What is payment tokenization? How PSPs improve payments

• Tokenization converts sensitive card data into random code during the payment journey.
• Tokens can be used in online checkouts, recurring billing, and mobile wallets.
• Tokenization increases sales by creating easy checkouts for returning customers and recurring payments.
• Tokenization can protect cardholders and PSPs from financial crime.

What is Payment tokenization?

Tokenization is a technique that replaces sensitive card data, such as name and primary account number (PAN), with a unique random code.

Tokens are ideal for storing sensitive data against financial crime such as unauthorised access (internal fraud) and data breaches (external hack).

Tokens also increase sales by reducing the need to re-key data, creating easy checkouts for returning customers, enabling recurring payments, and storing details in digital wallets.

What tokens do PSPs use?

Single-use tokens are only valid for one transaction.

Multi-use tokens can be used for recurring payments.

Network tokens are issued by card schemes like Visa and Mastercard for specific devices or merchants.

How does payment tokenization work?

Tokenization occurs when a cardholder enters their payment online. The payment gateway of PSPs will generate a token which is passed between stakeholders in the payment journey:

Payment tokenization in recurring payments

Tokens are reusable within certain parameters, making them ideal for businesses where customers purchase repeatedly, have loyalty schemes, subscription payments, or digital wallets.

Rather than ask the client to re-enter details, the business utilises the stored token, adding a verification step such as CVC or 2FA to autheticate payments.

Benefits of payment tokenization

Enhanced Data Security

Holding data in tokenized form makes it illegible to fraudsters and hackers. As financial crime booms, tokenization is critical for eCommerce and PSPs.

Increased Sales

Tokenization improves the checkout experience as it removes the need to re-key card details, reducing friction and increasing conversions. Tokenization also protects customer card data, a key trust factor in recurring payments.

Omnichannel Capability

Tokenization can be applied to any card regardless of whether the transaction occurs in an eCommerce or other environment.  Standardization across channels reduces complexity and costs.

Demonstrate PCI Compliance

Tokenization is a key criteria of the Payment Card Industry Data Security Standard (PCI DSS) that merchants, payment gateways, and PSPs are required to meet to process card payments.

Automated Updates

In some cases, tokens can be updated automatically by the provider, allowing recurring payments to occur without interruption.

Is tokenization the same as encryption?

No. Tokenization replaces data with a random token whereas encryption scrambles data using cryptography. Tokenization is not mathematical, encryption is and may be deciphered. A payment journey will use tokenization for data storage and encryption for data transmission.

Summary of payment tokenization

To succeed in eCommerce and FinTech requires the seamless integration of excellent customer experience, competitive financial services and effective technology. Payment tokenization is the enabler.

As financial crime booms, it is also a critical element of creating security and trust as data is passed and stored along the payment journey.

With AI enabling more elaborate financial crime, merchants and PSPs must adopt the highest levels of protection and review arrangements regularly.