Encryption protects online transactions by transforming sensitive data into a secure format, making it unreadable to unauthorized parties. It uses algorithms and cryptographic keys to change the original information into an encrypted text or ciphertext. Only authorized users who possess the correct decryption key can convert this ciphertext back to its original state, ensuring data confidentiality and integrity. This process instills trust in e-commerce and online banking, safeguarding against data breaches and identity theft. In essence, encryption is crucial for securing personal and financial information during digital exchanges.