What is Tokenization?

Tokenization is a term used to describe a highly-secure method of protecting payment credentials. It’s used in various stages in the payment process but is most commonly used when transmitting information between two systems or when storing card information for an extended period.

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What is tokenization?

When you hear the word token, your mind probably turns to an arcade or casino. But in the payments world, it means something entirely different.  Tokenization is a term used to describe a highly-secure method of protecting payment credentials. It’s used in various stages in the payment process but is most commonly used when transmitting information between two systems or when storing card information for an extended period. As an example, a credit card number is tokenized when it’s passed from your point-of-sale software to your credit card processor.

What happens when data is tokenized?

Tokenization essentially replaces sensitive data, like bank account or credit card numbers, with a unique string of symbols called a token. During this process, an algorithm transforms a 16-digit card number into a totally unrecognizable combination of letters and numbers which can only be interpreted by certain devices. Those symbols retain all of the data without compromising the security of the card. This makes it impossible for any prying eyes to steal the card information. 

Why is tokenization important?

Once card information has been tokenized, only the payment processor and gateway are able to decode it. This is a huge benefit of tokenization because it keeps your customer’s information as safe as possible from outside threats. 

Sadly, data breaches occur all the time. Tokenization is your best bet to protect your business from such a breach. It may not completely protect your business from a breach, but it can reduce the financial fallout. Because a unique token is generated for each card on file with your business, it’s much more difficult for ne’er-do-wells to find what they’re looking for. 

Of course, all businesses that accept credit or debit cards need to be in compliance with the Payment Card Industry Data Security Standard (PCI DSS.) If you’re using Tokenization, you’re compliant with these regulations. 

When is tokenization used?

For merchants, the process of tokenization is most commonly completed by your payment gateway. But that’s not the only time that tokenization is used. In fact, you probably see it in action every day, from in-store point-of-sales to in-app payments. 

When a customer pays with a mobile wallet like Apple Pay or Google Pay, their personal credit card data is stored on their phone as a token. Additional security comes from the smartphones themselves, with other advanced authentication measures, like Apple’s Face ID. 

Here’s another example: if you’re buying something from your favorite retail store online and you’ve previously saved your credit card information for a “one-click” checkout, tokenization is being used there, too. Your credit card information is stored within that website, but saved as a token. Apps like Venmo, Uber, and Lyft also tokenize payment card data. That information is uploaded to the app in order to protect the cardholder’s data. 

What’s the difference between tokenization and encryption?

You may be thinking that tokenization sounds like encryption, but there are some differences between the two. First, encryption allows the primary account number (PAN) -- which you know as a 16-digit card number -- to be seen by involved parties. This is because encryption is reversible. Basically, if an involved party has the key necessary to read the encrypted data, they’ll be able to see the data as it was originally entered.

Tokenization, on the other hand, does not allow the actual card information to be seen. Only the device which originally created the token is capable of reversing the tokenized data and viewing the information in its original form.

The second big difference between these two is the level of flexibility offered by tokenization. While tokens are always random and unique, it is possible to create different types of tokens. For example, a token can be created for continuous use or to expire after a single use. Tokens can also be created to require user authentication before they can be used, adding an additional layer of security.

Overall, there are more benefits to tokenization. In addition to hiding the PAN data, tokenization also reduces the PCI scope, makes for payment flexibility, is centrally managed, and has a low per-transaction cost for the merchant. If you care about your customers’ information, you would be wise to explore tokenization. This process can protect your customer’s information and, in turn, protect your business.

If you are looking to adopt a payment processing system that utilizes tokenization, the payments experts at SwipeSum would love to help! We help businesses of all sizes optimize their payment processing solution for better security and lower costs. Get started by visiting our Get Started page, emailing save@swipesum.com, or calling (314) 390-1461.

Zack Hechtman

Zach Hechtman is the former Director of Payment Facilitation Solutions at Swipesum. A rising senior at Washington University in St. Louis, Zach is studying Entrepreneurship and Healthcare Management.

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