Card Tokenization

What is Tokenization & How Does it Protect Data?

How tokenization helps enhance security for cardholder information

Written by
Andy McHale
Publication Date
May 5, 2023
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In a world of increasingly contactless payments, how well-protected are your customers?  

Online and contactless payments have opened numerous new opportunities for merchant growth and success — but they have also come with increased risk for cardholder data. 

A 2023 report from Insider Intelligence reveals that card-not-present (CNP) fraud is expected to result in $9.49 billion in total losses in 2023. Moreover, CNP fraud is projected to make up a whopping 73% of all card payment fraud losses this year, increasing 16% compared to 2019.  

Encryption can go a long way in keeping data safe. Yet, even encryption has limitations that can leave sensitive data vulnerable during a data breach. Luckily, as the payment industry continues to be flush with innovation, payment security is becoming more advanced than ever. 

Enter tokenization — a more modern approach to protecting financial and payment information that makes it near-impossible for your customers’ data to fall into nefarious hands.

Could tokenization be the solution to all your cardholder data concerns? And what’s the difference between network tokenization and vault tokenization? 

Let’s discuss. 

What is Tokenization? Understanding Network vs. Vault Tokenization

Tokenization is the process of replacing sensitive data — such as credit card information — with a unique set of data known as a token. This token is then used as a stand-in for the real data, which is stored in a PCI-secure vault.  

There are two types of tokenization to know about when talking about payments:

  1. Network Tokenization: In network tokenization, the tokens used are created and issued by the relevant payment network (Visa, MasterCard, Discover, American Express, etc.). As most of the major payment networks already work together closely, this makes network tokens more interoperable across an entire payment ecosystem.
  2. Vault Tokenization: In vault tokenization, the tokens are created as a proxy for the customers’ payment details. Rather than being accessible by would be thieves, vault tokens are only useable by the PSPs and other end points who are approved to do so.

Both types of tokenization can be beneficial in various use cases depending on a multitude of factors specific to your individual situation and circumstances.

How Do Network & Vault Tokenization Work Differently? 

The basics of tokenization are fairly straightforward — sensitive cardholder data is replaced with a unique network or vault token, with the sensitive data stored in a PCI-secure vault. If the token environment were to become compromised by malware or hackers, the token data is rendered meaningless without access to the vault as well.  

When we dissect these processes further, we can begin to see the true distinctions between vault tokenization and network tokenization.

Take a look at the breakdown of each tokenization process:

  • Network Tokenization: To use network tokenization, a merchant must first partner with a PSP that has the necessary connections to card schemes. With these connections and partnerships in place, the PSP can then request a network token from a card scheme whenever a customer proceeds to the checkout process. The card scheme shares the network token with the PSP, who then enables the merchant to finish processing the payment.
  • Vault Tokenization: To use vault tokenization, a merchant needs a PSP that offers a PCI-secure vault and issues tokens that correspond with that vault. The PSP has a secure server where these tokens are held until needed. During the checkout process, the token is used to connect to the vault, verifying the customer’s information. After being verified, the token then connects to the merchant’s acquirer bank or the customer’s issuing bank to give the final approval for the transaction.

As you can see, though the processes are similar, several key differences distinguish network tokenization from vault tokenization — the biggest of which is the role of the card schemes themselves in the process of network tokenization. 

Want more info on network tokens? Check out Spreedly’s Network Token documentation!

Is Network or Vault Tokenization More Advantageous for Merchants?

When it comes down to it, both network and vault tokenization have advantages to offer to merchants.

Three of the top benefits of both network and vault tokenization include:

  • Enhanced Security: One of the greatest advantages of tokenization is the opportunity to greatly enhance payment security. With cardholder information safely hidden with a unique token, merchants can ensure customer payment information is well-protected. 
  • Simplified Payments: Tokenization can speed up the payment process and make it more seamless overall. Not only does this save your business time but it also improves the customer experience, inspiring greater brand loyalty and trust in your customers. 
  • Streamlined Compliance: PCI compliance is essential for any business dealing with cardholder information — and tokenization helps to greatly reduce the hassle of these compliance standards. The PCI Security Standards Council (SSC) has even stated that tokenization can simplify a merchant’s validation efforts and reduce the overall burden of compliance.

What gives network tokenization the edge over vault tokenization is that network tokens can be used across an entire payment ecosystem, rather than solely in payment scenarios involving a specific PSP. 

As a result, network tokens enable merchants to work with a wide range of different PSPs without having to worry about whether or not they will have access to the necessary tokens to verify and complete a customer’s purchase.

Secure Your Customer’s Payment Information with Spreedly

To meet evolving customer expectations, merchants and merchant aggregators need to make sure their payment systems are up to speed on the latest security innovations. 

After all, providing customers with top-notch security is the first step to building long-lasting trust. 

At Spreedly, our payment orchestration platform helps you create a reliable payments ecosystem that provides customers with seamless, satisfying experiences — all while keeping the most vital cardholder payment data safe with our Network Tokenization and PCI-Secure Vault

With the support of Spreedly, you can leverage our network tokens to easily transact with a range of payment gateways. Even better, our platform and API give you access to more than 100 different payment services and fraud tools, ensuring your transactions are always optimized. 

Spreedly has both the capabilities and expertise your business needs to thrive in the era of digital and online payments. 

Chat with the Spreedly sales team today to learn more about our Network Tokenization services.

Download the Tokenization eBook Below

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