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Securing Real-Time Payments with Account Tokenization

November 10, 2023

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Secure Real-Time Payments with Account Tokenisation

The FinTech ecosystem is evolving rapidly, and tokenizing payment accounts adds a layer of security to real-time payments. Here’s more.

Growing penetration of digital payments, tightening PCI DSS regulations, and multiplying instances of fraud and cybercrime are driving rapid transformation in the data storage and funds transfer segments of the financial industry. Tokenization is one of the most powerful tools that adds an extra layer of security against cybercriminals, facilitating the prevention of payment fraud. Financial services providers are among the top adopters of tokenization technologies to bolster consumer trust and offer seamless experiences.

Blockchain, Not Crypto

According to Bloomberg, the global tokenization market is on a trajectory to an impressive CAGR of 19.7% from 2023 to 2030 to reach $13.23 billion in valuation by the end of the forecast period.

The technological potential of tokenization has been intriguing both banking professionals and asset managers. However, the financial industry is looking to leverage the best of distributed ledger technology without needing to transition completely to cryptocurrencies. Therefore, the narrative of “’blockchain, not crypto” is prevalent in the industry. In fact, Citigroup has gone so far as to say that the industry is “approaching an inflection point” to realize the “promised potential of blockchain.” Citi analysts expect tokenized financial and real-world assets to be valued at $4 trillion by 2030. Plus, financial infrastructure company Broadridge already facilitates the repurchase of tokenized agreements worth $1 trillion monthly on its distributed ledger repo platform.

In the age of digitization, the financial industry is rapidly transitioning to faster payments from traditional clearing systems. Real-time online payments make fraud detection and prevention even more complex. The process of tokenization replaces sensitive data with tokens (safe alternate data) for processing transactions. It has been successful in expediting fraud detection for digital wallets, in-store, and online payment systems. Therefore, its adoption for account-based transactions is gaining momentum. Most importantly, tokenization covers all use cases – B2C, B2B, C2B, and P2P (Person to Person), making the technique an all-inclusive solution for enhanced money laundering prevention.

Benefits of Payment Account Tokenization

Tokenization augments existing security and anti-money laundering practices in the industry. The added layer of security boosts the resilience of the payments network. A key benefit of tokenization is improved visibility of the network and ecosystem to enhance diagnosis and troubleshooting capabilities before a security breach impacts operations or user experiences. Tokenization offers several other benefits.

Reduces the Impact of a Breach

Since tokens by design cannot be used outside authorized channels, stolen tokens become unusable beyond the network for which they are designed. Moreover, sensitive data is removed from the process, which means fraudsters cannot extract such data from tokens.

Enhanced Transaction Protection

A popular technique of transaction fraud is replacing account information mid-way, while the transaction instruction is communicated. With tokenization, account numbers and authorization details no longer reside in the transaction. This means perpetrating fraud by replacing the information is not possible.

Unaffected Consumer Interface

Payment account tokenization acts in the backend. Therefore, technology upgrades have no impact on the consumer interface. There is no change in the initiation and authorization of a payment or its communication to the consumer. This helps maintain frictionless user experiences throughout the technology transition.

Enhanced Compliance

Compliance is a deciding factor in the long-term success for financial products and services providers. The best part about implementing tokens for enhanced security is that it inherently falls under the regulatory guidelines of diverse regulations, such as PCI DSS (global standard), and PSD2 (EU).

That’s Not All

Tokens create fresh opportunities for financial institutions and service providers beyond security, such as innovative account-to-account transactions, intermediary-free P2P payments, and much more. The provision of simpler and faster payments with added security will also strengthen the trust of the customer. With regulations being tightened worldwide, the strategic implementation of tokens and their applications are set to multiply as the technology evolves. Additionally, tokenization supports the evolution of banking and payment technologies.

How Does Tokenization Work?

Tokenization is a cost-effective technology, although it might not seem so. To put things into perspective, encryption entails data transformation. If a hacker cracks the transformation algorithm, they can transform all data and extract the original information. On the other hand, tokens eliminate sensitive information from the transaction process, rendering data extraction futile. This reduces the overall risk exposure and compliance hiccups.

Securing Payment Authorization with Payment Account Tokenization

Reference Image: Securing Payment Authorization with Payment Account Tokenization 

In simpler words, with tokenization, account data is stored securely on cloud-based servers, accessible through dedicated channels only. Users (effectively their mobile applications or digital wallets) get tokens representing their account information and use it for all transactional processes.

Transactions with Tokens

A similar activity takes place for each transaction. The original details are replaced with tokens that represent transaction details, authorization, etc. A sender initiates a transaction with a payment token and their account token is used to authorize the transaction. The receiver gets the payment when the corresponding token is forwarded to the receiving-side payment processor or bank as an identifier for completing the transaction. Thus, merchants or payment providers can facilitate transactions without having to store sensitive information in their systems. 

Securing Payment Authorization with Payment Account Tokenization-1

Reference Image: Securing Payment Authorization with Payment Account Tokenization 

Tokens can be single-use, multi-use, format-preserving, or non-preserving, based on the requirement. For instance, an account token will generally be multi-use while a payment or transaction token will be single-use. This way there can be many transactions from a single account, while a transaction token expires once the said transaction is completed.

Challenges to Implementing Account-Based Tokenization

Since the tokenization process aims to prevent account-based fraud, its implementation requires a systemic approach to create an ecosystem that stands on an account-based infrastructure. The role of central banks and clearing authorities transitions to that of creating, storing, and managing tokens and associated data. Additionally, the transaction process must be upgraded to use tokens and enable their verification and validation during each transaction.

Payments account tokenization is suitable for all stakeholders to enable effectively managed and secure real-time payments. Opus Technologies empowers payment processors, banks, and FinTechs to stay ahead of the curve and create the future of payments by leveraging innovating technologies. Contact the experts to learn more.

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