The term tokenization refers to a process in which a unique code or token is generated for each individual action made.
This term is often used in reference to information transacted by credit cards and mobile wallets. In these applications, tokenization improves security because a new, unique code is used for each transaction.
Tokenization is most widely used in relation to online shopping because online transactions bear the highest risk of data theft. Online tokenization systems are offered by many payment networks and by some card issuers.
The majority of mobile wallets which can be used to authorize point of sale (POS) transactions using near field communication (NFC) use tokenization to prevent transferred credit card or bank account information from being used fraudulently in the event that data is stolen from POS.
A number of credit cards and debit cards which have integrated tokenization capabilities have been developed. Some of these use electronic displays in the place of a printed or embossed card number, with a token card number being generated and shown on the display upon demand.
Example of tokenization:
A credit card has a credit card account number which can be used to make card-not-present purchases such as orders placed over the telephone or the Internet. This means that third parties can which intercept this number or unscrupulous merchants to whom the card number is given can use it to make fraudulent transactions.
To prevent this from happening, some card issuers or payment networks use tokenization. The actual credit card number is known only to the cardholder and the card issuer or payment network.
Every time you use your credit card to make purchases, a new token card number is generated for that specific purchase. Each token card number can only be used once, so anyone who gains access to that token number will not be able to use it to access your account.
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