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What is a one time password (OTP)? Features and benefits explained

Fraud and security
Products
Image shows abstract depiction of one time passwords for secure messaging
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In a world full of fraud in business communications, wouldn’t it be nice if there was a way to know you’re speaking with the right person? The more we conduct our lives online, the greater our need for verification solutions that protect our identities and data.

It turns out that a one time password (OTP) and two-factor authentication (2FA) are effective solutions for protecting users on a global scale. In fact, the appetite for mobile security is so great that the global 2FA market is projected to grow to roughly $9 billion by 2024, while the OTP market is expected to reach $3.2 billion over the same period.

OTPs are a remarkably simple and cost-effective way for organizations to verify and protect their customers' and employees’ personal information. If you’re interested in learning more about how you can instantly validate your customers from anywhere in the world — and save your organization time and money in the process — then this guide is for you.

What is a one time password (OTP)?

A one time password (OTP) is an identity verification tool for authenticating users logging into an account, network, or system. A user is sent a password containing a unique string of numbers or letters that can only be used once to log in.

Illustration shows three key features of one time passwords

Thanks to their time sensitivity and single-use, OTPs provide both end users and businesses with a great layer of protection against fraud and data leaks. 

OTPs can be used as single-factor authentication to replace static passwords, where:

  • Instead of a customer creating their own username and password, they’re issued a unique PIN for each session

Or, they can be used in addition to user-generated credentials for two-factor authentication (2FA) during sign-up, login, or transaction approvals, where:

  • A customer attempts to use their username and password from an unrecognized device
  • The customer then receives and uses their OTP to verify their identity and device

How can I get a one time password?

Illustration shows a person receives and uses a one time password

For the end user, getting an OTP is quite easy, making the experience secure but effortless. Here’s one example:

Step 1: A customer attempts to log on to their online banking account from their phone. 

Step 2: The bank doesn’t recognize their device. To protect the user’s information they offer to send a verification code via SMS, phone call, push notification, or email.

Step 3: After the customer selects their preferred delivery method, they get an OTP key within seconds. 

Step 4: The user proceeds with their login, entering the key along with their ID and password and…voila! They’re free to enjoy all of their online banking tools. 

Pretty cool, right? Behind the scenes, all kinds of magic happened to generate and deliver that one time password to the customer’s screen. We’ll reveal the magician’s secrets in the section below.

How does a one time password work? 

Whenever a user tries to access a system or perform a transaction on an unauthenticated device, an OTP generator and an authentication server work together using tokens (or shared secrets) to verify their identity.

First, the OTP generator uses a hashed message authentication code (HMAC) algorithm to create a new, random code for each access request. 

As the name implies, all OTPs only work once, but the unique password will either be hash-based (HOTP) or time-based (TOTP).

HOTP vs. TOTP 

The main difference between hash-based and time-based OTPs is the moving factor the algorithm uses to generate the code.

Illustration details the key differences between HOTP and TOTP

Hash-based OTPs:

  • The moving factor is a counter
  • Passwords are generated with an algorithm that uses a counter 
    • Like taking a ticket in line at the bakery, the number is included in the password
  • Passwords expire after use or a new OTP is requested
  • Also known as event-based OTPs

Time-based OTPs:

  • The moving factor is time
  • The password includes the exact time it’s requested
    • For example, 1:05:43 p.m.PM = 10543
  • Passwords expire after use or a certain amount of time has passed
  • Also known as app-based authentication or software tokens

Once issued, the OTP generator shares the new code with the backend authentication server. 

When the user enters their code, the authentication server uses the same algorithm as the generator to match the code for easy and instant validation!

Endless OTP use cases and examples

Okay, not exactly endless, but pretty close. With verification more critical than ever, we’re seeing more and more industries opt for two-factor authentication supported by OTPs linked to user devices.

Some of the industries that are successfully transforming the user validation process include:

  • Financial services and digital banking
  • IT services
  • Business administration
  • Health care
  • Insurance and employee benefit providers
  • Government services
  • Retail and e-commerce

Some of the useful applications include:

  • User authentication

  • Device authentication

  • New user registration

  • Sign up and login

  • E-commerce transaction confirmation

  • Password registration and resets

  • Money transfer validation

With such a wide range of possibilities, OTPs offer some spectacular benefits.

What are the benefits?

Illustration lists five advantages of one time passwords

We’ve been eager to tell you! The core benefits boil down to:

  • Enhanced fraud and data protection
  • Scalable global reach on mobile devices
  • Convenience and ease of use

But each benefit deserves some special attention, so let’s dive in.

Stops identity thieves in their tracks

Businesses that utilize OTPs for user authentication make it far more difficult for someone to break into a customer or employee’s account and steal personal information.

As a demonstration, let’s consider what happens when an unauthorized person attempts to access another’s account. The rightful user receives a code that they didn’t request. Now that seems strange.

While the organization can only guess if the login was legitimate or not, the user knows immediately something is fishy and takes action to further secure their account by updating their password.  

Verification messages may also be sent to the user’s registered mobile number or email address when another unregistered device is used for account access. If needed, the account holder can easily flag any unusual activity with the click of a button.

Instead of locking a user’s account with any sign of suspicious activity, which would be extremely frustrating every time it actually is the user, the user is in complete control. And as an added bonus, these types of alerts let people know that businesses are actively monitoring and protecting their personal information, which goes a long way to earn trust! 

Highly improbable for others to guess

For such a simple idea (four to eight random numbers), OTPs are remarkably effective at mitigating the risks that come from weak password security. 

Let’s look at this mathematically. If you issue a random six-digit code, an identity thief has to guess each number correctly within a short expiration window.

That means 10 possibilities (zero through nine), six times (10x10x10x10x10x10).

In other words, an identity thief has a one in a million chance of getting your OTP right, or a 0.000001% probability. 

That’s just for your standard six-digit OTP. If they include eight digits, the would-be identity thief would probably have a better chance of winning the lottery.

Gives your IT support a break

We’ve all got dozens of passwords and usernames to remember. Who hasn’t forgotten at least one? From the streaming service account to online newspaper subscriptions, it’s no small task keeping track of all that info.

It’s human to be forgetful. Without alternative verification methods, IT staff or customer care will get called in to help people regain access to their accounts,  and that time adds up fast.

OTPs can instead be used to reset passwords and save countless hours of manpower. As a result:

  • IT and customer support teams have more time to focus their efforts on more productive tasks and business-critical issues.
  • The user has a quicker and more convenient method of resetting their password and regaining access to their account.   

Easy for organizations to integrate and scale

Using verification APIs, organizations can easily build OTPs into their apps and products.

In just a short amount of time, these programmable verification integrations can quite literally pay for themselves by:

  • Safeguarding against internal and external cybersecurity threats
  • Securing customer trust 
  • Freeing up your valuable human support resources to focus on higher-level goals

Improves the user experience

Any organization’s reputation is built on customers trusting their brand, and according to recent Sinch research, 73% of consumers feel a high level of trust when their information and accounts are secure 

You don’t want to have to tell your customers their data has been compromised, do you? We didn’t think so!

Multi-factor authentication solutions like Sinch’s SMS Verification API provide security at scale and a buttery-smooth UX. 

One simple integration makes verification quick and easy through a user’s mobile device:

  • Everyone has SMS on their mobile phones 
  • It’s a familiar and comfortable communication channel
  • People can receive texts almost anywhere in the world for next to nothing 

Five bonus tips to keep your password safe

Multi-factor authentication is a great way to protect your accounts, but here are a few other helpful guidelines for good password habits:

  1. Never share your password: the easiest way to keep a secret is to keep it to yourself.
  2. Don’t use the same credentials for multiple accounts: this limits your potential risk if one of your accounts is ever compromised.
  3. Include numbers, special characters, and both upper and lower-case letters: case-sensitive passwords that feature numbers or symbols are much harder to guess.
  4. Randomize whenever possible: personal details are easily searchable online, so you don’t want your password to include obvious information.
  5. Use SIM-based verification methodsFlash Call Verification and Data Verification, for example, require you to engage on your mobile device, which makes life more difficult for opportunistic hackers.

Additional authentication resources

Level-up your authentication and verification knowledge in an evolving cybersecurity landscape:

For those really looking to nerd out → check out our whitepaper on Two-factor authentication.  

Otherwise, contact us anytime to chat with one of our experts about how to protect your customers and open the door to better customer engagement!