While advances in encryption aim towards protecting sensitive data, tokenization replaces sensitive data with a token or a pointer to the original credential. To a potential intruder or man-in-the-middle, the pointer or token in itself does not have any value, but in the hands of a legitimate participant, the token can be traced back to the original credentials to complete the transaction.
Encryption driven by a combination of software and hardware, along with tokenization driven by the necessary certification and business model, collectively, have the ability to provide an unprecedented level of comfort in the overall transaction environment.
As much as the concept of tokenization has been around for a long time, it is now taking center stage in the digital transaction space. Moving forward, it is safe to say that every digital transaction service will be built around tokenization, and hence, beyond the technology, the business of tokenization is becoming more relevant.
Each cardholder, as the payment industry refers to them, is assigned a unique account number typically referred to as a PAN or primary account number. The PAN serves the primary purpose of completing a payment transaction across the ecosystem but also has a secondary purpose of being a pointer or identifier for the same cardholder for loyalty and discounting systems.
Hence, tokenization provides an opportunity of not only securing payments but also potentially evolving into a larger identity management system across the extended offers and loyalty space. While the aspect of using a tokenization service to remove the PAN from the payment settlement process is welcome by all, the contention is around who will provide this tokenization service, and what are the safeguards in place to ensure that these providers do not take undue advantage of their critical position in the payment ecosystem.
In more simple terms the tug of war is between the payment networks and the large merchants who have been trying to leverage the emergence of mobile commerce to break the network's long-standing monopoly on cash-replacement at their point-of-sale.
With great power comes great responsibility, and with great opportunity comes great strife. The battle lines have been drawn with contenders pushing for their respective standards and jockeying to become the lead if not sole providers for various tokenization services. Consumers, at a bare minimum, should benefit from better security and hopefully, will also have the advantage of a competitive marketplace that will help drive the cost of cash-replacement down over time.
More importantly, developments in the areas of encryption and tokenization, combined with omnicommerce are helping morph the conventional view of a card-holder-present transaction and a MOTO or card-not-present transaction. The new hyperbole is around the “uberization of payments,” or invisible payments, or what we later refer to in a broader context as seamless transactions. As invisible payments, and eventually, seamless transactions, continue to increase exponentially, we can be assured that the payment and settlement networks will continue to evolve the underlying issuance and settlement capabilities, as well as the supporting business models.