The COVID-19 pandemic has completely changed the world as we know it. More and more things are being done online, leading to an increasing number of online payments. People pay for a variety of things online, from groceries and clothes to educational courses and access to digital platforms.
However, it also implies that we as internet users share our sensitive data every time we shop online.
How do all these companies and websites protect our private data every time we use our credit cards online?
Many believe that payment tokenization is one of the most effective ways to improve security and trust. But what is tokenization? How can such complex and 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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Payment tokenization and tokenization
So what is tokenization?
Simply put, tokenization transforms data or an asset into something equivalent to it. The concept of tokenization first emerged in 2001 as a means of securing sensitive transactional data. This system, which was developed by TrustCommerce, replaced the Master Account Number (PAN) with a random number or token. This has led to merchants no longer storing credit card information, which has greatly improved security as hackers have nothing to attack and steal.
Payment tokenization refers to the process of replacing sensitive and private data such as credit card number, account number and address with randomly generated numbers representing a token. Each token consists of thirteen to nineteen alphanumeric characters, and none of these digits include the PAN or any other details revealing the identity of the user.
Tokens protect valuable information and sensitive data. Tokens can be used in an internal database or system, with the original information stored in a token vault. What is important to keep in mind about tokens is that they are irreversible and unique. In other words, a token can only be used once, for a single purchase. The original token and number are not related in any mathematical way, so no one can revert them to their original version.
How to tokenize assets
However, there is another concept of tokenization which involves issuing tokens on the blockchain that are backed by real assets. This technology enables crowdfunding and more efficient investments. A user can tokenize anything from private equity stocks to real estate. When talking about how to tokenize real estate, one must begin by understanding how the value of the property is 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 this token is offered for sale, investors can buy it by obtaining fractional ownership of this property. It works the same way with any other data or resource. Asset tokenization leads to better liquidity, lower cost of entry, improved transparency, optimal security, and many other benefits.
Benefits of payment tokenization
The reason payment tokenization is becoming increasingly popular with businesses and customers is that it protects sensitive data, but also prevents data breaches. Still, those aren’t the only benefits that should put this term on your radar. As mentioned above, payment tokenization has several advantages that you should be aware of.
Payment tokenization builds customer trust. As customers have become aware of companies focusing on information security to protect their audience, avoiding implementing payment tokenization can result in the loss of existing customers and new customers.
With the tokenization of payments, you can expect to provide a better user experience. Your customers’ card information can be stored in the digital wallet or whenever making an online purchase. Tokenization allows customers to withhold their original data or fill in payment details when attempting to make a quick purchase.
Additionally, payment tokenization reduces financial and reputational damage. After all, data breaches are an incredibly costly situation, with some companies facing multi-million dollar costs. For now, payment tokenization is the best way to combat these cyber threats.
In the last words
Of course, tokenization will not magically solve all existing problems related to online payments, but it significantly reduces the changes in these situations. Payment tokenization allows merchants to move away from handling sensitive payment information, so privacy and security work on both fronts – merchants and customers.
When talking about security, it is important to note that the security token market is always evolving. This technology will probably provide answers to many other challenges in the near future, however, for now, we should be aware of its limitations. While it’s true that it improves privacy and trust while bringing businesses closer to their target audience, no one can guarantee the complete elimination of data breaches.
However, this is a crucial and very necessary step to make online payments more secure. As more businesses move their business online, customers need to feel secure when using their credit card information online.
RECOMMENDED READING: South African financial regulators launch Project Khokha 2 to issue, clear and settle tokenized debentures
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