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Is tokenization really the best solution to fraud?

Apple has made over one of the oldest payment security methods into one of the newest. But is it the best?

January 8, 2015 by Terry Dooley — SVP & CIO, ITS, Inc

Tokenization — one of the latest security measures the payment card industry is implementing to protect cardholder information — is also the method leveraged by Apple's mobile payment platform.

MasterCard and Visa both recently announced their support of Apple Pay's tokenization process. Specifically, both card companies will manage the process.

The processor and other networks can provide token services, yet the actual vault service and token creation is limited. This minimizes the opportunities of other networks and processors to manage the vault or to provide vault services to their customers.

Tokenization is not entirely new. You'll recall that it is a process that takes place between the merchant and card processor or issuer (it's invisible to cardholders). The process replaces sensitive cardholder information found on plastic cards with a digital account number or token.

Because tokens do not carry valuable information, such as account numbers and expiration dates, they can be safely stored by online merchants or on mobile devices to facilitate e-commerce and mobile payments.

(Ironically, the card number for the debit cards originally used with PIN authentication was a token, which provided access to the consumer's account.)

Of course, all of this new technology comes at a cost to issuers, acquirers, processors and networks. Simply requiring a PIN on all credit and debit transactions would significantly reduce fraud and eliminate a substantial amount of expense.

The best authentication is something you know, something you control and something you can change. A PIN has met that criteria well for 40 years, and in many countries, all transactions (both credit and debit) use a PIN.

 The payments industry will benefit from tokenization. But if the U.S. were to require a PIN on all card-present transactions, counterfeit fraud would be reduced just as much as it would be with chip.

photo lindsey b | flickr

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