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4 minutes read

Tokenized Credit Card Data: Everything You Need to Know

By Robert Kazmi
By Robert Kazmi
4 minutes read

Protecting sensitive credit card data is vital for online businesses that store customer credit cards for recurring payments. Not only can failing to protect a customer’s credit card data lead to credit card fraud and reputational damage to your brand, but it will lead to running afoul of PCI-DSS requirements. 

Credit card tokenization is one of the most effective ways to protect sensitive data and ensure PCI-DSS compliance. This post will explain credit card tokenization and how it works. If your business collects and stores credit card data, you will want to learn more about the value of payment tokenization. 

What Is Credit Card Tokenization? 

Credit card tokenization is a security method for protecting cardholder data by replacing a credit card number with a randomly generated token. Then, if a customer’s credit card information is stolen in a data breach, the information is useless to the hackers who stole it. 

eCommerce websites and other online businesses tokenize credit card data because it is one of the most secure data protection methods in the payments industry. Encrypted data can be decrypted with time and the right tools, but tokenized credit card data is useless without access to the secure token vault. 

Tokenization is a lot like going to the arcade or a carnival. At an arcade, you exchange money for tokens that are only valid in that location. Outside of the arcade, the tokens have no value or use. 

How Does Credit Card Tokenization Work? 

A tokenization solution replaces cardholder data with a one-time unique identifier. The randomly generated data, or token, acts as a stand-in for sensitive payment data. Credit card issuers can use randomly generated tokens for credit card processing since they have the corresponding payment data in their token vault. 

Here is how the process works for an average purchase at an online merchant with a tokenization security solution:

  1. A customer makes an online purchase or payment and enters their card number online. 
  2. Sensitive card data is tokenized by the tokenization solution replacing the card number. It is then sent to the seller’s bank. 
  3. The seller uses the token to request payment authorization from the card network, Visa, Mastercard, etc.  
  4. The card issuer supplies the token to the buyer’s bank. The token is matched to the proper account, and the transaction is verified. 
  5. The payment is successful, and the token is returned to the seller. 

Generally, the merchant is the weakest link in the security chain, so these businesses make attractive targets for bad actors. For example, the most infamous data breaches in the news tend to occur at the merchants that store card data, not banks or payment processing networks. 

Tokenization enables businesses to avoid storing sensitive information while card details are safely stored on a server with much higher security protocols. 

How Does Tokenization Compare to Encryption

Tokenization is far more secure than encryption, even though they may sound similar. Encryption involves encoding important information using an algorithm. To decrypt encrypted data, you need an encryption key.

However, if attackers are given enough time, even the most robust encryption algorithms can be cracked using powerful computers. Unlike encryption, tokenization cannot be cracked because tokens are randomly generated numbers entirely unrelated to the data they replace.

For merchants, achieving PCI compliance using tokenization is much easier than encryption. Merchants can still use encryption, but the Payment Card Industry Data Security Standard considers encryption insecure when used alone. 

The Business Benefits of Tokenization 

Tokenization benefits businesses in several important ways. Most importantly, it protects your customers’ data, which is critical to gaining consumer trust. If your brand is associated with data breaches and stolen credit card data, you will have difficulty gaining or retaining customers. 

Furthermore, failing to comply with PCI regulations can lead to costly fines. Tokenization is not the only way to be PCI compliant, but it is one of the easiest and most effective. 

Finally, tokenization can help your business enhance the customer experience by enabling it to offer one-click payments. Modern consumers are always looking for the most convenient way to shop and pay. With tokenization, your business can simplify the checkout process for returning customers.

Final Thoughts 

Credit card tokenization is one of the most effective ways your business can protect customer credit card information. If your business collects payment data, it should do everything possible to ensure it is always protected. 

If you want to learn more about tokenization and how it can help your business protect payment data, contact a FinTech development partner with experience working with these solutions like Koombea.

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