What is Tokenization and How Does it Work?

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Introduction

With the surging popularity of blockchain technology, tokenization is also becoming popular. Card tokenization secures the ownership of assets, secures data, and participation in crypto investing. However, many don't understand what is tokenization in banking. In this article, we will discuss tokenization, its examples, and how it works. 

What is Tokenization in Banking?

In layman's terms, tokenization protects exposed data by replacing it with a unique, non-sensitive, and temporary value called a token. Replacing sensitive data with non-sensitive data is also tokenization. Tokenization in banking is used to record the ownership of tangible assets (art) and intangible assets (shares) in a company.

The process of transforming an asset into a unique unit can also be referred as Tokenization. The ownership rights of an asset are then changed into what are called ‘tokens'. They are popular in blockchain technology and they tend to exclude the original data. Tokens share similar characters or formatting in general. 

Why is Tokenization of Cards Important? 

Tokenization is a crucial part of the card payments industry. It is a much-needed technology as it safeguards cardholders' sensitive data. If you issue a token for your debit/credit card, you can be assured of the payments being protected against threats and loss. 

In 2019, the RBI (Reserve Bank of India) passed a guideline called tokenization. As per the tokenization guidelines, merchants and payment aggregators can use encrypted tokens to execute transactions. The government and banking organizations introduced card tokenization regulations to control the threats and increase security. 

Tokenization of cards is crucial as it helps to transfer ownership of an asset, make payments, and complete other financial tasks. Below we have highlighted the top 3 needs for card tokenization:

• Transaction Safety

Tokenization cuts off the chances of fraud and threats resulting from sharing card details.

• Undisturbed Payments

The token supports contactless card transactions at point-of-sale (PoS) terminals. Even QR code payments can be executed without the need to share card details. All of these result in easy payments. 

• Data Storage

No third-party merchandise will have the right to save your card details. Tokens permit only card networks and card-issuing banks to have access to any card data.

Tokenization – Working Procedure

Tokenization of cards is a procedure that includes many parties like the merchants, card networks, issuer, customer, acquirer, and token requestor. Tokenization is a process that replaces the actual customer credit card details with the alphanumeric code or tokens. Certain algorithms are used for the tokenization working process. The generated code doesn't allow any third party to have access to the original data.

If you want to know how card tokenization works, just read the steps mentioned below. 

1. The customer makes a card purchase which includes the credit card details.

2. The tokenization system accepts sensitive card details.

3. It is the tokenization system where the random code called 'tokens' are generated.

4. These tokens replace the actual card details.

5. The link between the card details and the token is safely stored in the cloud space in the data vault.

6. Whenever a debit/credit card user uses the card for payment, generated tokens represent the actual card details in the system. 

7. Once the payment is processed, cardholders can save the tokens for future recurring transactions.

Tokenization vs. Encryption

Card tokenization is quite different from encryption. Tokenization – token is a substitution of vulnerable data like credit card numbers, and bank account numbers with a temporary randomly generated alphanumeric ID. Whereas, Encryption uses a key or an encryption algorithm to interpret data into ciphertext. Tokenization is a way to safeguard that card issuers' sensitive data. Encryption is a way to cover/conceal the data so that only authorized parties can access those data. 

Payment Tokenization Examples

• Mobile wallets

Mobile wallets are an important & popular tokenization example. Apple Pay, Samsung Pay, & Android Pay use tokenization for secure transactions. Mobile wallets are convenient and highly safe to use. Because your personal credit/debit card information is replaced with a token. The token is sent back to your mobile wallet for conducting transactions.

• One-click checkouts

Another popular card tokenization example is one-click checkouts. Today, eCommerce businesses rely on one-click checkouts to safely store a returning customer's data. Customers can finalize a transaction with one click. Amazon offers you to shop with their one-click function. 

• Recurring payments

A recurring payment business model makes repetitive payments safe and hassle-free. Card tokenization helps merchants securely store customers' payment data for recurring billing without compromising on security. 

Final Takeaway 

In conclusion, we can say that Payment tokenization is ideal for an extra level of security during online transactions. You should also adopt this effective way of transaction & avail of tokenization benefits. 

Payment tokenization enables customer convenience and supports safe payment processing. It comes with the benefits of decreased data breaches and fraudulent activities. Thus, tokenization will soon be an ideal approach for every retail & banking industry.