Tokenization vs. Encryption: Which Is Safer?

Given how fast things are moving digitally, securing sensitive data is an absolute necessity. With the exponential amount of data transferred globally every second, data security remains a paramount concern. To address this need, various data protection methods, such as tokenization and encryption, have emerged. Both methods strive to protect sensitive data, but they operate differently and have their distinct use cases. In the realm of payments, notably the data within scope for a merchant to be PCI compliant, tokenization is a critical path to minimizing compliance burden and reducing the costs associated with managing sensitive data.

Deciphering Encryption

Encryption, a globally recognized data protection method, converts plain text into unreadable cipher text using a specific algorithm and encryption key. The deciphering of the data is possible only with the appropriate decryption key. Despite its widespread use, encryption has its limitations, particularly in terms of key management and speed, making it less suitable for certain applications.

How Encryption Works

In encryption, 'plain text' is converted into 'cipher text' using a complex algorithm and encryption key. The cipher text can only be decoded into plain text using a matching decryption key. Although this method has received considerable attention in cryptographic research, the security of encrypted data hinges on robust key management. Any compromise in key security could potentially jeopardize the data.

Understanding Tokenization

Tokenization is the increasingly favored data protection method within financial and payment systems, with a projected volume of 1 trillion transactions in 2026 according to Juniper Research. Payment tokenization substitutes sensitive data with non-sensitive 'tokens' that have no intrinsic value. The original sensitive data is securely stored in a separate database, often referred to as a token vault, while the tokens are used throughout different systems and applications.

How Tokenization Works

The process of tokenization involves the following steps:

• Replacing sensitive data with non-sensitive tokens
• Ensuring these tokens hold no intrinsic value
• Storing the original data securely in a 'token vault'
• Using tokens to substitute for sensitive data in systems and applications

Underpinned by standards like the Payment Card Industry Data Security Standard (PCI DSS), tokenization has become a trusted method for data protection. It enhances security by mitigating the need for key management and reducing the risk of data breaches.

What is Token Encryption?

Combining tokenization with encryption can give you maximum protection for your payment data. 

Even if an attacker gains access to a token vault, they must also breach an encryption layer.

An encrypted token offers stronger data protection that one technology or the other cannot offer on their own. The typical tokenization process replaces sensitive data with a token that cannot be reversed without access to a secure token vault. 

Tokenization provides a greater degree of protection than encryption since the payment data itself is not used or transmitted and is only revealed once the token reaches its endpoint. 

But tokens can still become vulnerable if an unauthorized user gains access to this vault.  

Encrypting tokens ensures that any unauthorized users cannot reverse tokens without also obtaining the appropriate decryption keys. The encryption process converts the token into a ciphered form that can only be deciphered by authorized systems or users. This is especially important when tokens are transmitted across networks or stored in systems outside of a tightly controlled environment.

A major benefit of token encryption is the prevention of unauthorized access to your token vault if a breach occurs. It also aids with maintaining customer trust in the confidentiality and security of your tokenized system. For businesses operating in strict regulatory environments, such as finance or healthcare, encrypted tokens make meeting compliance standards easier. 

Combining tokenization with encryption can help you to achieve a more defensive approach to payment security that covers all of your compliance bases. Alone, tokenization only removes sensitive data from business systems. An encrypted token gives you peace of mind that even if the unthinkable happens and your vault becomes compromised, there’s an entire extra layer of defense for a hacker to get through, giving you more time to detect and prevent the incident from becoming a full-on breach. 

Token encryption gives you the capabilities you need to strengthen your data and cyber security by protecting both the original data and its tokenized replacement.  

Use Cases for an Encrypted Token

Encrypted tokens offer a compelling degree of security, but are they truly necessary? 

Certain use cases can certainly benefit from token encryption. 

Encrypted tokens can be especially valuable in payment systems where sensitive data is frequently transmitted, stored, or accessed by multiple systems. 

If you regularly handle information like credit card numbers, digital wallet credentials, or bank account authorizations, encrypted tokens can greatly reduce your risk exposure. 

Using mobile payments as an example, customers add credit card numbers to a mobile wallet where that information is replaced with a token. Encrypting that token before it is stored on the customer’s device or sent across different payment networks can help to prevent attackers from extracting any usable data even if the hackers gain access to the mobile provider’s internal vault or system. 

Tokenization vs Encryption: Spotting the Differences

While both tokenization and encryption aim to protect data, the distinct advantages of tokenization often give it an edge. Understanding these differences is crucial when deciding which method to employ.

Data Uniqueness

Unlike encryption, which yields identical output when the same data is encrypted with the same key, tokenization creates a unique token for each instance of data, even if the data is identical. This feature reduces the risk of pattern recognition in the data, providing an additional layer of security.

• Encryption: Same data + same key = same encrypted output
• Tokenization: Same data = unique token

Key Management

Tokenization's effectiveness doesn't rely on key management. Since tokens can't be reverse-engineered to reveal sensitive data, there's no need for key management, removing a potential point of vulnerability inherent in encryption.

Data Format Preservation

Tokenization can preserve the format of the original data. For example, a 16-digit credit card number can be replaced with a 16-digit token, allowing easy integration into existing payment systems. Encrypted data, on the other hand, often varies substantially from the original data format, requiring complex system modifications to accommodate the encrypted format.

Network Tokenization

With the growth of credit cards in e-commerce transactions card networks such as Visa and Mastercard now offer Network Tokenization (NT) services that replace raw card numbers (FPAN) with merchant-specific tokens. Like regular credit card numbers, these Network Tokens (also called DPAN) are a 16 digit value that can be used for completing e-commerce transactions.

Network tokens offer a wide range of benefits for the merchant and consumers:

Network tokens are issued in partnership with issuing banks. As a result network token transactions have a higher authorization rate when compared to payment made without network tokens.

Customers have a better experience as network tokens receive proactive updates from the card networks. Merchants can also choose to leverage detailed card art provided with the network token.

Network token payments have increased security as they are merchant-specific and each transaction is protected with a one time use cryptogram. As a result, instances of fraud decline with network token use.

Application Suitability

Tokenization is typically used for data-at-rest scenarios due to its independence from key management. On the other hand, encryption, despite its potential risks associated with key management, is often employed for data-in-transit scenarios. For instance, in a payment processing system, credit card numbers stored in a database can be replaced with tokens, thereby significantly reducing the risk of data breaches.

PCI DSS Tokenization vs. Encryption

Tokenization is closely related to the PCI Data Security Standard (DSS), so much so that providers have started designing token solutions specifically for PCI compliance.  

PCI DSS tokenization is a different application of token technology that replaces a PAN at a specific endpoint and tailors the process to meet the strict requirements of the DSS. 

This differs from the network tokenization process that replaces the PAN across the entire payment workflow and ecosystem. The PCI DSS imposes obligations on any company handling payment information on how that data must be stored, processed, and transmitted. PCI tokenization solutions aim to provide merchants and marketplaces with a token service that meets these requirements. 

Tokenization as a whole is a security method recognized by the PCI Security Standards Council as an effective means for protecting payment data and reducing overall compliance scope. However, the council does also impose technical guidelines for building, testing, and deploying tokenization solutions.

PCI DSS tokenization works fairly similarly to other forms of the technology by replacing a customer’s PAN with a surrogate value known as a token that takes the place of the actual card data. The original PAN remains safely stored within a PCI-compliant token vault that maintains the mapping between the tokens and the actual data. Only systems or administrators with access to this vault can retrieve and reverse the token to discover the original card data it represents.

Achieving PCI compliance with tokenization requires the token to not contain any part of the original card data or be derived from it using a reversible algorithm without access controls.

When comparing PCI tokenization vs. encryption, PCI DSS encryption must use strong cryptographic mechanisms not necessarily seen within the tokenization process. The cryptographic process must convert payment data into a ciphertext that can only be decoded with an encryption key. 

Per the PCI SSC themselves:

“Cryptography is a method to protect data through a reversible encryption process, and is a foundational primitive used in many security protocols and services. Strong cryptography is based on industry-tested and accepted algorithms along with key lengths that provide a minimum of 112-bits of effective key strength and proper key-management practices.”

Comparing the Benefits of PCI Tokenization vs. Encryption

Tokenization and encryption broadly affect compliance scope and risk exposure differently.

The key distinction between PCI DSS tokenization vs. encryption is that tokenized data is no longer considered cardholder data when implemented correctly. This can cause it to fall out of scope for certain compliance requirements that encrypted data must still uphold. 

Tokens hold no intrinsic value and cannot be reversed without access to the token vault. Since a merchant or marketplace can opt to only handle the tokens and outsource their token vaulting, this can push tokenization outside of the scope of PCI compliance that the business must follow. Instead, the compliance liability falls onto whoever maintains and manages the vault.

As mentioned above, encryption uses a ciphertext to transform payment data into something unreadable. However, this still comes with vulnerabilities that do not exist in the tokenization process, as the encrypted data is at risk if an unauthorized user gains access to the encryption key. Systems handling encrypted data remain in scope of PCI DSS, potentially increasing the compliance burden for the merchant and marketplace depending on what solutions they have implemented. 

PCI tokenization offers a path to a reduced compliance burden and simpler overall integration, while encryption does not. 

Is Tokenization the Superior Choice?

The choice between encryption and tokenization depends largely on the specific requirements of your application. However, due to its robustness and fewer points of vulnerability, tokenization often stands out as the superior choice. Here are some considerations:

Do you store sensitive data for extended periods? Tokenization provides the enhanced security required.

Are you concerned about the risk of key management? Tokenization's keyless nature is more suitable.

How is data transmitted between your servers and your service providers? How do your service providers prefer to receive sensitive data? Do they reward you with lower fees with use of network tokens?

Remember, the decision is not about which method is better in general, but which is better for your specific application. In many cases, tokenization takes the lead.

Start Tokenizing Your Payments

As payment security threats continue to evolve, so must our strategies and methodologies for data protection. Both encryption and tokenization are vital tools for protecting sensitive data, but the unique characteristics and strengths of tokenization often make it a more secure and robust choice. Furthermore, the innovation and momentum being driven by the card networks and fintech service providers demonstrates that tokenization will increasingly be adapted to optimize payment flows and reduce the friction of managing payment data.

Looking for more information? Get a personalized demo on how Spreedly can improve authorization rates and customer experience with secure network tokenization offered as part of our Vault solution.

Download the Tokenization eBook Below