Payment Tokenization: Meaning, Benefits, and How It Works

Key  takeaways 
 

• Reserve Bank of India mandated the use of tokens for transactions On September 30, 2022. Its e-mandate framework is enforced from October 1, 2021.
   
• Payment tokenisation is a method used to convert important data into a unique code for security purposes. 
   
• Increasing digitalisation and preferences for online payment make payment tokenisation more essential for the growth of any business. 
   
• Payment tokenisation reduces card abandonment by 20–60%. 

Are you fed up with watching online fraud? Want to be safe while doing online transactions? Tokenisation can definitely help you out. 

Tokenisation is the process of using a token instead of another item. When you proceed with a transaction your details are converted into a PIN or code. The real data of the user is never stored in the seller's account or server. In the same way, payment tokenisation works. 

Tokenization payment meaning is the process of converting important and sensitive data of the user into unique random numbers. These numbers are known as tokens. That sensitive data includes passwords, ID numbers, contact details, and digital assets. This token is generated by a mathematical algorithm and made for single use. 

Bonus tip - In 2024, the payment tokenisation market was of value $1.726 billion and it is expected to grow by $4.332 billion till 2031. 

Categories of payment tokenisation 

Categories of tokenisations are based upon user, storage system, and intention of use. 
 

Sellers can select these tokens based upon their need and preferences. 

How does payment tokenisation work
 

Working of payment tokenisation includes the following steps 
 

1. Enter data - when customers check out at the site or app, they enter their details like PAN, expiry, and CVV.
    
2. Token - These details are routed to payment service providers, and algorithms convert these details into 16 random numbers. Which is a token.
    
3. Reuse - this token can be stored or reused for transactions.
    
4. Approval -  Acquirer sends this token to the card network, and this network detokenise it and sends it to the bank of the issuer. The bank decides whether to approve or decline a request based on funds in the bank account.

With the spread of digitalisation tools like tokenisation have become easy to use. You can follow the above steps to use it. 

Benefits of payment tokenisation 

Payment tokenisation is a smart way of securing transaction details. It benefits merchants in many ways. It reduces the risk of fraud because stolen tokens can't be used like any card. It simplifies PCI DSS compliance by cutting audit costs and penalties. 

Fast process and fraud detection improve scalability. It also enables one-click checkout. It enhances security by mitigating the chances of data breaches. Also, it allows global payment, as a result, merchants can accept payment from worldwide. 

Businesses that can use payment tokenisation 

Payment tokenisation is suitable for all the businesses that accept debit and credit payments from their customers.

1. E-commerce Retailers

Online platforms like Amazon and Myntra use payment tokenisation for checkout and cart recovery.

2. Subscription Services 

Saas platforms like Netflix and Shopify rely on payment tokenisation for recurring billing and auto-updating expired cards.

3. Fintech and Mobile Apps

In India, apps like Google Pay, PhonePe, and Paytm use a token for secure transactions. On a global level, apps like Apple Pay, Samsung Pay, and PayPal are active.

4. Travel & Hospitality

Here, payment tokenisation helps in online booking of Flights, Hotels, Trains, Check-in and check-out, contactless services, in-app payments, refunds, cancellations, etc.

Those businesses with daily customer transactions can use tokenisation mechanisms.

Payment tokenization service providers

Tokenisation service provider is a company that uses secure technology for the generation, management, and issuance of tokens. These tokens are used instead of debit and credit cards. If you are also looking for the best platform for seamless transactions, here are some key payment tokenisation service providers.

• VGS
• Stripe
• Razorpay
• Visa (VTS)
• ACI Worldwide

These payment tokenization service providers reduced PCI compliance Scope, enhanced Security, and improved flexibility.

Which is the right payment tokenisation solution?

If you want smooth and sustainable growth, then choosing the right payment tokenisation solution becomes very important. While choosing the best one, follow the steps below.
 

1. The first thing you should take into account while choosing tokenisation is scalability. See if your provider can do cross-border transactions effectively, accommodate users' increased load, or work with various payment systems.
    
2. Then, look for security. The provider who offers more advanced fraud prevention systems like device fingerprinting, multi-factor authentication, and real-time monitoring goes for them.
    
3. Check and compare providers’ pricing structures. 
    
4. Your tokenisation system should easily work with existing software. 
    
5. Look for a tokenisation solution which offers features like one-click payment and recurring payment. 

There are many companies offering advanced tokenisation mechanisms. You have to choose them accordingly. 

Conclusion 

Payment tokenisation is a system that uses technology to change transaction details into unique random numbers to prevent misuse. It is the most secure and advanced way of transaction. Businesses with lots of volume adapt this method. Customers feel secure because of this. You also can adopt it and create a secure system.

FAQS 

RBI new rules for payment processing tokenisation from April 1 explained

RBI mandates use of payment processing tokenisation. Now tokens are being used for online transactions. This improves security.

How does biometric linked tokenisation differ from traditional OTP?

The traditional OTP method is like a one time password. When you verify you get notification. In biometric linked tokenisation fingerprints and facial recognition is used to do authentication. 

Should we stop tokenising cards as per RBI guidelines?

No, you should not stop tokenising cards as per RBI guidelines. Infact, the RBI made it mandatory to use this. 

What do tokenised debit cards fail for Autopay even after successful validation?

Tokenised debit cards fail for autopay because the bank is not supporting recurring tokenisation properly or Miss e-mandate setup.