Tokenization in payments is always trending, but what exactly does it mean?
In everyday terms, tokenization refers to substituting one thing for another. One of the clearest examples of tokenization is at casinos, where you buy tokens (“chips”) in exchange for real money. These tokens have tremendous value within the casino, but immediately lose their value outside of the casino.
The same concept applies to payments. Payment tokenization replaces sensitive payment information with a series of numbers or letters that are meaningless outside of a payment system.
Tokenization has evolved within the payments industry for many years. It is vital technology for ensuring payment security.
Let’s begin by tackling the most important definition — payment tokenization.
What is Payment Tokenization?
In simple terms, payment tokenization is the process of replacing sensitive payment data — such as cardholder information — with a randomly generated token.
The token comprises a string of randomized alphanumeric characters and is used to process transactions without exposing the actual payment information the token represents. As a result, should the token become compromised, cybercriminals and other bad actors are rendered unable to make sense of the token and cannot discover the payment information it protects.
Looking at the tokenization process, the payment tokenization process substitutes sensitive payment card data with a one-time ID that has no connection or value to the account owner. The token can safely access, transmit, and retrieve a customer’s primary account number (PAN) to complete transactions.
Let’s take a look at the six key steps for performing credit card tokenization:
- The card owner initiates the payment and enters their card details.
- The PAN goes to the merchant’s bank as a token.
- The receiver sends the token for authorization via the credit card network.
- After authorization, the bank stores the customer data in secure virtual vaults and matches the token to the customer account number.
- The bank confirms fund availability and declines or allows the transaction accordingly.
- After the authorization succeeds, the token goes back to the merchant for transactions now and in the future.
Ultimately, the tokens do not carry any sensitive data, instead acting as guiding maps explaining where the customer’s bank stores sensitive data in the payment system.
Mathematical algorithms generate the tokens, which are irreversible, meaning the token is only usable once. Furthermore, tokens are only de-tokenized to PCI-compliant parties, keeping the payment data secure throughout acceptance, storage, and payment processing.
As more and more customers turn to online shopping, better protections for digital payments are a necessity. Additionally, the PCI DSS version 4.0 update places greater emphasis on digital payment security, further highlighting the need for modernized payment security strategies.
Payment tokenization enables you and other merchants to process transactions and collect customer payment information securely and affordably.
How Payment Tokenization Works
Tokenization is a process for safeguarding sensitive data and information by replacing it with a unique identifier, known as a token. The tokenization process can protect all kinds of private information, including credit card numbers, social security numbers, and medical information.
In general, the tokenization process involves five main steps, though the specific process can vary depending on how tokenization is being leveraged:
- Data Collection & Tokenization: Data and sensitive information is initially collected by a system or application, such as during a payment initiation or medical record-sharing process. Once collected, sensitive data is sent through the tokenization process and replaced with a randomly generated token. Most often, this token comes in the form of a random string of characters or symbols with no intrinsic value.
- Data Storage: The tokenized data, now represented by these tokens, is stored in the system’s database or transmitted through various networks. Tokens are meaningless to anyone who gains access to them without also gaining access to the corresponding system that generated them.
- Secure Transmission: When transactions or data transfers occur within the system or between different entities (like merchants and payment processors), only the tokens are used. The actual sensitive data remains securely stored within the tokenization system.
- De-tokenization: When the token arrives at its intended destination, the token is sent back to the tokenization system to be de-tokenized, allowing the user to access the original data. The system uses a mapping table or algorithm to match the token to its corresponding sensitive information.
- Usage and Security: Once de-tokenized, the sensitive data is used for authorized processes, such as completing a transaction. This process ensures that sensitive information is never exposed during normal usage or transmission, reducing the risk of data breaches.
Tokens may be format-preserving, in that they reflect the structure of the value they tokenize (e.g. a 16-digit numeric token for a card payment-method), or could be completely random in size and characters (e.g. a 32-digit alpha-numeric token replaces a 9-digit US social security number).
Tokenization and PCI Compliance
PCI compliance is a required industry standard that keeps sensitive payment data secure. A business that handles debit or credit card holders' data must be PCI complaint at the appropriate level. A council made up of major credit card providers created the PCI Security Standards Council (PSI SSC).
If your business handles cardholder data at all, you must comply with the PCI Data Security Standard, or PCI DSS for short. The PCI DSS includes 12 main requirements that cover a wide scope of operational considerations, including technology and internal data security processes.
Failure to comply with the PSI DSS leads to stiff fines and a potential loss of business credibility.
Tokenized payments can greatly help your business meet the demands of the PCI DSS. As we approach the 2024 deadline for PCI DSS v4.0 implementations, payment tokenization can aid in improving the user experience, cutting compliance costs, and reducing your overall operational burden.
While PCI DSS compliance is not a mandatory legal requirement, it is necessary for businesses that work with major payment card companies like Mastercard or Visa. With most estimates place PCI Level 1 security compliance at over $50,000 annually, payment tokenization will save you on PCI DSS compliance regulation costs.
If you choose a solution like Spreedly, it's a great investment with several benefits for all ends of the transaction lifecycle.
A Payment Tokenization Use Case
Suppose you visit an online store. During your previous visit, you entered your credit card details. Since your last visit, the company has optimized its transaction process or expanded to other countries. These changes meant the company had to change its payment gateways and move to new ones. This is where data portability comes in.
You will not know about these new changes as a customer, and you do not need to re-enter your details. Data portability is the ability of a business to seamlessly transfer customer data to and from one gateway to another.
How is tokenization connected to data portability? A merchant can choose between two options:
- Using a dedicated solution that collects and stores PAN information in a separate vault.
- Export the data and create brand new tokens for specific gateways (a “token migration”).
When a merchant wants to process a transaction, they transfer the token and its data to their payment tokenization provider. The platform transfers the stored details to the payment gateway and can process one token via hundreds of compliant endpoints and gateways. This option enables the provider to provide merchants who use multi-provider plans with data portability.
Benefits of Credit Card Tokenization
Tokenization is handy for different online transactions, but that is far from its only advantage. An e-commerce merchant might want to give returning customers the luxury of a secure automated checkout. This automated option allows the customer to skip entering their payment details each time they check out. Essentially, the non-sensitive token can be operated on in place of the raw card-data without the vulnerabilities. Aside from protecting stored cardholder data, tokenization offers benefits for:
- Developers: Tokenization provides payment developers with a foundation for future security improvements and enhanced overall security measures.
- Merchants: For merchants dealing primarily online payments, tokenization offers greater data security that can simplify compliance, improve customer trust, and enhance the user experience.
- Merchant Aggregators: Merchant aggregators can benefit from tokenization thanks to faster approvals, efficient payment processing, greater payment flexibility, and simplified compliance.
- Fintech Companies: Competitive fintech companies strive to be on the cusp of emerging technologies. Tokenization encourages payment innovation, helping fintechs pull ahead.
How is Payment Tokenization Different From Encryption?
When discussing tokenization, it is crucial to distinguish the process from encryption.
Both tokenization and encryption are used to protect sensitive data, but tokenization is widely considered a more secure alternative to encryption.
Though sometimes used interchangeably, tokenization and encryption are different processes. Understanding the differences between the two is key to choosing which security measure is best.
Encryption is a type of cryptography that protects information by changing it into indecipherable code. An algorithm chooses a different number that disguises each credit card's letter, space, and number. The decryption of this data is only by a password or key.
Unlike tokenization, however, encryption is still reversible and the sensitive data it protects can be accessed so long as the user knows the password or key. As a result, encryption remains vulnerable to digital threats and theft, while tokenization offers a more secure alternative.
Overall, although encryption offers robust protection for sensitive information, tokenization offers better protection within digital environments. Most security experts recommend using a mix of the two to comply with relevant regulations, such as PCI DSS in the payments industry.
How is Payment Tokenization Different From Encryption?
For merchant payments, tokens are generally named after the token provider. Some examples include:
- Acquirer Tokens are generated by the acquirer when a merchant submits card data for processing. However they are owned by, and limited for use with, that acquirer.
- Merchant Tokens are those provisioned and stored by the merchant and usually mean the merchant is vaulting in-house and bearing the PCI-compliance burden that comes with that.
- Vendor Tokens are similar to merchant tokens, and are those provided by a payments vendor like Spreedly to merchants and service-providers. We call our tokens Universal Tokens for their interoperability across partners like gateways.
- Issuer Tokens are provisioned by issuers for cards in their environment. The primary use-case for these are when they provide a token for cards stored in digital wallets such as Apple or Google Pay. These tokens will sit in your mobile application for payments with the wallet.
- Network Tokens are gaining a lot of momentum these days. They are tokens provisioned by the networks in cooperation with the issuers. They use an enhanced level of security and while they are still gaining adoption, come with a number of benefits to merchants around cost and security.
Discover the Power of Spreedly’s Merchant Tokenization Solutions
Tokenization has evolved from a simple digital security measure to a concept that takes many forms - even just within the payments realm.
Ready to take advantage of the power of tokenization in your payment system? Spreedly’s universal tokens provide ownership of payments data with your vault - avoiding vendor lock-in and giving you full ownership of your payments data without the heavy PCI standards that would come with doing it yourself.
Interested in Network Tokens? Our Advanced Vault provisioned network tokens include Secure Network Tokenization standard and at no extra costs. See how they can improve your payment security and provide customers with an exceptional payment experience.
Contact the Spreedly team to learn more!