These days, being able to take cashless payments in person and online is vital to the success of all kinds of enterprises.
Whether you’re making money on the side or have made the leap to become your own boss full time, you’ll need to accept card and digital wallet transactions or risk losing a sizeable swathe of customers to your competitors.
You also need to keep these transactions safe and secure, and the good news is there are some effective safeguards baked into today’s cashless payment systems.
One is two-factor authentication, where customers have to verify their identity in two different ways for payments to go through. Another is payment tokenization, which automatically shields sensitive payment details from prying eyes.
We’ll focus on the latter in this guide, exploring how the tokenization of cards works, and how tokenized payments help secure your customers’ personal information, and your operating cash flow, against third-party threats.
What is tokenization?
Payment tokenization is the process of replacing sensitive financial account information like debit and credit card numbers with unique, randomly generated sets of characters called tokens.
Such tokens are used by cashless payment systems as a stand-in for actual account information when cardholders make in-person or online payments.
This boosts payment security because any data breach would only expose the tokens, which have no inherent value in themselves and are effectively gibberish outside the specific context of a particular payment system.
The criminals behind such a data breach would therefore be unable to use the tokens to commit debit and credit card fraud.
With more than £708.7 million lost to unauthorised card not present transactions and other forms of financial fraud in 2023 alone, it’s vital that small business owners protect their revenues and reputation through measures like card tokenization.
How does payment tokenization work?
To better understand the tokenized payment process, let’s imagine you’re interested in online business ideas and have launched a brick-and-mortar store which also sells online. This is what happens when one of your customers makes a purchase.
1. Payment details are provided
The process begins with the customer providing their payment details. If they’re buying in your shop, they might do this with a contactless card payment, or by tapping their phone on a card reader to pay via a digital wallet.
If they’re purchasing something online, they’ll input their details into your online store’s payment gateway. The card tokenization process takes place in the same way, whether the transaction is conducted virtually or in person.
2. The token is generated
Your payment processing platform (or a specialist token services provider connected with your platform) uses a tokenization algorithm to generate a random set of characters to serve as a substitute for your customer’s card number (technically known as the primary account number, or PAN).
The token itself has no worth or meaning, and only represents the real data in the same way that a casino chip represents real money.
3. The transaction is authorised
The customer’s PAN is stored in a secure digital vault while the token is transmitted on the payment network so that the customer’s funds are verified and the purchase is authorised.
The token may be stored by the tokenized payment system so the customer can make future payments without having to re-enter their card details or expose their sensitive financial data.
The benefits of payment tokenization
Unless you’re keeping things ultra-simple with a cash only business, tokenized payments are likely to play a key role in whatever small business idea you bring to life. Here are some of the main reasons why this is a good thing.
Increased security
The primary goal of payment tokenization is to protect both in-person and online payment methods from hackers and fraudsters.
It does this by taking sensitive data out of the equation, so that even if malicious third parties do manage to break into a payment system, they wouldn’t be able to steal PAN information and other details which could potentially be used for card not present fraud.
This is obviously good news for your customers, since it’s their financial details which are on the line if their cashless transactions aren’t suitably protected. But it’s worth emphasising why tokenized payments systems are also good news for you, and give you one less thing to worry about when it comes to small business risk management.
Increased payment security lowers your chances of being hit with chargebacks, which is when a customer instructs their bank or card issuer to reverse a transaction. While the chargeback process can be exploited for illegitimate reasons (in what’s known as chargeback fraud), it can also be instigated because a customer’s card details have been stolen and used to make unauthorised purchases.
In the latter case, the customer will be fully justified in reversing the payment, meaning the money will be deducted from your business account, dealing a blow to your cash flow and small business finances.
Bear in mind as well that incurring frequent chargebacks can harm the reputation of your business in the eyes of financial institutions, and potentially require you to switch to a high risk merchant account with more stringent regulations and higher fees. It almost goes without saying that customer retention will also be impacted if purchases lead to them being targeted by fraudsters.
Improved customer experience
As the tokenization of cards takes place automatically without the need for you to invest in complex and costly small business cyber security solutions, it empowers you to provide a range of simple and efficient payment options which will make shopping more convenient and aid with customer acquisition.
Online payment options
Earlier, we touched on how token payments make it easy to accept transactions through the payment gateway of an online store. But payment tokenization has also enabled the effortless implementation of other web-based methods of payment which improve the customer experience.
For example, you can let your customers complete transactions via payment links, which are shared on social media and by text and email like any other web link. This option can be provided with both you and your customer safe in the knowledge that card tokenization technology ensures no sensitive data is shared when the payment link is used.
Similarly, you can make gift cards available, so that existing customers can purchase them for their friends and family while keeping their PAN details confidential. This has the bonus effect of making more people aware of your brand, and can aid in your marketing strategy for small business success.
In-person payment options
As noted earlier, payment tokenization is integral to many in-person transactions as well online purchases. It helps safeguard POS system payments such as contactless card and digital wallet purchases via card machines and self-service kiosks.
The tokenization of cards is what allows consumers to safely store their payment details on digital wallets like Google Pay and Apple Pay. When the consumers make in-person payments by tapping their phones, the digital wallets share unique, valueless tokens rather than the PAN numbers they correspond to, so there’s nothing useful for online thieves to steal.
Take in-person payments on your phone
SumUp’s Tap to Pay on iPhone and Tap to Pay on Android allows you to turn your smartphone into a point-of-sale system with no extra hardware needed. Your customers are able to pay through their debit cards, credit cards or digital wallet apps simply by tapping their cards or phones on your phone, with tokenization ensuring customer security every time.
Increased sales
Several strategies can come into play when it comes to boosting your sales, from conducting research to identify your target market to using social media to promote your products and engage with potential customers. But the implementation of tokenized payment systems can also help improve cash flow by making purchases as frictionless as possible.
For example, storing customers’ payment details in the form of tokens means they can return and make further purchases through an online payment gateway without needing to input their card details all over again.
Such hassle-free “one click” payments encourage repeat business, and have helped major multinationals like Uber and Amazon achieve monumental revenues on a global scale.
But even if you’re only exploring side hustle ideas, or small scale business ideas from home, the streamlined nature of tokenized payments can go a long way towards enhancing customer loyalty and encouraging bigger cart sizes.
Bump up sales with self-service
SumUp Kiosk allows customers to place food orders and make purchases securely, without having to take up the time of you and your staff. The touchscreen system has also been shown to bump up cart sizes, with customers buying 25% more on average compared to verbal orders.
FAQs
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