Understanding Tokenization and Fraud Prevention

It’s October and this means one thing: the holiday shopping season is fast approaching. For merchants this is a season of mixed blessings: peak sales bring with them peak fraud risk. The frequency of merchant security hacks at this time of the year is in itself verging on becoming a holiday tradition.

The good news for merchants is that the tools, technologies, solutions, and expertise are readily available to put an end to the looming threats of security hacks and chargeback fraud. The key for merchants to protect their data, and that of their customers, is in using the latest in top-end fraud prevention strategies.

Tokenization for Modern Fraud Prevention

Tokenization replaces sensitive account and card information with a non-sensitive token or placeholder. This token is used as an identifier during the payment process. This token can only be traced back to the original account or card data with a master key as part of the tokenization system.

These tokens are created by a token service and are issued to the customer’s device by the token issuance process. This keeps the entire tokenization process secure and virtually impossible to reverse engineer.

There are three common payment scenarios where tokenization is used to secure cardholder data:

• Tap & Go. This payment method uses a standard card payment terminal, but rather than swiping or inserting their card the customer simply taps their card on the screen. The customer doesn’t need to enter a PIN or sign for verification.

• In-app purchases. To secure cardholder data over mobile and cloud networks, tokenization is used to transmit payment data. Customers are not required to enter credit card numbers, and their identity is confirmed with the mobile device (fingerprint or other biometric data).

• In-app virtual purchases. Typically used within apps such as video games or other subscription services that allow customers to purchase additional services or options. A token is used to transmit the customer data.

A well-recognized example of tokenization is when a customer taps their Apple watch on a payment terminal screen for a purchase. In this instance, a token is used to communicate and secure the customer’s purchase.

Tokenization does not guarantee merchants will be protected from security breaches. It does, however, guarantee that vital customer data is protected and secure in the face of a security breach. Because the customer’s data is replaced with a token and cannot be traced to the customer, the token itself does not provide any value to the hacker.

This extra layer of protection is one that customers have come to expect. Tokenization enables the latest in payment options, and it gives customers confidence to use the merchant’s payment solution. This is a prime advantage for merchants who need to build customer confidence and ensure that their data is safe and secure.

A Complete Solution for Enhanced Fraud Prevention

For merchants concerned about protecting their customer data, tokenization provides benefits that other fraud prevention measures cannot. However, it’s important that merchants understand that using only one fraud prevention solution is not the answer.

Along with tokenization, merchants should consider implementing other key components of fraud prevention technology, including:

• IP intelligence. Allows merchants to block transactions from fraudulent IP addresses.

• Device fingerprinting. Uses device information and reputation scoring to validate the transaction request.

• Address Verification Service (AVS). Verifies the address connected to the cardholder using a comparison look-up.

• 3D Secure. Uses a three-domain model to validate credit and debit card purchases.

• SSL. Provides secure communication between customer devices and payment solutions.

Along with these modern fraud prevention technologies, merchants must have an end-to-end solution in place to detect, prevent, and proactively react to chargeback fraud.

For some merchants, this might seem overwhelming or even overkill – but the costs of not knowing chargeback fraud risks and not using the best in fraud prevention can prove difficult for merchants to manage.

Moving Forward with Fraud Prevention Technology

What worked last year will not work with this year. The ways customers pay for their purchases has greatly evolved over the past few years. Smart watches and mobile devices have become ubiquitous, forcing merchants to change with the times and support how their customers want to shop and pay.

Along with keeping pace with mobile-friendly websites, in-App purchase options, and connected experiences across devices, merchants must pay equal attention to their fraud prevention technology.

Slick websites and Apps do not matter when your brand and company name is associated with a security breach. Feel free to contact us to learn about our end-to-end solutions and how we can prepare you for the busiest time of the retail year.