A secure payment system allows customers to make payments safely and protects businesses from fraud and data breaches. It collectively refers to payment processing solutions, information technology tools, and practices that allow businesses to accept payments while ensuring information and payment security. Some of the key features of a secure payment system are authentication protocols, encryption, tokenization, security standards compliance, and a secure payment gateway.
What is a payment gateway?
A payment gateway is a service that provides the technology that allows merchants to accept credit and debit card payments by electronically taking the customer payment information and transferring it to the bank for authentication and processing.
Key Features of Secure Payment Systems
To ensure the safety of your transactions and the protection of sensitive financial information, look for the following key features of secure payment systems from your merchant processor:
Encryption
Encryption is the process of converting plaintext or readable data into an unintelligible and secure form called ciphertext using encryption algorithms and cryptographic keys. Secure payment systems use encryption protocols to scramble sensitive data (such as credit card numbers) during transmission. Even if intercepted, the data will remain unreadable to unauthorized parties.
Most of the reputable payment processors like Square, PayPal, and Stripe use encryption for secure payment processing. Below are the two most common encryption protocols used by payment processors:
Secure Sockets Layer (SSL)
SSL, a type of digital certificate, was one of the earliest encryption protocols designed to secure data transmission on the internet. However, due to vulnerabilities and the emergence of more secure versions, it has largely been deprecated in favor of Transport Layer Security (TLS). Nevertheless, the term “SSL” is still commonly used colloquially to refer to the broader concept of securing web communications.
Transport Layer Security (TLS)
TLS is the successor to SSL and represents an improved and more secure version of the protocol. TLS operates at the transport layer of the internet protocol suite and provides secure communication by encrypting data and ensuring data integrity.
SSL/TLS encrypt the data exchanged between a user’s web browser or device and a web server. In secure payment systems, this encryption is essential to protect sensitive information like credit card numbers and personal details during online transactions.
Expert Tip: When choosing a payment service provider, make sure that they provide end-to-end encryption when processing payments.
Tokenization
Tokenization is a security process in which sensitive data, such as credit card numbers, bank account details, or personal identification numbers (PINs), is replaced with a unique token. These tokens are random, generated strings of characters that hold no intrinsic value and are used as placeholders for the actual sensitive information.
Tokenization is primarily used to enhance data security and protect sensitive information from unauthorized access and potential breaches. Some of the common uses of tokenization in secure payment systems involve storing card information such as in online and mobile payments, recurring payments, in-app payments, and point-of-sale (POS) systems.
Expert Tip: Always choose a payment service provider that uses tokenization in handling payment information.
Authentication
Authentication is a critical component of secure payment systems as a key mechanism for verifying the identities of users and ensuring that only authorized individuals or entities can initiate and complete transactions. It plays a fundamental role in safeguarding financial data, protecting against fraud, and building trust in payment processes.
In secure payment systems, authentication is applied to all entities and elements involved in payment transactions:
User Authentication
This involves verifying the identity of customers making the payment transactions. Here are some of the most common methods for user authentication:
- Username and password: The customer needs to correctly input the unique username and password to their account to complete the transaction
- Biometric authentication: The customer needs to pass fingerprint recognition, facial recognition, or iris scans
- Two-Factor Authentication (2FA) or Multi-Factor Authentication (MFA): Customers needs to provide other forms of identification such as a password, a one-time code sent to their mobile device, or a PIN code
- Smart cards and tokens: The customer has a physical card or hardware token to authenticate the transaction
- Knowledge-based Authentication: The customer answers a security question
Merchant Authentication
Secure payment systems often incorporate merchant authentication to ensure that the entity accepting payments is legitimate. Authentication methods for merchants may include verifying business licenses, tax IDs, and compliance with industry regulations. Merchants often undergo this process when registering with their chosen payment service provider.
Device Authentication
Device authentication verifies the legitimacy of the device used to initiate a transaction. This is particularly important in mobile and online payments. Device fingerprinting and digital certificates are common methods for device authentication. Choose a payment service provider that offers secure card readers and POS terminals.
Transaction Authentication
To ensure the authenticity of individual payment transactions, secure payment systems may employ various transaction-specific authentication methods:
- Dynamic CVV (Card Verification Value): The CVV on the card changes periodically, adding an additional layer of security.
- One-Time Passwords (OTPs): A unique code is generated for each transaction and sent to the user’s mobile device.
- Digital Signatures: Used in digital wallets and mobile payment apps to ensure the integrity of transaction data.
- Transaction Confirmation: Users are asked to confirm transactions via mobile apps or other means.
To increase the security of payment systems, a combination of authentication methods may be used. 3D Secure (3DS) authentication and chip and PIN authentication, for example, use a combination of user and transaction authentication.
Expert Tip: The user authentication methods used in a transaction depend on the customer’s payment method. Consider limiting the payment methods your business accepts—exclude those that have little to no authentication in place to protect your business from possible risk of fraud.
PCI DSS Compliance
Payment Card Industry Data Security Standard (PCI DSS) is a set of security standards designed to ensure the safe handling of cardholder data. Compliance with PCI DSS standards is essential for secure payment systems and not having PCI compliance may result in paying PCI non-compliance fees.
Choose a payment service provider and hardware that are PCI-compliant. Read our guide to PCI compliance for small businesses to learn more about maintaining PCI compliance for your business.
Fraud Detection and Prevention
Secure payment systems often include advanced fraud detection algorithms that analyze transaction patterns and flag suspicious activity in real time. Identifying suspicious transactions helps prevent fraudulent transactions from being processed.
Expert Tip: Strong fraud detection and prevention tools should be among your top considerations when choosing your payment service provider.
Secure Payment Gateway
Whether you choose a payment service provider that has a built-in payment gateway or you have a separate one, the payment gateway itself should be secure, ensuring that data is transmitted securely between the customer, the business, and the financial institution. The best payment gateways should have strong security protocols.
Transaction Monitoring and Reporting
A secure payment system also relies on your business environment and practices. Your business should have practices and tools in place to monitor transactions, generate reports, and identify any anomalies or discrepancies that may indicate fraud or security breaches.
Expert Tip: To make it easy to monitor your transactions, choose a payment service provider with strong and robust reporting capabilities. Square and Stripe are some of our top recommendations.
Regular Updates and Patch Management
Keeping payment system software and hardware up-to-date with the latest security patches is crucial to address vulnerabilities and protect against emerging threats. Set business practices that will make sure that you perform security and software updates as soon as they’re available.
Our guide to ecommerce payment security for small businesses has more tips on secure online payments.
Security Risks of Different Payment Methods
Different payment methods have different risk exposures. When considering the payment methods you want to accept, it is best to consider the risks associated with each one:
- In-person Payments: In-person transactions, especially those using EMV chip cards and PINs (Chip and PIN), are generally considered highly secure. The physical presence of the card and the requirement of a PIN add layers of security. However, risks may still exist, such as with card skimming devices so make sure that any hardware you use in your business is secure.
- Online Payments: Online payments can be secure when using reputable payment processors like PayPal, Stripe, or Square. Encryption, tokenization, and two-factor authentication (2FA) are common security features. However, the risk of data breaches, phishing attacks, and card-not-present fraud remains a concern.
- Contactless Payments: Contactless payments, such as those made with NFC-enabled cards or mobile wallets like Apple Pay and Google Pay, are generally secure due to tokenization and encryption. However, there is a potential risk of unauthorized transactions if a mobile device is lost or stolen.
- Keyed-In Payments: Keyed-in (manual entry) payments, where card details are typed in, are considered less secure than chip or contactless payments. They are susceptible to keyloggers and human error. Businesses that frequently rely on keyed-in payments may face higher processing fees and potential chargebacks.
The level of security for each payment method is inversely related to the level of risk. In-person and contactless payments tend to be more secure, with lower associated risks, while online and keyed-in payments carry higher risks due to the potential for fraud. Secure payment systems with encryption, tokenization, and fraud prevention tools can mitigate these risks.
The level of risk of each payment method also affects the transaction fees. In-person payments and contactless payments may have lower transaction fees because they are considered more secure. Online payments and keyed-in payments may have slightly higher fees due to the increased risk and associated costs of fraud prevention.
Ultimately, the choice of payment method and payment system should align with a business’ specific needs, risk tolerance, and customer preferences.
Benefits of Secure Payment Systems
A secure payment system offers a wide range of benefits for both businesses and customers. These benefits not only enhance the safety and integrity of financial transactions but also contribute to the overall success and reputation of a business. Here are the key benefits of a secure payment system:
Fraud Prevention
Secure payment systems employ advanced fraud detection mechanisms that help identify and prevent unauthorized or fraudulent transactions. This safeguards both the business and the customer from financial losses. According to the Association of Certified Fraud Examiners 2022 Report to the Nations, businesses lose around 5% of their revenue to fraud each year.
Customer Trust and Confidence
When customers know that their payment information is protected and transactions are secure, they are more likely to trust the business and make purchases. This trust fosters long-term customer relationships and brand loyalty.
Reduced Chargebacks
Secure payment systems can help reduce the occurrence of chargebacks, which can be costly and time-consuming for businesses. By verifying transactions and implementing fraud prevention measures, chargebacks can be minimized.
The average chargeback rate is 0.60% which means that 6 in 1,000 transactions results to a chargeback. Learn how to prevent chargebacks in our guide.
Streamlined Transactions
Secure payment systems facilitate quick and efficient transactions, enhancing the overall customer experience. Customers appreciate the convenience and speed of secure payment methods, leading to increased sales and repeat business.
Regulatory Compliance
Secure payment systems often ensure compliance with industry-specific and government regulations, such as the Payment Card Industry Data Security Standard (PCI DSS). Compliance helps businesses avoid legal issues and fines, which can range from $5,000 to $100,000 per month until the issue is resolved.
Enhanced Reputation
Businesses that prioritize security and customer data protection are viewed more favorably by consumers. A strong reputation for security can be a competitive advantage in the marketplace.
How to Secure Your Payment Systems
Below are some best practices you can use to ensure that your payment systems are secure.
1. Choose a Reputable Payment Service Provider
Selecting the right payment service provider is the first step in securing your payment systems. Research and choose a trusted provider with a strong reputation for both security and reliability.
Here is a quick comparison of some of the top payment service providers to give you an idea of their transaction fees and security features:
- Processing Fees
- Security Features
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|---|---|---|---|---|
In-Person Transaction Fee | 2.6% + 10 cents | 2.7% + 5 cents | Interchange plus 0.15% + 6 cents–0.4% + 8 cents | 2.9% + 30 cents |
Online Transaction Fee | 2.9% + 30 cents | 2.9% + 30 cents | Interchange plus 0.15% + 15 cents–0.5% + 25 cents | 2.9% + 30 cents |
Keyed-in Transaction Fee | 2.9% + 30 cents | 3.4% + 30 cents | Interchange plus 0.15% + 15 cents–0.5% + 25 cents | 2.9% + 30 cents |
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|---|---|---|---|---|
Encryption | E2EE AES-256 TLSv1.2 | E2EE AES-256 TLSv1.2 | E2EE AES-256 TLSv1.2 | E2EE AES-256 TLSv1.2 |
Tokenization | ✓ | ✓ | ✓ | ✓ |
PCI Compliance | ✓ | ✓ | ✓ | ✓ |
Fraud Detection | Square Risk Manager | Stripe Radar | Helcim Fraud Defencer | Advanced Fraud Detection Suite |
Security Updates | Regular | Regular | Regular | Regular |
2. Perform Regular Software Updates
Maintaining up-to-date payment system software is crucial for security. Vulnerabilities and security issues are often addressed through patches and fixes included in software updates. Ensure that both the payment gateway and any associated software or applications are regularly updated.
3. Train Employees on Payment Security
Your staff plays a vital role in maintaining payment security. It’s essential to educate and train employees to recognize and respond to potential security threats and suspicious transactions. Encourage them to report any anomalies promptly. Establish clear security protocols and ensure that all employees are aware of and adhere to them.
4. Monitor Transactions
Proactive monitoring of your transaction history is essential for detecting and responding to unusual or suspicious activity. Implement transaction monitoring tools and practices to identify potentially fraudulent transactions, such as unexpected chargebacks, multiple failed payment attempts, or unusually high transaction volumes. Rapid detection can help mitigate risks and minimize potential financial losses.
5. Back Up your Data Securely
Data loss during security breaches can have severe consequences. To protect customer data and maintain business continuity, establish a robust data backup strategy. Regularly back up customer data, financial records, and transaction histories to secure storage locations. Ensure that backups are encrypted and accessible only to authorized personnel. In the event of a security incident, reliable data backups can expedite recovery efforts.
Secure Payment System Frequently Asked Questions (FAQs)
These are some of the most common questions we get about secure payment systems. Expand the sections below to learn more.
There are several strategies and best practices that can help protect your online store from fraud. Some of these are using a highly secure payment services provider, making sure that your payment system has authentication, encryption, and tokenization in place, implementing fraud detection tools, and monitoring your transactions for unusual patterns.
Friendly fraud, also known as chargeback fraud, occurs when a legitimate customer disputes a valid transaction with their bank or credit card issuer. It may be for reasons like forgetting a purchase or seeking an easy refund. To prevent friendly fraud, businesses should establish clear refund policies, maintain transaction records, and provide excellent customer service to address issues promptly.
The most secure payment system is one that combines robust technology with vigilant user practices to protect against evolving security threats. Businesses and individuals should choose payment methods that align with their specific needs and risk tolerance while prioritizing security.
A secure payment system is important in safeguarding financial transactions, protecting sensitive data, preventing unauthorized transactions, mitigating financial losses, and maintaining trust with your customers. According to the 2022 ACFE Report to the Nations, businesses lose around 5% of their revenue to fraud each year.
Bottom Line
A secure payment system offers protection against fraud, ensures data confidentiality, and fosters customer confidence. Key features like encryption, tokenization, authentication, and PCI compliance form the bedrock of secure payment systems.
Your choice of a payment service provider should be a carefully considered decision, balancing transaction fees and security features. Regular software updates, employee training, and vigilant transaction monitoring are also vital elements of payment system security. Safeguarding data through secure backups is not just a precaution but a necessity.
Securing your payment systems isn’t a luxury; it’s a responsibility. Prioritizing payment security protects your business but also nurtures customer trust and builds a trustworthy reputation for your business.
