Published on Nov 10, 2023
Olivia Williams
Read time: 7m
44.6K viewer

One-Time Passwords: Your Cyber Guardian Angel Against Fraud

One-Time Passwords (OTPs) are a security measure used to authenticate users during online transactions or logins. They provide an additional layer of security and are valid for only one session or transaction.


Presently, security is very important as cyber attackers are always trying different means to gain access to valuable credentials.

One important method is the one-time password (OTP), which involves using different methods to verify a user's identity.

In this article, you will learn all you need to know about OTP, how it works, and its benefits.

What is One-Time Password (OTP)?

One-Time Password (OTP) is a security measure used to authenticate and verify the identity of a user during online transactions or logins. OTPs are unique and valid for only one login session or transaction, typically for a short period of time. OTP provides an additional layer of security to protect against unauthorized access or fraudulent activities.

One-Time Password is an important part of 2-factor Authentication (2FA) solutions that are utilized by most financial service providers to offer the highest level of security to customer transactions. OTPs are generated automatically and usually sent to a mobile device so that a single login session or transaction can be performed.

Some of the advantages of OTP are that they are fast, can be used easily, secure transactions at a low cost, and prevent fraud incidents that are expensive to tackle.

An OTP is more secure than a static password, especially a user-created password which can be weak and reused across multiple platforms.

What are the Types of OTPs?

1. Hash-based OTP (HOTP)

This is a type of OTP that is obtained and delivered to a user according to a hash algorithm that syncs the OTP code with a counter that changes increasingly every time the user gains access.

2. Time-based OTP (TOTP)

This is a type of OTP that is time-based, meaning it offers a window of time in which the OTP code will be valid. Generally, timesteps range between 30-60 seconds in length. If the OTP codes are not entered by the user within a specific timestep, they would need to request a new one.

3. SMS-based OTP

One of the most common types of OTP is OTP delivered via text message to the user's mobile phone. The OTP is typically a numeric code that the user inputs into the authentication system to verify their identity.

4. Email-based OTP

Similar to SMS-based OTP, this method involves sending the OTP to the user's email address instead oftheir mobile phone. The user then enters the code to authenticate their identity.

How OTPs Should be Delivered to Users Securely?

OTPs need to be delivered securely to legitimate users in order to avoid giving unauthorized access to cyber attackers. Therefore, OTPs should be delivered to users securely through the following methods:

1. Encrypted Communication

The delivery of OTPs should be done through encrypted channels, such as HTTPS or SSL/TLS, to protect the code from being intercepted or tampered with during transit.

2. Secure Messaging Platforms

Organizations can use secure messaging platforms that provide end-to-end encryption to deliver OTPs. These platforms ensure that only the intended recipient can access the OTP.

3. Tokenization

Instead of sending the actual OTP, organizations can send a token that represents the OTP. The user can then use this token to retrieve the actual OTP securely from a trusted source. The forms of tokenization include:

  • Soft tokens: The most common form of OTP soft tokens is a push notification to email, through SMS, or an app. It generates a unique code that expires after a few minutes, they are secured and encrypted but are vulnerable to malware attacks.
  • Hard tokens: OTPs can be generated by smart cards, USB keys, keyless entry systems, mobile phones, and Bluetooth tokens. They are physical devices that are carried around by the user and used to generate OTP at any time. Unlike soft tokens, they are not susceptible to malware attacks.

4. Out-of-band Delivery

OTPs can be delivered through a separate communication channel than the one used for authentication. For example, if the authentication is done through a mobile app, the OTP can be delivered via SMS to the user's registered mobile number. This ensures that even if one channel is compromised, the other remains secure.

5. Secure Storage

Organizations should securely store OTPs on their servers and ensure that they are not accessible to unauthorized individuals. This can be achieved through strong access controls, encryption, and regular security audits.

How are One-Time Passwords Created?

There are different methods for generating one-time passwords, each has security, convenience, cost, and accuracy trade-offs.

1. Grid Cards

A set of one-time passwords can be provided by simple methods like transaction number lists and grid cards.

They provide low investment costs but are slow, hard to maintain, can be easily replicated and shared, and need the users to keep track of their location in the list of passwords.

2. Security Tokens

One easy method for users is the use of an OTP token, a hardware device that can generate one-time passwords. Some of these devices are protected with PIN, and provide an extra level of security.

The user enters the one-time password alongside other identity credentials (typically username and

password), and an authentication server verifies the login request. This method is effective for enterprise applications but the deployment cost can make the solution expensive for consumer applications.

Since the token must be using a similar method as the server, a separate token would be required for each server login, so users need a different token for each Web site or network used.

3. Smart Cards and OTP

For advanced hardware tokens, a microprocessor-based smart card is used to determine one-time passwords.

Several advantages are associated with smart cards, this includes strong authentication, high data

storage capacity, processing power, portability, and ease of use.

They provide more security than other OTP tokens as they generate a unique, non-reusable password for every authentication event, store personal data, and do not send confidential or private data over the network.

What are the Benefits of Using One-Time Passwords?

OTP is very important to businesses by reducing the risk of unauthorized access and transactions as OTP is used alongside static passwords to verify identity before authorizing logins. The advantages of using OTP are:

1. Increased Security

Two-factor authentication provides more security against fraud than standard passwords. They cannot be used in a replay attack as they become invalid after some time when they are generated. This makes it useless to hackers.

2. Low Cost

When OTPs are performed properly, they provide users with a simple, and cheap experience that is user-friendly.

3. Ease of Use

With OTPs, users can easily log into their accounts even when they do not remember their password.

4. Increased Efficiency

In addition to improving user experience, OTP also helps free up IT staff and help them focus on other projects.

5. Hacker Proof

OTPs are generated randomly by an algorithm, this makes it difficult for fraudsters to use social engineering to obtain it with brute force.

6. Decreased Risk

If the credentials of a user are released during a data breach, fraudsters won't be able to use them without the OTP. OTPs also lower the security risk for users who use one password for multiple accounts.

7. Assurance and Credibility

OTPs have become more popular as they are more secure and easy to use. They also increase the confidence of customers in the company's security.

8. Forgotten Passwords

In cases of account breach or forgotten passwords, OTP can be given to the user to enable them to gain access to their account before they reset their password.

9. Replay Attacks

In a replay attack, the login credentials of a user, including their password, are intercepted. If the user uses a static password, the attacker will have access to the account. However, if OTP is used, the password intercepted by the hacker would not be valid as it has already been used when the user logged into their account and therefore cannot be used again.

10. Multi-Factor Authentication

OTPs add [an extra layer of authentication](). With security tokens, OTPs can be obtained for users and act as an extra form of authentication, which provides added security and lowers the risk of a breach.

11. Compliance with Regulatory Standards

Many industries and sectors have regulatory requirements for secure authentication. OTP systems help organizations meet these standards and ensure compliance with regulations.


One-time passwords (OTPs) are very effective for protection against fraud by adding an extra layer of security to online authentication processes which helps businesses prevent unauthorized access, data breaches, and account hijacking. OTP authentication is inexpensive, easy to use, and can assist

businesses in complying with industry regulations and standards.


Did you find this article helpful?
😍 752
😕 11
Subscribe RSS

Share this article

Stay in the Loop: Join Our Newsletter!

Stay up-to-date with our newsletter. Be the first to know about new releases, exciting events, and insider news. Subscribe today and never miss a thing!

By subscribing to our Newsletter, you give your consent to our Privacy Policy.