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

Fraud and security
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. 

One-time passwords (OTPs) 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 multi-factor authentication (MFA) market is projected to be valued at $49.7 billion by 2032, as compared to $12.5 billion in 2022.  

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. Used or not, these password codes expire after a short period of time. 

As their name suggests, one-time passwords can only be used once and expire after a set amount of time. They can be sent to a user by email, phone call, authenticator app (common ones include Google Authenticator or Microsoft Authenticator), text message, or as a push notification. 

three key features of one-time passwords (OTPs)

OTPs can be used as single-factor authentication to replace static passwords, where customers are issued a unique PIN for each login session rather than creating a username and password. 

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

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


How does a user get a one-time password?

For the end user, getting an OTP code is quite easy, making the experience secure but effortless. Here’s a common scenario:  

  1. A customer attempts to log on to their online banking account from their phone.    
  2. The bank doesn’t recognize their device. To protect the user’s information they offer to send a verification code via text message, phone call, push notification, or email.  
  3. After the customer selects their preferred delivery method, they get an OTP key within seconds.  

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 passcode to the customer’s screen. We’ll reveal the magician’s secrets in the section below. 

Smiling woman receiving and entering a one-time password (OTP)  into her phone

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 security 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). 



The main difference between a hash-based OTP (HOTP) and time-based one-time password (TOTP) is the moving factor that changes each time the algorithm generates the code. 

Hash-based OTPs: 

  • The moving factor is a counter, which is generated based on the total number of OTPs created  

  • Passwords are generated with an algorithm 

  • 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 

  • Are 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. = 10543 

  • Passwords expire after use or a certain amount of time has passed 

  • Are also known as app-based authentication or software tokens 

  • Are generally understood as being much more secure than HOTPs because they're only valid for a specific period of time. 

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

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

Chart showing differences between hash-based OTPs and time-based OTPs (HOTP vs. TOTP)

Are one-time passwords secure? 

Passwords are a vulnerable form of identity verification. In fact, in 2023, 74% of business data breaches were attributed to the “human element,” including weak or stolen credentials.  

So, how can businesses help their customers keep their passwords safe? Well, the first step is certainly educating them on best practices – things like never sharing a password, never using the same password for multiple accounts, including numbers and symbols in passwords, and never using personal information like a phone number or birthday for a password. 

But often that isn’t enough, especially for businesses holding sensitive information. Adding another layer of authentication like one-time passwords or two-factor authentication ensures better security because these factors change with each new login attempt or transaction. Overall, one-time passwords serve as a reliable and versatile security measure, and with such a wide range of possibilities, they offer some spectacular benefits. 

However, one-time passwords can still be abused by hackers, so we recommend using SIM-based verification methods like Flash Call Verification and Data Verification. These methods require users to engage with a prompt on their mobile devices, making life more difficult for opportunistic hackers. 

What are the benefits of OTPs?

OTPs are highly versatile, leveraging the widespread use of mobile devices to reach users across the globe. They can be delivered through varied and convenient channels, making them accessible and user-friendly. 

With OTPs, organizations can offer their users a secure, scalable, and hassle-free authentication experience, safeguarding sensitive information and instilling trust in their digital platforms. 

The core benefits boil down to: 

  • Enhanced fraud and data protection 

  • Scalable global reach on mobile devices 

  • Convenience and ease of use 

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


Stop 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 online 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 the action was legitimate, 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 by militating risk factors for unauthorized internal access, or external threats due to bad actors trying to obtain or guess a user’s regular login credentials.  

  • Securing customer trust by adding an extra layer of security beyond traditional username and password credentials, assuring customers that their data is safe from unauthorized access.  

  • Freeing up your valuable human support resources by reducing the need for manual verification and assistance so they can focus on higher-level goals. 


Improves the user experience

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

No business wants to tell their customers that their data has been compromised, right? 

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

With Sinch, one simple integration makes user verification quick and easy through their mobile device, because: 

  • 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. 

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 methods supported by OTPs to verify user identities.  

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

  • Insurance and employee benefit providers: Insurers can use OTPs  to validate and verify claim submissions and access to other important documents. 

  • IT services: Information technology services can use OTPs as an additional factor, along with regular credentials like username and password, for user authentication when employees log in to systems, networks, or applications. 

  • Business administration: OTPs can secure access to confidential documents, or in workflows that include approval processes;  

  • Government services: OTPs add another layer of security for individuals logging in to government portals or applications to access services like tax filing, permit applications, or benefits enrollment. 

Across industries, some additional useful applications of one-time passcodes include validating users when they take certain actions, like: 

  • Authenticating their identity 

  • Authenticating a device  

  • Registering as a new user 

  • Signing in and logging on 

  • Confirming a transaction 

  • Registering or resetting a password 

  • Validating a money transfer request 

Learn more about one-time passwords (OTPs) and user authentication

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!