The COVID-19 pandemic has completely changed the world as we know it. More things are being done online, which leads to a growing number of online payments. People are paying for a variety of things online, from groceries and clothes to educational courses and access to digital platforms.
However, this also implies that we as Internet users are sharing our sensitive data each time we purchase online.
How are all these businesses and websites protecting our private data each time we use our credit cards online?
Many believe that payment tokenization is one of the most efficient ways to improve security and trust. But, what is tokenization? How can such a complex, emerging technology make us feel safer when buying anything online?
In this article, we bring you all the answers about payment tokenization.
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SEE ALSO: A Balanced Realistic Explainer on Tokenization
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Tokenization & Payment Tokenization
So, what is tokenization?
Simply put, tokenization turns data or an asset into something that is equivalent to them. The concept of tokenization first appeared in 2001 as a way to secure sensitive transactional data. This system, which was developed by TrustCommerce, replaced the primary account number (PAN) with a random number or token. This led to merchants no longer storing credit card information, which improved security tremendously because there is nothing for hackers to attack and steal.
Payment tokenization refers to the process of replacing sensitive, private data like credit card number, account number, and address with randomly generated numbers representing a token. Each token consists of anywhere from thirteen and nineteen alphanumeric characters, and none of these numbers include the PAN or any detail revealing the user’s identity.
Tokens protect valuable information and sensitive data. Tokens can be utilized in a database or an internal system, with the original information being stored in a token vault. What is important to keep in mind about tokens is they are irreversible and unique. In other words, a token can only be used once, for only one purchase. Token and the original number are not connected in any mathematical way, so nobody can revert them to their original version.
How to Tokenize Assets
However, there is another concept of tokenization which means issuing tokens on blockchain that are backed by real assets. This technology allows for more efficient crowdfunding and investment. A user can tokenize anything from private equity shares to real estate. When talking about how to tokenize real estate, one must begin by understanding how the value of the property is being translated into tokens. In real estate tokenization, the value of a property will be converted into digital tokens through special blockchain real estate tokenization platforms. These security tokens will represent shares of the property.
Once that token is offered for sale, investors can purchase it by getting fractional ownership of that property. It works the same with any other data or asset. Asset tokenization leads to better liquidity, lower entry cost, improved transparency, top security, and many other benefits.
Benefits of Payment Tokenization
The reason why payment tokenization is becoming increasingly popular with businesses and customers is that it protects sensitive data, but also prevents data breaches. Yet, these are not the only benefits that should put this term on your radar. As mentioned above, there are several advantages of payment tokenization you need to know about.
Payment tokenization enhances customer trust. As customers are now conscious of businesses who focus on information security to protect their audience, avoiding implementing payment tokenization can lead to losing existing and new customers.
With payment tokenization, you can expect to provide a better user experience. Your customers’ card information can be stored in the digital wallet or each time when making an online purchase. Tokenization allows customers not to disclose their original data or fill out payment details when trying to make a quick purchase.
Also, payment tokenization reduces financial and reputational damage. After all, data breaches are an incredibly expensive situation to be in, with some businesses facing costs of several million dollars. For now, payment tokenization is the best way to combat such cyber threats.
In Final Words
Of course, tokenization will not magically solve all existing issues around online payments, but it tremendously reduces the changes in these situations occurring. Payment tokenization enables merchants to step away from dealing with sensitive payment information, so privacy and security work on both fronts – merchants and customers.
When talking about security, it’s important to note that the security token market is still evolving. This technology will probably provide answers to many more challenges in the near future, however, for now, we have to be aware of its limitations. As much as it’s true that it improves privacy and trust while bringing businesses closer to their target audience, nobody can guarantee the complete elimination of data breaches.
However, this is a crucial, and very necessary step to more secure online payments. As more and more companies are moving their businesses online, customers must feel safe when using their credit card information online.
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RECOMMENDED READING: South African Financial Regulators Launch Project Khokha 2 to Issue, Clear, and Settle Tokenized Debentures
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