What is Payment Tokenization and how does it work?

In simplest terms, the word “tokenize” means substituting something or turning it into something else. 

Tokenization isn’t a new concept by any means. Think about when you go to a casino and purchase tokens to play slot machines. You exchange money for plastic coins that have no value outside the casino.

It’s the same in the world of online payments. Credit card tokens protect customers’ sensitive data (like credit card numbers, addresses, account numbers, etc.) by replacing them with algorithmically generated numbers and letters.

Using credit card tokenization, merchants can move data between networks without exposing customers’ sensitive information.

Credit card tokenization substitutes sensitive customer data with a one-time alphanumeric ID with no value or connection to the account’s owner.

This randomly generated token is used to safely access, pass, transmit and retrieve customer credit card information.

Tokens don’t contain any sensitive consumer data. They instead act like maps explaining where the customer’s bank is storing this sensitive data within their own systems.

Tokens are generated through mathematical algorithms, and they can’t be reversed.

The tokens can only be opened after the transaction is complete. Outside of your system, these tokens have no meaning and no value. So even if hackers somehow encounter your customer’s data while it’s being processed, they will not be able to use it.

Here is how the tokenized credit card transaction works:

Because the entire tokenized credit card payment process is happening behind the scenes, customers don’t actually need to do anything differently.

It goes without saying: credit card tokenization boosts payment security immensely. Tokenization is a sure way to protect your customers’ payment information from outside digital hackers and potential internal problems.

Randomly generated tokens are only readable by the payment processor – they can’t be monetized even if they’ve been exposed.

Thus, anonymous thieves and hackers have fewer opportunities to commit a cybercrime when a token passes through the systems.

Many businesses that collect and store sensitive data on their networks often find it difficult to comply with PCI DSS standards. If the data breach happens, the lack of PCI compliance can result in fines by the PCI Council.

Tokenization allows merchants to comply with PCI DSS with minimal liabilities and security expenses.

By removing customers’ card information from your network, you minimize the risks of data breaches.

Therefore, you don’t have to invest as much money and resources in data protection – it’s been done for you by credit card tokenization.

Other sensitive business data like passwords, addresses, secret files and customer accounts can also be protected using the tokenization technology.

While both are excellent tools for combating credit card fraud, tokenization and encryption are often confused with one another. So, what is the difference between tokenization and encryption?

Encryption is a form of cryptography that protects sensitive data by turning it into unreadable code. Each number, letter and space on a card is disguised by a different one chosen by a system based on a sophisticated encryption algorithm.

This encoded information should be decrypted using the key or the password at the end.

The most significant difference between tokenization and encryption is that encryption is reversible. Encrypted information can be returned to its original form at any point if you know the algorithm behind it.

Because encrypted data is “breakable,” the PCI Council still views it as sensitive. Thus, meeting compliance obligations with encryption is much more expensive than tokenization.

Encryption is one of the most robust card data protection methods for transactions where the card is physically present. And yet, tokenization provides much better protection when it comes to payments where the card is not current.

To better secure sensitive data in transit and comply with PCI DSS requirements, specialists recommend having encryption and tokenization working together.