What is digital wallet tokenization?

Learn what digital wallet tokenization is and how it works

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Max Lamond
November 2, 2023
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What is digital wallet tokenization?

Digital wallets are set to become the world’s most widely used payment method, growing from 3.4 billion people in 2022 to 5.2 billion by 2026 - 60% of the world’s population - according to Juniper Research.  

And that’s not surprising. Digital wallets offer consumers unparalleled convenience by allowing them to make secure payments from any device in just a few taps. They also enhance security and improve user experience for merchants. 

Key to the success of digital wallets is tokenization, a technology that disguises sensitive card data during transactions. 

In this article, we look at the relationship between digital wallets and tokenization, how the tokenization process works, how it makes digital wallets safer, and the key benefits. 

What is a digital wallet?

A digital wallet is a software application, such as Apple or Google Pay, that allows users to store multiple payment methods on their devices. They can then make secure payments, either online or in an outlet, without having to use a physical card or enter payment details each time. Digital wallets are typically protected by encryption, multi-factor authentication, and tokenization.  

Digital wallets are one of the world’s fastest growing payment methods, and were used in around half of all ecommerce transactions in 2022 by approximately 2.8 billion users. 

What is card tokenization?

Card tokenization is the process of protecting sensitive card data, such as the Primary Account Number (PAN), expiry date and security code, by replacing it with a unique, algorithmically generated number called a token. It's a core method of securing mobile payment processing.

When a user adds a credit or debit card to their digital wallets and uses it to make a payment, the token is sent through the payment network for processing, rather than the actual card details. 

This ensures that even if a hacker intercepts the token, they cannot use it for fraudulent transactions, as tokenized numbers have no intrinsic meaning or relationship to the original card details.

How does tokenization in digital wallets work?

There are a number of different parties involved in the tokenization process, including:

  • The cardholder - the owner of the card adds their payment details to a digital wallet on their device 
  • The digital wallet - a certified digital wallet provider (like Apple Pay or Alipay) requests tokenization of the user’s card details from the card network and then stores the tokenized card
  • The issuer - the party that issued the original card approves the request, and enables tokenization through integration and certification with the card network 
  • The card network - the card network is then responsible for generating, storing and updating the token

Every network token is unique to the digital wallet or device that it’s been created for. So if the user adds their card to their iPhone’s Apple Pay digital wallet, the tokenized version of this card can only be used on that iPhone.  

Does tokenization make digital wallets safer?

The process of payment tokenization makes digital wallets an extremely safe way to conduct transactions. 

In their original format, the card details that a consumer needs to provide to complete a payment are highly exploitable by fraudsters. In order to make fraudulent payments, all a criminal needs is the consumer’s name, PAN (the long number on the front of the card), the expiry date, and the security code. 

Someone could easily obtain this information by stealing a physical card. But when a card is stored for use in online transactions, its details are especially vulnerable to hackers through phishing or malware. 

However, payment cards added to digital wallets are automatically tokenized. That means every card is replaced by a token that is unique to that specific device and that specific digital wallet, which is also protected by encryption and authentication.

Even if a hacker were to successfully break into a secure system, instead of the customer’s card details, all they would see is a randomly generated sequence of numbers that they can’t use to make payments. 

Benefits of digital wallets and tokenization 

As well as the clear benefits to consumers, digital wallets and tokenization hold a number of benefits for merchants, including: 

  • Security - by replacing sensitive card details with tokens, the risk of theft and fraud is significantly reduced. This means customers feel more secure and more confident about making online transactions using digital wallets, building trust between merchants and consumers and leading to more revenue for the merchant   
  • Convenience - being able to make quick and secure payments from anywhere with an internet-enabled device is, of course, convenient for consumers, but it’s also convenient for the merchants that accept digital wallet payments, because they stand to receive a higher number of successful transactions 
  • Improved customer experience - tokenized digital wallets provide a seamless user experience to your customers by allowing them to complete a purchase in just a few taps. This builds trust and loyalty between the merchant and the consumer. Additionally, when the original card expires or is lost, the card network is responsible for automatically updating the token with the new card details. This means less effort for the consumer, who doesn’t have to spend time updating information, and for the merchant, who doesn’t have to worry about payments failing due to expired cards
  • Compliance - as they also employ advanced security measures like encryption and multi-factor authentication, tokenized digital wallets help merchants comply with security standards like PCI DSS
  • Integrations - some digital wallets can be integrated with loyalty and reward programs, giving merchants new opportunities to target consumers with effective marketing 

How Checkout.com helps with digital wallet tokenization

Enhanced security, improved trust and loyalty, and more opportunities to drive revenue: just a few of the many benefits for merchants to invest in digital wallet tokenization. 

And Checkout.com can help. We allow you to accept digital wallet payments and provide network tokens to ensure those payments are secure. 

We also give you the power to fight fraud through our machine learning-based fraud detection tool, and to optimize your payment operations through granular analytics and reporting. 

Find out more about digital wallet tokenization with Checkout.com.

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November 2, 2023 13:54
November 2, 2023 13:54