A Guide to Payment Tokens for Ecommerce

Advances in electronic payments has always balanced risk and advantage. Generally, a payment system that is suitable for customers is insecure for merchants. The use of “tokens” can reduce that risk by protecting credit card details.

In this post, I will explain how tokens can secure payment transactions and databases — and enhance your ecommerce business.

The use of “tokens” can reduce that risk by protecting credit card details.

Tokens Described

A token is a representation of something else. In payments, a token represents a credit card number.

Tokenization converts a credit card number to a string of arbitrary characters which have no value. Just one party can then convert that token back to a usable card number.

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When a credit card payment has been converted into a token, a payment system such as Visa utilizes its protected keys to decode it and pass the card number to the standard electronic payment processors.

Importantly, merchants themselves can’t decode a token. Converting a token back to a card number requires access to the encryption keys, which are generally stored in military-grade security.

Moreover, merchants themselves don’t create tokens. Industry providers — again, Visa, Mastercard, payment gateways — offer the service of converting card numbers to tokens. Generally, a merchant will embed on a checkout page an externally hosted iframe, including boxes for customers to enter credit card numbers. The token service provider supplies the code for this iframe. The credit card details transmit directly to the supplier and don’t”touch” or interact with the merchant’s site.

Because of this, merchants do not manage sensitive credit card details.

I need to add that merchants could, theoretically, create tokens. However, the merchant would then become responsible for protecting the encryption keys, which means building Fort Knox-like physical and electronic defense systems.

Moreover, the merchant would need to coordinate key exchanges (and a number of other security systems) with each party in the payment-processing chain. This type of payment-token ecosystem is more-or-less impossible for any thing other than the biggest financial and technology companies.

Tokens can be stolen, but they can’t be used to make a payment with no important cryptographic info. Absent that pre-arranged and pre-approved payment stream, a token could be rejected immediately.

Use Cases

  • PCI compliance. Since the merchant doesn’t have access to credit card information, the reach of Payment Card Industry compliance is significantly smaller. Generally, merchants using a respectable token service provider automatically comply with PCI standards.
  • Client convenience. Retaining tokens allows merchants to execute customer-convenience features like one-click checkouts. Since they’re easy to store in databases, tokens can be fetched to complete payments fast, without asking the client to re-input credit card details. If a token expires (and it may, like a credit card), most suppliers can upgrade it without bothering the client.
  • Subscriptions. With saved tokens, merchants can provide friction-free recurring payments for subscriptions and installment purchases.
  • Refunds and returns. Tokens can be fetched quickly and then utilised to reverse transactions — online or in person. Tokens therefore expedite processing of yields and refunds.
  • Post-purchase selling. Tokens are a simple way to provide post-purchase updates and cross-sells. Merchants can use the token to process follow-on transactions without asking the client for the credit card information.
  • Custom mobile pockets. Merchants can use saved tokens for payments in a mobile app, thus creating a mobile wallet. Tokenization is vital for omnichannel payments.

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