
What Is Tokenization in Payments?

Data breaches remain a top concern for consumers and businesses alike. Between phishing scams, ransomware attacks and hacked Wi-Fi networks, consumer data is facing more threats every day. In the United States, more than 60% of credit card holders have been victims of fraud , and more than half have experienced it multiple times. With millions of dollars and lives on the line, the need for data security is heightened.
One way businesses are protecting consumer information is through tokenization. This security strategy makes it nearly impossible for third parties to access sensitive cardholder information, and combining this strategy with other robust cybersecurity measures amplifies security efforts. Here, you can learn more about tokenization, including how it works and its benefits for your business and customers.
What Are Tokens?
Payment tokenization is a method of securing payment information like credit card numbers. This security strategy replaces sensitive information with what appears to be random characters or numbers. Rather than using and storing card information during transactions, systems use and store the random tokens.
This strategy keeps information secure because even if a malicious third party were to gain access to the token, the information would be encrypted, meaning the third party couldn’t read or make sense of it to determine the card information. Tokenization gives peace of mind to customers by reducing the likelihood of data breaches or fraud.
The transactional party generating the tokens, enforcing custody of the token-generating keys, retrieving the non-encrypted transactional information and operating the tech stack used in these operations is generally referred to as the “token vault.”
Tokens can take several formats, including:
Nonpreserving: Nonpreserving formats replace sensitive information with random characters in a format different from the original. For example, a token for a nine-digit Social Security Number could appear in seven characters like “L$@9%0C” to ensure security.
Format preserving: These tokens maintain the original information format but change the values randomly. Consider this credit card tokenization example—a card ending in 1234 could appear as 5678.
Partial replacement: Some organizations leverage selective masking techniques for payment tokens. This method involves changing some of the information while leaving the rest in its original form. For example, a credit card of 1234 5678 9876 5432 could become 1234 WXYZ ABCD 5432. This method can be helpful if a merchant needs to verify information from a customer, such as the last four digits on their card.