Tokenization: Everything You Need to Know
What is Tokenization and How Does It Work?
As the progress of payment technology gathers pace, the potential threat to sensitive customer data increases at a similar speed. A particular danger arises with the storing of customer payment details, and it is therefore vital that organizations take appropriate measures to heighten data security and prevent credit card fraud.
If your organization accepts credit card payments, tokenization is one of the most secure ways to protect against loss or theft of customer information. But what exactly is credit card tokenization, how does it work, and what are the benefits?
What is credit card tokenization?
The tokenization process replaces sensitive customer details with an algorithmically generated number which is impossible to trace back to the original data or information. The result - a token - makes it impossible for anybody to misuse sensitive information, as the algorithm ensures the data is unable to be traced back to its source.
As an example, when a customer makes a purchase using a credit or debit card, the tokenization process takes the card number and transforms it into a mathematically irreversible token. If the credit card number or account number needs to be billed again in the future (such as for a recurring payment or subscription), the payment system recognizes the token associated with the card, rather than the card number itself.
This process gives greater confidence for organizations and significantly reduces the risk of sensitive data such as cardholder data being exposed.
How does credit card tokenization work?
Tokenization can take many forms, but a useful example to consider would be a purchase made from an e-commerce store. The process would work as outlined below:
- A customer makes a purchase and uses their credit card to check out (e.g. 1923 1242 4629 2649).
- The card number is changed to a random sequence of characters (e.g. EUSH127ABD5562).
- The relationship between the actual card number and the token is stored in a separate vault.
- If the transaction is recurring (for example, for a monthly subscription) or a refund is required, the merchant can simply use the token rather than needing to store the sensitive card data itself.
As another example, when users of Apple Pay or Android Pay add a credit card to their mobile device, each of the card numbers will be tokenized and stored on the phone. When a purchase is made, the token is used instead of the payment card itself, thus adding an extra layer of protection for the transaction.
What are the benefits of credit card tokenization?
The decreases in data theft and fraud as a result of tokenization means businesses are less likely to incur reputational or financial damage as a result of a data breach. Customers will also feel reassured and confident in shopping with merchants who utilize a tokenization process, as this shows a strong emphasis on protecting the sensitive information of the customer.
Tokenization also has other benefits, particularly when combined with PCI-validated Point-to-Point Encryption. As well as ensuring unsecured payment data never enters your organization’s systems and safeguarding against cybersecurity threats, tokenization helps with PCI compliance and reduces the scope of PCI-DSS audits, saving cost and time.
Tokenization Vs. Encryption
If you’re familiar with tokenization, you may have also heard of credit card encryption. How does encryption differ from tokenization?
When data is encrypted, it is coded into a hidden language, similar to tokenization. However, encryption uses a mathematical formula which it is possible to reverse-engineer, meaning encrypted sequences can be deciphered and risks exposing sensitive information such as credit card data.
Conversely, tokenization turns a meaningful piece of data into a string of random characters that cannot be reversed - so if breached, no meaningful value is exposed. This is a huge benefit in the payment card industry, ensuring the highest security standard possible. The only thing a hacker would obtain is a list of token numbers which would be of no use to them. This makes credit card data unusable, adding additional layers of security.
To learn more about how CardConnect utilizes both tokenization and encryption to ensure maximum security, fill out the form below and we'll connect you with our support teams.