One Time Password (OTP)

What Is a One-Time Password (OTP)?

A one-time password (OTP) is a password for use on a digital device that is valid for only a single transaction or login. It is also known as a dynamic password, one-time PIN, or one-time authorization code.

OTPs are often used as part of multi-factor authentication processes, where the user will need not just the password but also something else they have to hand (such as a specific cellphone to which the one-time PIN is sent).

How Does a One-Time Password Work? 

One-time passwords work by providing the user with credentials that they can use for a single login or transaction. They are generated by algorithms and cryptographic hash functions designed to avoid the possibility of predictable patterns. OTPs are often used alongside other login credentials such as usernames and passwords.

What Are the Types of OTP?

There are two primary types of one-time passwords in use as part of modern authentication methods: time-based one-time passwords (TOTPs) and hash-based one-time passwords (HOTPs). Let’s take a closer look at both.

  • Time-based one-time passwords – A TOTP is valid for a set period of time – usually 30 or 60 seconds. Such a password must be used within that timeframe or it will become invalid, meaning the user will need to request another one.
  • Hash-based one-time passwords – An HOTP remains valid until the user requests another password. Hash-based one-time passwords are event-based rather than time-based.

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Why Is a One-Time Password Important? 

One-time passwords are important because, when implemented correctly, they can support organizations’ attempts to provide robust authentication processes.

The fact that 81% of company data breaches are caused by poor passwords, and that 80% of hacking incidents are the result of stolen and reused login information, highlights how valuable a robust OTP implementation can be. This is particularly so in light of the fact that hackers have stolen 555 million passwords and made them available on the dark web since 2017.

Differences Between OTP and 2FA

Two-factor authentication (2FA) requires the user to have two things: usually, something they know (such as a username or password) and something they have (such as a smartcard, cellphone, or hard token).

Some 2FA systems use something that is inherent to the user, such as a fingerprint, instead of something that is in their possession. A one-time password can be part of a 2FA login process or a multi-factor login process.

OTP Use Cases and Examples

The fact that OTPs can be far more secure than static passwords has led to their use across a wide range of sectors. Let’s look at some examples.

Financial Services and Digital Banking

A wide range of banks and financial service providers around the globe use one-time passwords as part of their security processes. Some use them as part of their account access procedures while others use them to authorize transactions.

IT Services

Another widespread use case for OTPs is the IT services sector. From remote logins to users’ computers to network access, the use of one-time passwords is helping IT companies ensure they maintain strong security.

Business Administration

OTPs have a range of uses when it comes to business administration. They can be used to ensure that access to anything from governance documents to finance systems to HR software is carried out securely.


Healthcare providers can use one-time passwords when sharing information with other providers securely and when enabling individuals to log in and access their own medical files. With medicare fraud believed to cost around $60 billion every year, the importance of robust security is palpable.

Insurance and Employee Benefit Providers 

Insurance fraud costs American consumers at least $308.6 billion per year, which is why it is so important to do everything possible to fight it. OTPs have an important role to play in doing so, as they can help ensure that everyone from employees to claimants can access information securely.

Government Services 

As more government services move online, there is a greater potential for cybercriminals to steal information. From paying taxes to ordering passports, the use of OTPs for government services is helping to ensure information is accessed only by those authorized to do so.

Retail and Ecommerce

Many online retailers have embraced the use of one-time passwords as part of their users’ account access procedures. This acts as an ATO fraud prevention method to help avoid cybercriminals taking control of users’ accounts.

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How Does a One-Time Password Fight Fraud?

One-time passwords are an essential part of defending against the methods that cybercriminals use to attempt to access and steal data. This is particularly important given the rise of fraud as a service (FaaS) in recent years.

The unpredictable and regularly changing nature of one-time passwords means that they are harder to steal and use than static passwords – though users must guard against phishing, interception, and rerouting, which fraudsters can use to obtain and use one-time passwords. Cybercriminals are also turning to automation to help access OTPs, with one report finding that bots had a success rate of around 80% when it came to stealing one-time passwords once they had the victim’s phone number.

That said, multi-factor authentication – including the use of one-time passwords – can help to deter less committed fraudsters, particularly when OTPs are combined with other verification processes, such as an email confirmation. As such, they have a vital role to play in ensuring that businesses are doing all they can to fight fraud.

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