Tokenization Is a Game-Changer in the Financial World – Here’s How!

Tokenization Is a Game-Changer in the Financial World - Here’s How!

Tokens are the stepping stones to more secure online payments. 

By 2027, businesses and people alike are expected to lose US$40.62 billion in payment fraud. The solution to this problem? Tokenization. It refers to the replacement of sensitive data with unique identifiers that retain the length and format of the original data without having any relationship with it. 

Think of it this way, you use a credit card instead of actual cash so as to not lose the money or have it stolen. Similarly, companies use tokens to secure credit card data to prevent it from being misused. Simply put, tokens are placeholders of the original data and cannot be deciphered to find out the original information without the presence of additional data. 

As the crypto craze picks up steam, everything from real estate to video games is getting tokenized. Tokenization is a particularly crucial step for the financial world since it can help secure the bank details of customers. This is because, unlike the traditional financial systems where a customer’s details were stored on the business’s database, a breach in the token storage systems wouldn’t compromise the security of the underlying data. Let’s take a look at the full scope of tokenization in finance that take place today and why businesses should opt for tokenization. 

What is tokenization in payment gateways?

Let’s say you want to buy a new dress from XYZ website, when you go to make the purchase, the website will ask you for your card details. Instead of storing this information directly on XYZ’s website, the data goes into a token vault and is replaced by a series of unique characters. This token is passed by XYZ’s bank to the credit card network and is mapped against your information. It is then authorized by your bank to complete the transaction.

Whenever you make your next transaction with XYZ website, your information will now be present on their website as a token. Alternatively, you could also make payments through wallet applications, like Apple Pay, where again, the card details are tokenized and stored into the wallet’s database. 

It is important to note here that there is a difference between tokenization and encryption. While encrypted data can be decrypted using a cryptographic key, the same is not possible for tokens. Tokenized data can be detokenized, but only by the original tokenization provider, other than that there is no way of retrieving original data from a token. 

Why is tokenization important?

Besides protecting the loss of sensitive data, tokenization can also help businesses forge stronger relationships by assuring customers that their data is in safe hands. Whenever a company loses customer data (and with it, customers’ trust), it can directly translate into a loss in revenue. Moreover, companies can also get sued by customers for losing or exposing their data which can again put a dent in the company’s wallet. 

Just take a look at what happened to the American bank holding company, Capital One. The company was embroiled in a class-action lawsuit for a data breach in 2019 that affected 100 million people. Capital One eventually settled the lawsuit by paying US$190 million to its customers in December last year. This was on top of the US$80 million that the company had already been fined for the same breach. This should tell you the financial loss of data breaches is multi-layered and can have long-lasting effects on a company.  

Tokenization helps businesses stay compliant with Payment Card Industry Data Security Standard (PCI DSS). PCI DSS refers to the guidelines created by credit card companies to ensure that financial data is protected through strict regulatory standards. Since tokenization prevents businesses from ever holding any sensitive data, it satisfies the regulatory requirements of PCI DSS. All you need to do is find a tokenization provider who complies with the requirements and your job is done. You can then focus more on strategies to grow your business instead of ensuring regulatory compliance. 

Tokenization can also help you get recurring sales since it simplifies the process of making a purchase. With all the information stored as a token, the customer only needs to tap on the pay button instead of typing out all their card details over and over again or trusting the e-commerce website storing their data there.   

Tokenization is rapidly becoming the norm for financial services. In December 2021, India’s central bank, The Reserve Bank of India, announced that customers would now be able to make transactions online with their details no longer being stored on the website. Mastercard and GooglePay have even partnered with each other on the tokenization of card details of customers to ensure payment security and improve online shopping experience. With tokenization picking up steam, not only customers but also businesses will be able to protect themselves against financial loss. 

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Header image courtesy of Freepik

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