What Is an OTP (One-Time Password)? What You Should Know 2024

February 29, 2024 | By Sam Pelton
Woman on computer receiving OTP on phone

What Is an OTP? Definition

OTP stands for “one-time password” and refers to a login credential that is good for a single use only. This is, of course, in contrast to traditional passwords which are static unless specifically changed by the user.

OTPs are commonly used across the internet, and more and more online providers are requiring users to implement some form of OTP in order to help preserve safety.

OTPs are usually generated automatically for users and are delivered to them via a number of methods, including SMS, email, authenticator apps, or other various forms of notifications.

What Is an OTP Used For?

Imagine this: you're lounging in your PJs, checking your bank account on your phone, when a notification pops up…

"Unusual activity detected. Please verify your identity."

Your heart jumps into your throat. Did someone just try to steal your hard-earned savings?

Panic sets in, but then you remember the secret weapon nestled within your phone: the OTP (“one-time password”).

In this case, your OTP was your digital fortress protecting your personal information from ill-intentioned foes. And this is a scenario that is, unfortunately, all too common.

Nefarious identity thieves are highly skilled in the art of finding ways to uncover and abuse passwords, via a variety of methods from breaching online data to phishing to brute force.

And that means that static passwords are not totally secure.

Implementing OTPs in a business, therefore, is a way to protect your users and customers—so that they can have peace of mind and more security for their private information.

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How Does an OTP Work?

3 Basic Forms of OTPs

There are 3 basic forms of OTPs: time-based, hash-based, and challenge-based.

With time-based OTPs, the OTP is created based on the time that the user accesses the account.

With hash-based OTPs, the OTP is created based on a calculation from the previously generated password.

With challenge-based OTPs, the OTP is created in connection to the user answering a response to a challenge.

What is 2FA (2-Factor Authentication)?

Note that many businesses use 2-factor authentication (2FA) as a part of their OTP process.

2FA requires the user to submit 2 forms of authentication in order to access their account. This typically would include their static login credentials (i.e., username and password) in addition to an OTP provided to them upon their login attempt.

Although 2FA makes the user experience slightly more complicated, the added layer of security may be worth it to many businesses and users.

How OTPs Are Delivered

With all of the above mentioned forms of OTPs, you need some way to deliver the OTP to the end user.

Different companies approach this differently—as examples, companies may do any of the following (or a combination):

  • Send an email with the one-time code after the user enters their email address on the login page (example: Microsoft Ads)
  • Display a code on connected devices after the user enters their login credentials on the login page (example: Apple App Store Management)
  • Send an SMS to a phone number on file after the user selects to log in via SSO on the login page (example: Customer.io)
  • Require the user to enter the answer to a “challenge” that appears on their screen after they enter login credentials

The method that you offer to your own users may vary depending on the nature of your business and what your audience prefers.

Example OTP Flow

To help you visualize how this whole process might work, let’s say you have a user, Cynthia, who is a customer of your SaaS product.

Cynthia thinks she is terrible at remembering passwords, so she always uses the “continue with Google” SSO option on your login screen. When she clicks that button and selects the Google account she wants to log in with, she sees a notice on the screen that says a code has been sent to her phone.

Her phone is sitting next to her on her desk, so she simply picks it up, looks at the text message, and punches in the code that she sees. And that’s it! She’s in.

Now let’s suppose that for one reason or another the text message never appeared on her phone. She looks at the notice on her computer screen and sees that it says “Didn’t receive the text? Click here to resend.” So she clicks the link there and successfully receives the text message.

"Potential Downsides to OTPs” with each of the subheaders below and icons related to each

Potential Downsides to OTPs

While OTPs are excellent for adding an extra layer of security to your users’ data, they are not without a few downsides.

1. Diminished User Experience

Usually, implementing OTPs means adding extra steps for your users.

Obviously, adding more steps means adding more friction. And more friction is less than ideal for the user experience.

Thankfully, as OTPs and 2FA become more and more common, users are not likely to get too terribly frustrated. However, you may consider whether your business really needs the added security that OTPs bring.

If your business is a financial institution and you store sensitive information, then implementing OTPs is a no-brainer.

But if you’re a very small online business with only a handful of active users and you don’t store sensitive information, adding an OTP process may be overkill.

2. Potential for Malfunction

In addition to the inevitable friction that adding an OTP process can bring, there also opens up the possibility of malfunction.

For example, what if the 2FA email goes to your users’ spam folder? What if they accidentally input the wrong phone number so they never receive the SMS? What if the push notification never comes through for one reason or another?

Not being able to log in because of a malfunctioning OTP process is a very frustrating experience for users. So you’ll need to make sure to have contingency options in place in case something like this happens.

3. Malicious Attacks on Your Business

Implementing an OTP process can in some cases open the door for malicious attacks on your business.

If you don’t have the right safeguards in place, bad actors could take advantage of the OTP process to trigger exorbitant amounts of SMS or emails or push notifications, for example. Depending on the extent to which this happens, it could end up costing your business a significant loss.

So if you do implement OTPs, make sure you have protections in place to prevent abuse.

How to Implement OTPs in Your Business

If you have a business in which people need to log in to an online account, you’ll want to at least consider implementing OTPs as an option for your users.

(In some cases, you may be required to have your users log in with OTPs.)

Here’s what you should know…

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How to Implement OTPs in Your Business

1. Choose the Best OTP Method for Your Situation

Here are some pros and cons of some of the most popular methods…

  • SMS OTPs: Convenient and accessible, albeit potentially vulnerable because SMS are not totally secure.
  • Authentication Apps: Can be more secure since it requires users to have an app installed, but less convenient than some other methods.
  • Email OTPs: Accessible but also has potential vulnerabilities.
  • Push Notification OTPs: Secure but also requires users to have a specific app installed on their device.
  • Hardware Tokens: Most secure option, ideal for high-risk transactions, but requires additional hardware purchase.

2. Integrate with Your Existing System

Once you’ve decided which OTP method(s) you’d like to use, you can use an API service to integrate an OTP/2FA flow with your current system.

For example, you can use the Mobile Text Alerts API to trigger 2FA notices via SMS when someone tries to log in.

(You will, of course, need development work in order to build the 2FA system and implement the API.)

3. Monitor

You will need to keep an eye on your OTP process to make sure that everything is functioning as expected.

Make sure you pay attention to what users are saying—are they running into problems with the process? Do they find it too cumbersome? Would they prefer a different method?

Remember that if someone contacts you with a frustrating issue, there are probably many other users experiencing the same frustrations but who never say anything.

Also keep an eye out for suspicious activity. Hackers/scammers can unfortunately be both relentless and brilliant—a dangerous combination when you have ill intent. And they can use that relentlessness to find ways to game your system if you’re not vigilant.

Implement OTPs in Your Own Business

Now that you know all the in’s and out’s of OTPs, you should consider implementing them for your own business if you don’t already use them.

You can also consider using SMS as one of your OTP channels. Get a free SMS API trial here so you can get a feel for how it works.

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