryption uses cryptography to necessarily scramble data at the initial point in order to secure it for transit. In other words, it substitutes sensitive data with a one-time alphanumeric ID. This ID has no value to the hackers who might break in between, nor does it have any use to the account’s owner.

Finally, the recipient decodes it on the other point. In all this, a third party provides encryption keys to the parties in both points so that a more secure exchange can take place rather than sending raw and unencrypted data.

Tokens do not include any sensitive data. They are just like a map that explains where the customer’s bank keeps the information within their systems. Tokens are generated through mathematical algorithms that cannot be reversed. These can be opened only after the transaction is completed.

These are the six steps necessary in this process that happens behind the scenes:

1. A consumer initiates a transaction and enters sensitive card-related data.

2. This information is received by the merchant acquiring bank in the form of a token

3. Acquirer transmits this token to the credit card networks for authorising

4. Once it is authorised, the customer’s data is stored in the bank’s vault. These are secured and the token gets matched with the customer’s account number.

5. The bank verifies the transaction and declines or allows it depending upon the funds.

6. If authorisation is successfully done, the merchant gets a unique token in return for current and future transactions.

End-to-end encryption was started back in the 90s. However, it became popular with a program named Pretty Good Privacy (PGP) in the 90s itself. It again became famous with messaging apps as mentioned before.

Benefits of credit card tokenization

Credit Card tokenization boosts payment security by a lot. Tokenization is a foolproof way of protecting your customers’ payment information from both external hackers and internal problems.

These randomly generated tokens can be read by the payment processors only. So it cannot be monetised unnecessarily by any party involved or external hackers.

With tokenization, many businesses have to comply with PCI DSS standards or they will be imposed a fine in case of a data breach. Also, merchants can comply with PCI DSS with negligible liabilities and security expenses.

Not just transactions but other sensitive information like passwords, secret files can also be protected using the tokenisation mechanism.

What are the differences between tokenization and encryption?

Source: Experts Exchange

These two technologies are complementary. They are used together as a part of layered security approaches. However, there are a few differences to keep in mind.

1. Functional difference:

Encryption protects data in motion whereas tokenization protects the data at rest. In spite of sending the raw data, it is encrypted. It is encryption that makes the data more secure.

Tokenization is the process of replacing the data with randomly generated tokens, which stores the sensitive data in a secured vault.

2. Operational difference:

Encryption is dependent upon cryptographic algorithms and keys to encode the data during the transmission process. This transmission is risky as data has to travel through different networks.

Tokenization replaces the data with tokens. These tokens have no value to hackers as it is generated randomly by mathematical algorithms.

The role of digital wallets.

When you are shopping for something, you look for both convenience and security. Digital and mobile wallets stand on both tests.

Tokenization is important to bring the use of digital wallets to life. Mobile applications have come out as an important sales medium mostly because of integrated payments.

The payment credentials saved already make checkout easy for the shoppers. However, to add some extra layers of security, encryption, tokenization and device authentication are needed.

The scope of tokenization and Reserve Bank of India

We have talked in this article previously about how tokenisation makes online payment and shopping easier and more secure. Even in the policy front, the Reserve Bank of India has realised its importance.

Reserve Bank of India (RBI) has issued a notification permitting authorised card networks and issuers to offer card tokenization services. With effects to the same, it has advised that neither the authorised Payment Aggregators (PAs) nor the merchants on-boarded by them shall store customer card credentials. So it will affect the information stored as Card on File as well, even the card on file information needs to be tokenized and payment networks, issuers will have to ensure compliance. Further, RBI has also extended the scope of the tokenisation to other devices as well like devices that can support or participate in the Internet of Things (IoT) ecosystem for payments.

Also, explicit customer consent will be required from the customers if they want to use tokenization service or not, and only then tokenisation can be given. Customers must also be given a choice to remove the tokens associated with their card as per their wish, and such facilities must be provided through digital modes, like IVR, net banking, mobile application etc. Whenever a new card is issued, previous tokens need to be removed and explicit consent for registration needs to be taken. We are hopeful that in the future tokenisation will not remain a choice but a necessity.

However, for transaction tracking and/or reconciliation purposes, entities can store limited data. It will be the last four digits of the actual card number and card issuer’s name, in compliance with the standards applicable.

So, the future of tokenisation is very bright.

Should you learn about this technology?

This technology makes things easier and more secure for businesses and individuals. The use of it will increase in the future. So, the answer to the question above is yes.

Why should you enroll in the GFA Course?

Global FinTech Academy aims to make the knowledge behind Financial Technology available to all. We offer a range of courses that make the understanding of Technology easier for you. You can use this to strengthen your career, knowledge, disrupt the FinTech market with new and innovative product/s that are full of potential, or for literally anything. The good news is you get to learn all this in an easy language and from ground zero. Our aim is to deliver the best knowledge to you in the easiest way possible.

This course is Business-Oriented. This means it is fully updated with the industry trends of all time that you need to know about.

In this course, you will learn about.

  • Tokenization in Digital Payments
  • Tokenized Transaction Flow
  • Network based tokenization
  • Apple Pay Tokenization
  • Hardware Security Modules (HSM) for Encryption and Decryption
  • PCI DSS on Tokenization
  • Merchant Responsibilities in PCI DSS Tokenization process
  • Open Authorization OAuth and Tokens

With the increasing number of Digital Payment tools and use cases, we are also becoming prone to newer frauds and risks. New age fraudsters and hackers are smarter and we need to protect ourselves by being one step ahead of them. Tokenization and Encryption are the tools that can secure mobile-based digital payment systems and Payment Processing.

Apple Pay, Samsung Pay, Google Pay, payment service providers, almost all companies are using tokenization and encryption to secure their own as well as the entire payment ecosystem.

We are excited to simplify these two most talked about security tools in digital payments in this course.

To get this course for USD10, apply code GFA10 at the checkout/payment page

Get it HERE

Expecting to meet you on the other side of the course!

You can access this course on Udemy as well – Click Here



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