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6 minutes read

What Is Tokenization?

By Jose Gomez
What is tokenization
By Jose Gomez
6 minutes read

If you are concerned about your data security, you might ask, what is tokenization? Tokenization is one of the primary ways businesses protect sensitive data. This HiTech security practice was initially developed in the late 90s/early 2000s, and since then, the underlying technology has not changed much. However, tokenization has been widely adopted and has become the primary way businesses protect sensitive information like payment card data. 

This post will explain what tokenization is and its purpose for modern businesses. We will also explain the advantages and disadvantages of tokenization to give you a complete picture of this data security method. 

What Is Tokenization and How Does It Work?

Tokenization is a security method in which sensitive information is exchanged for meaningless data, called tokens, which can be used internally in databases or other payment processor systems. Typically, tokens retain the length and format of the original data to make business processes more seamless. The quality of tokenization that makes it more robust than most other data security methods is that it cannot be deciphered or reversed to reveal the original sensitive data. 

To truly understand why tokenization is such a robust security measure, you need to know how it works. First, sensitive data is replaced with a meaningless token value. Next, the relationship between the original data and the token value is encrypted and stored in an external token vault. Finally, the token value is used in place of the original sensitive data for all internal processes and database storage. In the event of a security breach, hackers only gain access to meaningless tokens and not the sensitive information your business collects from users. 

Plus, since there is no logical-mathematical relationship between the token and the original data, hackers cannot reverse or decipher the token and retrieve the protected data. The only way to access tokenized data is to access the original tokenization system. 

Let’s imagine that your business’s internal databases were breached by attackers looking to steal credit card data. Since your business uses tokenization to secure sensitive cardholder data, all the attackers get are meaningless tokens. To retrieve the information they want, they would need to breach the external token vault, secured by a third party and separated from your internal systems, and then decrypt the data within the vault to determine the relationships between token and original data. This isn’t impossible to accomplish, but it is challenging, and it doesn’t account for the security measures taken by the external token vault. 

Tokenization is one of the most secure ways to protect sensitive data, so it has become a standard security practice in the payment card industry. 

The Purpose of Tokenization 

Beyond the apparent security purpose, tokenization also preserves business utility in a way that other security measures can’t match. Users don’t enjoy completing data fields. Even if sensitive data is involved, most users want to enter their information once and save it for future use. 

Most web services and mobile apps offer users the ability to purchase items, content, subscriptions, etc. These businesses need to collect payment data to process credit card payments online. Storing this information internally presents several security risks, but requiring users to re-enter their information every time they want to purchase something also risks creating a poor User Experience and driving users away from your service. 

Tokenization helps businesses securely save sensitive data so that it can be reused and business processes are not interrupted. As a result, tokenized data remains functional for business purposes. This is not true of encrypted data, which must be decrypted before it can be used. 

The Advantages of Tokenization 

Tokenization is a popular data security choice for many businesses because of its advantages over other methods. The significant benefits of tokenization that you should be aware of are:

  • Compliant
  • Secure 
  • Fast


Several industries have regulations requiring businesses to protect sensitive data. Failure to comply with security regulations can result in costly fines and irreversible brand image damage. Tokenization is the choice of many organizations because it simplifies compliance. Many organizations in the healthcare industry use tokenization for this very reason. In the financial sector, the Payment Card Industry Council requires tokenization to protect credit card payments. 


Malicious hackers are getting better at exploiting system weaknesses all the time. Tokenization is the strongest way to secure sensitive data moving around the Internet. Even if data is intercepted or stolen, hackers get a meaningless token. Tokens cannot be cracked or decrypted like encrypted data. There is not a more secure method of data protection your business could use. 


Security is essential, but it should not hinder your business processes. Tokenization allows your business to quickly validate payment data and other important information, such as Social Security numbers, account numbers, etc. Tokens also allow your business to automate processes. For end-users, tokens allow them to set up recurring payments for subscriptions. 

The Disadvantages of Tokenization 

Tokenization is not the perfect security choice for all types of data. It is essential to understand the limitations of tokenization as well as the benefits. The primary disadvantages of tokenization are:

  • Unstructured data
  • Complex implementation
  • User overconfidence 

Unstructured Data 

Tokenization is not a reliable or efficient method to secure unstructured data. Tokenization is perfect for securing small bits of structured data like a credit card number, account number, etc. However, if your business wants to secure unstructured data in the form of documents, emails, memos, etc., you will have to use another security method. The most popular way to secure unstructured data is encryption

Complex Implementation 

Implementing tokenization can be complex. The complexities of tokenization are primarily caused by the number of different token solutions available. Several different companies provide tokenization solutions, and they don’t always integrate or work well with one another. As a result, your business might find that the token solution you are using won’t interface with your other business tools or processes. 

User Overconfidence 

Tokenization is one of the most secure methods of protecting sensitive data. However, this can lead to overconfidence. Tokenization should not be the only security measure you take with your data. Most security experts will encourage you also to use encryption in tandem with tokenization, especially when it comes to the relational data stored in your token vault. Tokenization is a strong tool, but it is not flawless. Ensure your business takes the appropriate precautions and does not rely solely on tokenization. 

Final Thoughts 

Data security is a significant concern for most businesses. Remember, no security tool is perfect. Your business should take a measured approach to data security that utilizes various methods and tools. If you’re interested in learning more about the importance of data security, reach out to an experienced app development partner. We hope this informative post helped you answer the question, what is tokenization?

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