Fraud Prevention with Tokenization

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Fraud Prevention with Tokenization

Fraud happens when someone uses illegally obtained information, such as credit card information, to make purchases. For online businesses, this has become part and parcel of their daily operations. Electronic transactions allow fraudsters to conduct fraudulent purchases on a global scale.

According to Statista, the value of fraudulent transactions made with payment cards worldwide in 2021 was projected to amount to more than 32 billion U.S. dollars. The source forecast that the figure would increase to 38.5 billion by 2027. Hence, online merchants need to find ways to mitigate such fraudulent transactions. One strategy being used by merchants and payment gateways is called tokenization. Tokenization provides an extra layer of security on the merchant side.

What is tokenization, and how does it work?

Tokenization functions similarly to encryption because both goals protect the payment information from being exploited by unauthorized parties. However, tokenization’s advantage over encryption is that it’s non-reversible. As a result, no one can retrieve any credit card information or sensitive data even if they intercept the token used for payment.

So, what exactly is tokenization?

A token is often just a randomly generated string of alphanumeric characters. For example, instead of submitting credit card information when making a purchase, the e-commerce site uses the token linked to that user’s credit card to complete the payment transaction.

A new customer must submit their actual credit card information when making their initial purchase at a particular website. The online store then submits this payment info to their payment processor to get back the payment token. The website stores this payment token for future purchases by the same customer.

The online merchant does not need to store credit card information like debit or credit card numbers, CVV numbers, and expiry dates. Tokenization can drastically reduce the chance of fraud due to data breaches at e-commerce websites. This is because tokens have no meaning, nor are they embedded with sensitive data. When tokens are used with encryption and 3D Secure authentication, it will be almost impossible to commit payment fraud.

Benefits of tokenization

  • Customers can be assured that online merchants are not storing their credit card info.
  • This reduces the risk of a disgruntled employee misusing the payment info for their shopping spree.
  • Improves data security at the merchant websites by removing the storage of sensitive payment info from their system.
  • Limits potential customer payment info damage if the online store is hacked and suffers a data breach.
  • Only the payment processor has the necessary information to link a token to the actual credit card information, thereby severely hindering potential hackers or scammers.
  • Helps online merchants to comply with PCI-DSS compliance requirements.
  • Drastically reduces payment card fraud by following this payment industry best practice.
  • Boosts the merchant’s reputation for protecting and securing payment information which will help gain customers’ trust and business.


Fraud prevention is necessary for any online business to thrive and maximize its ROI. Unfortunately, any sized business is subject to payment fraud, especially if accepting payments through websites. Online merchants should no longer accept fraud as a cost of doing business—there are many ways to mitigate fraud and reduce the risks to your online stores.

Tokenization should be only one facet of a holistic fraud prevention strategy. Ideally, tokenization should be accompanied by a robust fraud screening service.

Don’t let fraudsters and scammers conduct their malicious activities on your websites. Letting them do so will result in large amounts of chargebacks that can financially cripple your online business. To start, you can secure your business and prevent financial losses from fraud by screening up to 500 transactions monthly without paying a single cent using FraudLabs Pro Micro Plan.