Card Payment Tokenization – What It Is and How It Works?

Over the last decade, India has catapulted into a leadership position globally for its efforts to embrace digital payments across the nation. While UPI brought digital payments to the masses, the country’s rising middle class was also showing increased patronage of physical payment instruments like credit cards. Banks, Fintech companies, and even retail brands were bringing new credit cards to the market every year. According to the data from the RBI, in February of 2024, India witnessed its credit card population breach the 100 million mark!

The surging user base for credit cards in the country was also a potential hotspot for cybercrime. On a global scale, studies estimate that credit card fraud will result in losses amounting to over USD 43 billion by 2026.

The country’s financial watchdog did not want major fraudulent activities to affect the booming financial inclusion scenario. They have taken a series of steps to ensure that customers are protected from attacks and thefts across various online and offline payment channels. However, the most promising effort in this direction was the mandate for card payment tokenization in all internet-enabled payment ecosystems.

What is card tokenization?

In the past, e-commerce websites and other online service providers allowed customers to store their card details on the merchant’s server to facilitate easier payments. But in the wake of rising cybercrimes, any breach of the merchant’s digital ecosystem could result in the payment info of millions of customers falling into the wrong hands. To avoid this, the concept of tokenization was introduced and made a mandatory feature for payment processing online by the RBI. In simple terms, tokenization is the process of replacing the actual payment information of a customer’s payment card with an alternate unique code known as a token. The token will have a distinct identity created with components like a card number, the issuer network or bank, the merchant, and the device used by the customer.

How does card tokenization work?

Once a customer provides their payment information to an online merchant and opts for tokenization, the website forwards the bank information to the card issuer network or bank which creates the token and shares it back with the merchant. The merchant only stores this token in their servers. When the customer makes their next payment using the tokenized payment card, he or she must enter only the CVV number to complete the transaction. The website or app doesn’t store the card details but rather an encrypted code that doesn’t reveal any actual identifier information about the card used.

Merchants like online shopping websites or apps must register with card network providers or banks to become token requestors. Only then they would be able to provide customers with the option to tokenize their card payment information. Banks and card networks are tasked with the job of building a token generation and management system that follows internationally accepted security standards and protocols to mask and protect data while seamlessly processing payments without delays.

How is card tokenization beneficial?

With card tokenization, both the merchant and consumer get a failproof mechanism to prevent unauthorized access to payment information by fraudsters. Let us explore the top three benefits of such an arrangement for payment processing at online payment channels:

·       Secure Customer Experience

Payment data is one of the most targeted entities in cyberspace today. The potential losses that customers can experience directly, and brands incur for lawsuits can run into billions of dollars as shown earlier. In the fast-paced world of e-commerce and digital services, repeat transactions are an inevitable scenario. Offering convenience to customers by not having them enter their card information every time is a huge respite and a valuable addition to the overall customer experience. However, doing so without any vulnerability that leads to data breaches is extremely important. With tokenization, this is possible as no matter the mechanism deployed to break the merchant’s servers, all fraudsters can access is the encrypted token. It barely contains any credible data that can be pieced together to make any fraudulent attempt to steal money.

·       Lower Security Costs for Merchants

With tokenization, merchants play the role of token requestors only. They do not have to invest in building and maintaining high-security card storage infrastructure. It is the banks or card networks that handle token generation and verification processes. Merchants can direct their efforts toward building their core digital experiences and other security initiatives and not worry about breaches of sensitive financial data. In other words, they can simplify sensitive data management with zero risks.

·       Build New Service Models

With tokenization, merchants get the opportunity to carry a secure payment data set to multiple services and use them across a wide range of applications in their ecosystem. They can club them with loyalty programs, integrate with physical POS systems, etc. to build new service models with secure payment options. Back-end financial data convergence can be streamlined effectively without risks and businesses can concentrate on building new front-facing services innovatively.

The future

Tokenization is more of a principle that can be extended to multiple payment use cases. For brands and e-commerce players, this opens an opportunity to build secure digital experiences involving payments in multiple formats. For example, the same technology can be modified to include wallets and other prepaid or postpaid financial instruments. The technology helps to maintain compliance with globally recognized standards like PCI and hence, can be a major competitive advantage for businesses when they expand either domestically or globally.

Getting into the world of secure payments with trends like tokenization is, however, a journey that needs to overcome multiple stages. Businesses need a strong technology partner that understands modern nuances in payment technology and helps them find the right solutions, prepare the most strategic roadmap to integrating new mandates, and build scalable payment experiences for customers. This is where Verinite can be a game changer. Get in touch with us to know more.