Why is Tokenization so Important to Credit Card Security?
The answer in a word: mobile payments and data breaches
In more than a word: Payment technology has changed quite substantially since the first card-reading terminals in the 1970s. With mobile payment and mobile processing options where they are nowadays, I think it’s fair to say we’ve reached a zenith in terms of how much we can simplify payments. We’ve completely removed physical credit cards from the equation for mobile and eCommerce payments, relying only on the associated credit card numbers to provide us the information we need to process transactions. And, because of bypassing the magnetic strip (and the EMV chip, where applicable) associated with those cards, the raw card information that we’ve been disseminating freely over the internet has lost most of its protection.
Enter tokenization. Tokenization in the credit card industry means scrambling credit data and translating it into unusable something valueless, much like exchanging quarters for tokens at the arcade. Businesses who utilize tokenized payment systems can then recall the tokens and detokenize them if necessary, making recurring payments much easier. The real value in tokens, however, lies in their lack of value. Businesses can store tokens inside their own servers and, even in the event of a data breach, fraudsters that acquire the tokens will have nothing of value to use – no credit card numbers and no other identifying information. In a data security climate peppered with data breaches, the implications of the widespread adoption of this technology are frankly staggering. Imagine a Target or a Home Depot without the data breach! A widespread adoption of tokenization would reduce data breaches, not to mention credit card fraud, quite considerably. The problem is it hasn’t been utilized to its fullest potential yet.
Tokenization With Digital Wallets
Tokenization has held a small presence in the payment industry since around 2010, but it hit the mainstream consciousness largely thanks to Apple Pay, which (in a limited market thus far) allows Apple users to pay for items by credit card by transferring credit card information to their Apple phones and then waving their phones in front of special scanners that receive the information. Transferring the card data to the phone necessarily means the cards used are no longer present when used, so any protection offered by a magnetic strip or an EMV chip is gone – which makes tokenization of the credit card data the perfect solution for Apple to have implemented.
While tokenization is Apple’s answer to the mobile payments and data breach scares, the general population still isn’t entirely convinced mobile payments are the way to go. This article from Main Street, for example, cites 40% of consumers polled used mobile payments in 2014, up from just 8% in 2013; however, 56% of consumers believed cash was still the most secure payment method, over just 38% who vouched for credit cards, regardless of whether or not they were mobile. (And, this brings another question to mind: Do consumers use credit cards begrudgingly, weighing factors of convenience over possible security deficits?) We obviously still have a long way to go until consumers as a whole accept mobile payments, but, as the concept of tokenization sinks into our collective consciousness a little more deeply, I have a feeling the general public will eventually accept mobile payments as quite safe and secure.
Tokenization Use Poll
Does Apple's use of tokenization to protect your credit card data make you more likely to use Apple Pay?
Tokenization Applied to eCommerce
As Apple Pay essentially turns a would-be swiped card-present transaction into a scanned card-not-present one, eCommerce credit card processors can use tokenization to help secure data transmitted to merchants over longer distances than just a couple of inches – they can do it from all around the world, in fact, wherever an internet transaction takes place. Consumers have had a bit more time to become acquainted with eCommerce than they have the concept of digital wallets, so consumers tend to feel a little more at ease when using it than they do with mobile phone scans – but, in the end, tokenization is still the ultimate in protection technology, and not all eCommerce providers even utilize it. (Compare that to Apple Pay, which uses tokenization as a standard and gets more flak than regular eCommerce does.)
The Other EMV Shift
By now you know about the October 2015 liability shift, which forces merchants to comply with EMV standards (read: buy EMV-reading terminals) or face penalties for fraudulent card-present transactions committed using EMV-type credit cards, whose main security feature is rendered useless without an accompanying EMV reader. But, it seems that another shift – in the type of fraud committed – has taken place at the same time as EMV’s adoption, based on this report from Aite Group. In response to EMV card adoption, which makes card-present fraud more difficult to pull off, fraudsters have turned to card-not-present fraud to make their money. With the prospect of far increased card-not-present fraud in the USA, tokenization should prove absolutely invaluable to credit card processors and merchants alike – if only they would develop and adopt it a little more quickly.
Have you seen it yet?
Have you been to a store that accepts EMV credit cards?
Things Should Look Better Soon
Again, as time passes, I’m sure eCommerce and mobile payments will become part of the norm, and, eventually, no one will even bat an eyelash when someone mentions anything of the sort. The technology to bolster these payment methods is available; it just hasn’t been implemented to its fullest potential yet.