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Advanced Data Security: Tokenization Explained

Boaz Gam

Boaz Gam

CEO

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04.10.2021
7 min
What Is Credit Card Tokenization? How Does Credit Card Tokenization Work? Tokenization in Alternative Payment Methods
System Operation, Restrictions, and Tokenization Development Benefits of Tokenization for Your Business Convenient Payment Solutions from Payneteasy

Online payments have become an integral part of everyday life. However, as e-commerce develops, so does cybercrime. To prevent fraud and protect user data, online payment services are implementing various security protocols.

Tokenization is currently among the most advanced technologies for safeguarding sensitive information in online purchases. If you as a business owner are striving to offer your customers the highest data security level, this guide is for you. Keep reading to learn about card tokenization and its principle of operation.

What Is Credit Card Tokenization?

Tokenization is a technology that replaces a customer's primary account number (PAN) with a token, which is essentially a randomly generated, unique placeholder. Such tokens are used to access, maintain, and retrieve the consumers’ credit card information and provide both your business and its clients with an improved fraud-management algorithm.

But what truly makes this security process stand out among other data protection methods is that a token has no true meaning or value. With the majority of anti-fraud systems, a security breach could lead to severe consequences due to criminals getting hold of all the essential data. Tokens, on the other hand, provide fraudsters with zero valuable information. Besides, there is no algorithm that allows third parties to change a token back to the data’s initial form. Let’s take a look at how exactly a credit card is tokenized.

Tokenization Vs.Encryption

Tokenization and encryption protect data effectively if implemented correctly and demonstrate the best results when combined. However, while both these methods perform essentially the same function, they feature some key differences.

One of the key distinctions between encryption and tokenization is that the latter requires significantly less computing resources. Faster processing of tokens is possible because certain data, either partially or fully, remains visible for analysis while all the confidential information is hidden.

Besides, tokenization is far more flexible than encryption. This is partly due to the fact that it is a non-mathematical approach that replaces sensitive data with non-sensitive substitutes without changing the data’s type or length. This way, the tokenized data stays secure while being processable for legacy systems.

How Does Credit Card Tokenization Work?

To answer the question “how does tokenization work?” it’s best to start with an example. If the client's card number was 5678 1234 4321 8765, after tokenization it would appear as a code similar to this one: E54TY7HR18X. Thus, there is no connection between the token and data, so no matter how many times the client sends the same card information again, they will receive a different token every time.

Tokens are typically generated in real-time, and the procedure has no negative effect on the transactions’ speed. The standard payment tokenization process looks like this:

  1. During checkout, a consumer enters their credit card data into the secure payment form and initiates the purchase.
  2. The system forwards the token representing the card details to the merchant acquiring bank.
  3. The acquirer then forwards the token to the credit card network for authorization.
  4. After the authorization is complete, the user’s data is stored in the bank’s secured virtual vaults, and the token is matched to the consumer’s account number.
  5. Then, the bank verifies the sufficiency of funds and either accepts or declines the payment.

As you can see, credit card tokenization provides top-notch data security, but it is not the only advantage it has. Read ahead to find out how your business can benefit from this technology.

Tokenization in Alternative Payment Methods

An alternative payment system requires several organizations to cooperate for providing end users with Near Field Communication (NFC) or other payment service-based technologies. A Trusted Service Manager (TSM) is often required to resolve the compatibility issue among the mobile operators and service providers. Tokenization can play an intermediary role for such entities.

As mentioned above, tokenization replaces the real card number with a placeholder with certain usage restrictions. If the tokenized data can be used without limits, or even in a broad sense, as in Apple Pay, the token takes on the same value as the original credit card number.

In such cases, the token can be protected by a second dynamic token that is unique for each transaction and is also associated with a specific payment card. One example of dynamic transaction-specific tokens is cryptograms used in the EMV specification.

System Operation, Restrictions, and Tokenization Development

Despite being a convenient data security method, tokenization faces certain restrictions and limitations:

  • Complex synchronization. Ensuring consistency across datacenters is demanding in terms of synchronization of the token databases. Unfortunately, significant compromises between availability, consistency, and performance are unavoidable in accordance with the CAP theorem. This contributes to a limited scale and complicates real-time transaction processing.
  • Higher risk of cyberattacks. Keeping all sensitive data in one place makes token databases an attractive target for attacks. It also introduces legal risks of confidential data aggregation, especially in the EU.
  • Independent security level assessment. According to PCI DSS, merchants using tokenization should conduct a thorough risk analysis to identify the unique characteristics of their specific implementation.
  • Ongoing maintenance. First-generation tokenization systems use a database to match real data with the substituting tokens and vice versa. To avoid data loss, this requires storage, management, and continuous backups.

As tokenization becomes more widespread, new approaches to its use emerge to address the current operational risks and complications.

Benefits of Tokenization for Your Business

Credit card tokenization goes far beyond being just a data security technology, as it assists merchants in creating smooth payment experiences and increasing customer satisfaction. Here are some of the benefits that tokenization brings to businesses:

  • Lower risk of data theft. Thanks to tokenization, even if a data breach occurs, the users’ sensitive data won’t be there for fraudsters to steal.
  • Increased consumer trust. 59% of consumers claim that data breach lowers their trust towards an affected company. Advanced security measures, such as card tokenization, enable clients to feel more comfortable in trusting a merchant with their sensitive data.
  • Less hassle in PCI DSS compliance. Card tokenization relates to the PCI DSS requirement of protecting cardholder data at rest. This technology lets the merchant avoid processing sensitive information directly and delegate it to payment technology companies.

Data tokenization solves one of the most important problems faced by businesses today - sensitive data protection. Evolving regulations and the severe reputational and financial risks associated with data breaches are setting the bar high for organizations to keep the information they process secure. Therefore, adopting credit card tokenization and finding the right payment service provider is crucial for any company that aims to move with the times.

Convenient Payment Solutions from Payneteasy

Payneteasy is a leading payment platform provider established in 2006. We offer tailored solutions to fit the needs of PSPs, banks, financial institutions, nonprofits, and more. Therefore, we know what an important role first-class data security plays and how to help our clients achieve it.

Our Payneteasy Payment Gateway is a white-label platform that will allow you to accept payments securely and without delays. It comes with advantages that every business owner will appreciate, such as:

  • Seamless integration
  • Flexibility to suit any payment interaction
  • Swift technical support
  • Branded checkout page
  • Ultra-strong fraud prevention algorithms
  • User-friendly back office
  • Effective traffic routing system

We are also happy to offer custom solutions to satisfy every client’s request to the fullest. Are you ready to level up your business’s payment and data security? Then go ahead and fill up the contact form, and we will get back to you in no time!

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