OTP (One Time Password)

The meaning of OTP or One-Time Password is that it is a unique password that can only be used once. These passwords are generally used to log into a network or account, or to initiate or confirm a financial transaction. By ensuring that the password cannot be used a second time, OTPs prevent identity thefts and facilitate secure transactions online. Unlike a static account password, the OTP changes for each login attempt or transaction attempt, making it harder to commit fraud. To protect your financial accounts and ensure that your funds are safe, ensure that you do not share your OTP with anybody.

OTP verification essentially adds a second layer of protection to your account. Tackling cybercrime with a single static password can be difficult, especially with the current sophisticated hacking tools. Static passcodes also run the risk of being stolen or guessed during a brute force attack. OTPs help avoid these risks.

Since generally you would need to have access to your smartphone to retrieve the OTP, fraud logins fall drastically. Adding this extra layer of authentication on the existing security system prevents network access and the end-user’s digital identity. Given its benefits, several online platforms are embracing OTP authentication systems. So, right from credit card bill payments to money transfers, and even ordering products from e-com portals, OTP verification has become ubiquitous. 

As banks and financial institutions deal with extremely sensitive information, it is critical to have a strong customer authentication process in place. Luckily, OTPs help to do just that. To understand this, let’s take the example of fund transfers. Whether you opt for IMPS, NEFT, or RTGS, you have to first login to your account, select your beneficiary and then proceed to transfer the money. 

At this stage, the bank needs to ensure that it is really you who is initiating the transfer and not a fraudster who has hacked into your account. So, the bank sends a one-time password to your registered mobile number and/ or email so that only you can proceed to complete the transaction. 

If the OTP entered is correct, the bank transfers the amount. If it's incorrect, the transaction is declined and fails. Similar types of OTP verifications are required when you apply for a credit card, set up standing instructions, add a beneficiary, pay your utility bills using your debit or credit card, etc.

Single-factor authentication, as the name suggests, uses only one level of check to verify your identity. For example, you are required to only enter your username and password combination when logging into your account. As long as you enter these details correctly, you can access your account.

Two-factor authentication or 2FA, on the other hand, is a more complex form of authentication. In this case, there are two levels of check-in before an action is processed. For example, if you are paying the dues on your credit card statement via net banking, you have to first log in to your account using your username and password. Once you are logged in, you would need to do the second level of authentication, by entering the OTP sent to you on your registered mobile and/ or email.

OTPs are much safer than static user-created passwords. These one-time passcodes ensure that a particular username-password pair can only be used once. In other words, with each login attempt, the OTP allotted changes. So, even if hackers tried to guess the password during a replay attack, their attempts would fail as each session requires a fresh OTP. 

Moreover, since OTPs are computer-generated, users don’t have to worry about a weak, easy-to-guess password and compromised data security. All this helps minimise chances of identity theft, fraud, and data breach, making OTP authentication systems well-suited for ebanking, corporate networks, and other sensitive data systems. 

The Hashed Message Authentication Code (HMAC) algorithm is used to create OTPs. This, combined with a moving factor, like Time-Based Information (TOTP) or an Event Counter (HOTP) is used to derive an OTP. For better security, each OTP value comes with timestamps. 

One-time passwords can be created through a number of ways, these include:

1. Grid Cards

One of the primary methods of creating one-time passwords are grid cards. These are credit card-like documents carrying a grid of figures, which can be used for authenticating online transactions. However, they are difficult to maintain and can be easily replicated.

2. Security Tokens

An OTP token is a PIN-protected, hardware device which can generate one-time passwords. When transacting, you are required to enter the one-time password along with your credentials. If the correct details are entered, the authentication server validates the login process. However, a separate token is required for every network or website you log in to.

3. Smart Cards

Smart cards are microprocessor-based, advanced hardware tokens that generate unique, one-time passwords. These cards have significant data storage capacity, easy portability, increased security, and higher processing power. In some cases, smart cards can sport improved authentication capabilities such as Public Key Infrastructure (PKI) certificates which offer better encryption.

When you attempt to transact or access a system, the network/ website authentication manager generates a secret number using the OTP algorithms. The security token on the smart card also uses the same algorithm and number to validate the OTP and authenticate the user.

Several banks these days leverage two-factor authentication, whereby a temporary password is sent to you on your preferred registered channel- SMS, email, and/ or call. This is done after you enter your username and password which serves as the first layer of authentication. You can enter the random combination OTP in the field provided. If the code entered is correct, the transaction will be processed, else the verification will fail.

As a second layer of authentication, a One Time Password (OTP) will help you stay ahead of cybercrime and keep you safe from the devastating effects of fraud. Additionally, as OTPs stay active only for a brief period of time, it is practically impossible for hackers and fraudsters to reuse the code and access your sensitive and confidential information.

Along with the username and password, which the user already knows, some additional information must also be provided by the user in order to login. This will reduce the probability of fraud occurring. This information can be an OTP – a one-time password that is accessible only on the registered mobile number of the user. OTPs make it much harder for someone to steal personal information from an account belonging to a customer or employee. As OTPs are a string of random characters and numbers, it is difficult to replicate them, which, thus adds an extra layer of authentication for the user.

In the hyper-digital world, where everything is online and logging into digital accounts is key, OTP has been a saviour for several industries. From banking to e-commerce, different industries rely on OTP verification systems to boost their security parameters and protect customer data from cyberattacks. 

Here’s a list of industries currently benefiting from OTP systems: 

• Banking and Finance

• Defense

• Government

• Travel and Immigration

• Healthcare and Insurance

• Retail

• Consumer Electronics

The differences between OTP, TOTP, and Static passwords are mentioned below-

Security from identity thefts has been a constant priority for the banking sector. With OTPs, one can avoid the common pitfalls associated with weak and static passwords. As they are generated randomly when a request is placed, a hacker cannot access the code in advance. Also, most OTPs today remain valid for only a short period of time, which eliminates the chance of hackers reusing the secret codes and accessing your sensitive financial records or transacting on your behalf.