Tokenization is a fundamental method of securing user data, especially for businesses that process online transactions and handle secure customer information. While tokenization has provided significant advances for online payments, it also comes with unique implementation and compliance challenges. This article breaks down everything to know about tokenization, including different types, how it works, key benefits, and a basic run-through of PCI DSS compliance and how tokenization can help mitigate the scope. Ready to fast-track tokenization for your business? PCI Proxy is ready to help.
Tokenization is the process of replacing sensitive data with a randomly generated string of numbers and/or letters called a token. Businesses can use tokens as a stand-in for confidential information like credit card numbers, bank account details, or personal data to keep it secure from third parties. By storing tokens rather than privileged information, businesses can safeguard customers’ personal data, mitigate the risk of a harmful security breach, and significantly reduce the scope of PCI DSS compliance.
To understand tokenization, consider a credit card number: 1234 5678 9012 3456. A tokenized version could be 8723 5612 4398 2267*. The token is unique and randomly generated with no relation to the original number. Even if the token is stolen, it cannot be reverse-engineered to reveal the original card number. *Token formats vary depending on the tokenization system, and some may not resemble the original number at all.
The main difference between tokenization and encryption is how they protect data and allow access to the original information. When it comes to encryption, complex cryptographic algorithms are applied to the original data which can only be deciphered via a key. To state the obvious, this means that if someone gains access to the key, the encrypted data can be decoded. In tokenization, sensitive data is replaced with a token, and the original data is securely stored in a token vault.
Tokenization can be used in a wide range of scenarios when it comes to securing data, and the main types include data, payment, credit card, and banking tokenization. Below is a breakdown of the different types of tokenization, as well as examples of how they work and specific use cases.
Personal Data tokenization is the process of taking sensitive information – anything from a social security number to health records – and replacing it with a randomly generated token. This token is used in place of the original data (which is kept secure in a token vault) so a business can process or analyze it without exposing confidential information.
Let’s use the case of a personal loan. In most cases, the borrower will be required to provide a social security number to apply for funds, which the loan provider must store for credit checks and processing. Before tokenization, the social security number may be 123 45 6789. A tokenized version might look like XJ4 Z1 89KL. Through tokenization, if the loan provider’s database is hacked or stolen, there will only be randomized tokens rather than real customer information, protecting against fraud and unauthorized use.
Aside from financial institutions, other data tokenization use cases include:
Payment tokenization secures transactions by replacing sensitive payment details with a unique token. When a customer makes a purchase, their card number is converted into a token by a payment service and stored by the merchant. Since tokens are merchant-specific, they can’t be used elsewhere, reducing fraud risk. For example, platforms like Amazon and Netflix store tokens instead of actual card numbers for hassle-free transactions. Similarly, credit card tokenization is used in contactless payments like Apple Pay, where a device-bound token replaces the real card number.
Tokenization is a crucial element of the banking industry as it helps protect financial assets and customer financial data. This can cover anything from bank account numbers to debit card numbers and specific transaction details. To get around storing actual bank account numbers, financial institutions tokenize customer information. This ensures that the bank’s database is made up of random tokens, not real account numbers. If the bank’s database is hacked, only the tokens are exposed, which are essentially useless.
Additionally, real banking details are stored in a secure database, while tokens are used for processing financial transactions. Because the token is processed as opposed to the actual bank account number, if the transaction is intercepted, the token cannot be linked back to the real bank account without explicit authorization.
On top of basic protections, there are extensive use cases for tokenization in banking, which include:
This system of tokenization in banking works to protect individuals from fraud through ACH transactions, wire transfers, and digital or online banking.
How does tokenization actually work? In broad terms, tokenization replaces sensitive payment data with a secure, non-sensitive equivalent, allowing businesses to store and transmit payment details without exposing the original data to security risks. The process follows these steps:
More specifically, in the context of online shopping, the tokenization process is pretty simple:
Network tokens differ from payment tokens because they’re created by card networks rather than merchants or token vaults. Because these tokens are managed by card networks and allow for Token Domain Restriction Controls, they’re more secure and compliant than other types of tokenization. Token Domain Restriction Controls mean that network tokens may be limited to certain merchants, types of transactions, or even specific devices (like an iPhone for Apple Pay). This reduces fraud opportunities since the network token has restricted uses based on specific parameters.
Additionally, since network tokens never expose the real card number, merchants who use them do not need to worry as much about PCI DSS compliance because they never handle raw card data. With this in mind, there’s a slightly different tokenization process when it comes to mobile wallets like Apple and Google Pay, which rely on network tokens as opposed to standard payment tokens.
Here’s a breakdown of how network tokenization works for mobile wallets:
Let’s take a closer look at the difference between payment tokens and network tokens.
So, what’s really worth remembering here? Payment tokens are merchant-specific, meaning there can be endless payment tokens for a single PAN. Sensitive information is stored by payment processors who retrieve it on behalf of the merchant when a transaction takes place. Network tokens are issued by the card network and can be used across multiple merchants. Card networks store the actual banking information, which they serve as a device-specific token at the time of a transaction. Network tokens are commonly associated with mobile wallets.
Tokenization and PCI DSS have cropped up multiple times because it’s essential to have a solid understanding of how they work together to gain a clear view of the data protection requirements surrounding payments. Starting with the basics: PCI DSS stands for Payment Card Industry Data Security Standard. This term refers to the universal security framework designed to protect credit card data from fraud and breaches.
Any business that works with cardholder data (including storing, processing, or transmitting card numbers) must comply with PCI DSS, which has strict security requirements. These include:
Failure to comply with PCI DSS can be catastrophic for a business, resulting in steep fines, reputational damage, and, of course, legal issues if cardholder data is compromised. PCI DSS requirements are the strictest when a business stores or processes PANs. However, tokenization removes the need to handle the raw credit card number and instead enables businesses to store only a token.
Because tokens omit any actual card data, it significantly reduces the scope of the PCI DSS for a business. This translates into less liability, lower compliance costs, and decreased security risks, giving both the customer and the business peace of mind.
If a business stores tokens rather than customer credit card numbers, only the tokens will be exposed if there is a data breach. No sensitive information will be uncovered, and the stolen tokens cannot be used for fraud or reverse-engineered to reveal the actual card number.
Network tokenization eliminates the need to continually update information if a card is lost, stolen, or expired. This is done automatically, which, above all else, is convenient for the customer who does not need to manually update card information across multiple merchants or experience a lapse in service when a new card is issued.
From the physical in-store POS to mobile payments and digital wallets, tokenization allows businesses to create a seamless payment process across multiple channels that can be scaled with ease. This enhances flexibility and convenience on the customer side while increasing conversions and customer retention for a business.
Above all else, tokenization enables speedy online and mobile payments. Customers no longer need to enter their card information for every purchase, yet the data is protected with an extra layer of security by tokenizing the card number. Overall, payment tokenization greatly improves the customer experience with one-click checkouts and instant transactions, encouraging repeat purchases by the customer and higher sales for the business.
Tokenization helps businesses reduce their security and compliance burden under PCI DSS because only tokens are stored and processed, as opposed to real sensitive information. Tokenization mitigates the need for extensive security infrastructure and concerns about data breaches because there is no actual card data stored in the merchant’s system. This means businesses utilizing tokenization do not need to follow all PCI DSS protocols, saving time, money, and effort. In payment tokenization, everyone wins (aside from the hackers).
The concept of tokenization can be distilled down in this article, but in practice, it can take months, or even years, for a business to implement, especially considering the complexities of PCI DSS compliance. At PCI Proxy, we take matters into our own hands with a modern approach to tokenization. No more spending valuable resources and getting bogged down in creating a secure payment process – PCI Proxy facilitates seamless tokenization, storage, and use across merchant platforms. We ensure the PCI DSS scope is minimal, with only a subset of PCI DSS requirements, saving time, costs, and major headaches.
Aside from mitigating PCI DSS compliance, PCI Proxy comes with major benefits like bypassing vendor lock-in and data transfer roadblocks, allowing businesses to scale without being held back by an inefficient and insecure payment process. If you’re tired of jumping through hoops and the challenges associated with processing sensitive data, PCI Proxy focuses on the future of your business through tokenization. Click here to learn more about how we can transform your PCI woes into serious wins for your business, starting today.
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