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A Definitive Guide to Credit Card Tokenization

The world is getting increasingly digital day by day, and it’s hard to name a field of human activity not affected by digitalization. Among others, finance is undoubtedly one of the industries that have experienced a major shift to digital over the past decade.

However, along with the remarkable advantages digital transactions deliver, they are still associated with certain concerns, such as ensuring the security of online transactions and protecting sensitive cardholder data. Here’s where data tokenization vendors come to save the day. Merchants can breathe a sigh of relief thanks to tokenization — a system that can help effectively secure their customers’ financial data and safeguard their payments.

In this guide, we’re taking a closer look at credit card tokenization — what it is, how it works, what benefits it brings, and even more. Let’s dive in.

What is credit card tokenization?

Credit card tokenization means de-identifying cardholder data by converting it into a string of random letters and numbers called a “token.” Like encryption, tokenization makes the original data indecipherable in case of a data breach or other exposure.

However, unlike encryption, credit card tokenization is irreversible, and tokenized data can be stored inside your cardholder data ecosystem without violating the PCI DSS.

How does credit card tokenization work?

Merchant systems often act as the weakest link in the chain of networks necessary to complete credit card purchases. Serious data breaches you might have heard of mostly happen due to merchants storing credit card data, not banks or payment networks. Tokenization allows merchants to store only tokens while the sensitive card data is stored on a high-security server.

When you’re buying something from a merchant using tokenization, your card data is replaced with an alphanumeric string. For instance, instead of Jack Sparrow, account number 0987 6543 2100 0000, expiration date 12/2029, the merchant uses a token JK86NP177RB. Needless to say that a hacker who steals it from the merchant’s system will find it useless. The token is valid exclusively for purchase at a particular merchant.

Here’s what tokenization credit card processing looks like:

1. A cardholder initiates a transaction (online, in-app, or in-store) by giving their credit card details.

2. The merchant transmits a token to the receiving bank.

3. The party acquiring the token launches the routing process to transfer the token to the bank network for authorization.

4. Once authorization is accomplished, the token matches with the corresponding bank account while customer data remains secure.

5. The tokenization vendor accepts or declines the transaction, returns the token, and sends its authorization notice back to the bank.

6. If payment authorization is successful, the merchant receives a new token for future transactions.

Tokenization vs. encryption

Tokenization and encryption are typically mentioned together as means to secure data transmitted over the Internet. Although both are effective at data obfuscation, they are not the same and can’t replace one another. Encryption and tokenization are combined in the digital payments landscape to secure the end-to-end process.

So what’s the difference? While tokenization replaces a customer’s credit card data with a token that can’t be converted to its initial form, encryption encodes this data with the help of an encryption algorithm and key, making it possible to decode. Merchants use card encryption to safeguard card data while transmitting it over a network with further decryption.

Tokenization vs. EMV

EMV (EuroPay, Mastercard, and Visa) is similar to tokenization in a way it protects credit card data; however, it relates only to a physical card. Similar to encryption, EMV stores sensitive data directly on its microprocessor chip that encodes the digital signature used in the course of the transaction.

EMV can be applied exclusively to “chip-and-pin” transactions, meaning that it calls for a machine that can process payments from cards with microprocessor chips. Initially, these transactions required customers to dip, not swipe, cards into a terminal. However, EMV cards have recently started to use NFC to process and secure transactions, allowing customers to make payments with a tap.

Benefits of credit card tokenization

Credit card tokenization is not only an effective way to reduce fraud and shield cardholders’ data — it offers a range of other benefits to businesses. Here are some of the significant benefits of credit card tokenization.

Zero data theft risk

Again, unlike encryption, tokenization doesn’t allow data to be returned to its initial form — it completely removes the data from your internal system, exchanging it for a randomly generated token. Consequently, no sensitive data will be revealed if a tokenized ecosystem is breached. In other words, no sensitive data is stored, so it can’t be stolen. As a result, the risk of data theft is entirely removed.

Building trust with customers

Enhanced security provided by credit card tokenization goes a long way toward establishing customer trust. Although digital payments are gaining more and more traction, many people still don’t feel safe about them. Tokenization makes sensitive customer data less vulnerable to cyberattacks and payment fraud, helping keep online transactions secure and establishing trust.

Easier PCI compliance

While older POS allowed storing credit card numbers and their free exchange over networks, the advent of PCI made it no longer possible. To stay PCI compliant, businesses should store credit card data through tokenization to make transactions and sensitive data safer.

Parting thoughts

Credit card tokenization is an effective method of protecting sensitive customer data. As a merchant, you don’t store any actual information — just a token that would have zero value when breached. This helps secure credit card information and efficiently shield cardholders against fraud, eliminating data theft risk and building trustful relationships with your customers. Moreover, using credit card tokenization is a way to go if you want to stay PCI compliant without extra moves.