
Tokenization in Digital Payments: How it Works, Benefits and More
Posted on Thursday, January 23rd, 2025 | By IndusInd Bank
In a day and age where digital payments have become the norm, it is more important than ever to ensure safe and secure transactions.
One of the most effective security measures in digital payments is tokenization. This process helps protect sensitive financial information during transactions by replacing it with a ‘token’. Let’s understand what tokenization is in banking, how it works, and glance at its benefits as well.
What is Tokenization in Digital Payments?
Tokenization is a process that replaces important payment information, such as a debit or credit card number, with a unique identifier called a ‘token’.
In a way, the token acts as a stand-in for the original data. By doing so, it ensures that the actual card details remain unexposed during transactions. Tokenization in banking adds an extra layer of security. It prevents unauthorised access to critical payment details.
Let’s suppose you are making an online purchase from an e-commerce platform. You reach the payment gateway and enter the details of the debit card connected to your Savings Account.
Here, instead of transmitting your card details, the system will generate a random token to process the payment. This ensures that even if someone intercepts the token, they will not be able to extract any meaningful information.
How Does Tokenization Occur?
Now that you have understood what card tokenization is, let’s see how the process works:
1. Initiation of the Transaction
When a user initiates a transaction, the card details are collected as usual.
2. Creating a Token
The card details are then sent to a secure tokenization vault. Here, the system generates a unique token in place of the actual card number.
3. Processing the Transaction
The token is then sent to the payment processor or merchant for authorisation.
4. Authorization
When the user makes a purchase, the tokenization system links the token back to the original card details for validation. This occurs without the original card information being revealed to the merchant.
5. Completion
Once the payment is approved, the transaction is complete.
Since the tokens are unique for each transaction or merchant, they prevent misuse, even in the event of a data breach.
Benefits of Tokenization for Cardholders
With tokenization in banking, users can enjoy a host of benefits, such as:
1. Extra Level of Security
One of the primary benefits of payment tokenization is that it protects cardholders from fraud. It replaces sensitive data with tokens. Thus, the chances of a hacker gaining access to card details are reduced. Even if a token is intercepted, it is useless without the original card information.
2. Protection in Data Breaches
In the event of a data breach at a merchant or service provider, tokenization ensures that no real card data is compromised.
3. Smoother Transactions
Tokenization in banking allows for faster and smoother online transactions. Once a user tokenises a card, they can complete the purchase without needing to re-enter their payment details.
4. Easy to Suspend
If a token is no longer useful, the user can suspend it easily. If you receive a new card, you can follow the usual process to get it tokenised.
For merchants too, tokenization can be quite beneficial. It reduces the risk of fraud, builds customer trust, and supports multiple payment channels. This can improve both security and the overall customer experience.
RBI Guidelines on Tokenization
The Reserve Bank of India (RBI) has issued clear guidelines when it comes to payment tokenization. These guidelines include points such as:
- Tokenization is voluntary. Hence, it can only occur with customer consent. The cardholder must approve the use of their card for tokenization during a transaction.
- Only authorized card networks can perform tokenization and detokenization processes.
- Customers can set and adjust limits for tokenized card transactions as needed.
- Tokenization is available on various consumer devices. This includes mobile phones, tablets, laptops, desktops, wristwatches and bands, and Internet of Things (IoT) devices.
- Tokenization is completely free. The user does not have to pay any charges to access the tokenization service.
Also Read: Discovering ATMs- How They Operate
Conclusion
It is crucial to understand what tokenization is in banking and how it works to have secure and seamless transactions. Whether you are a customer or a merchant, opting for payment tokenization can make it easier and safer for you to conduct transactions.
Similarly, if you are looking for a secure and efficient banking experience, consider opening a Zero Balance Savings Account with IndusInd Bank.
With us, you can enjoy an easy and 100% online account opening process, digital banking services, competitive interest rates on Savings Accounts, and the peace of mind that comes with secure digital payments. Click here to know more!
Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.