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What is Payment Tokenization and How Does It Work?
From shopping on e-commerce websites to using mobile wallets to buy goods in person, secure payment processing is more critical than ever. Payment tokenization has emerged as a powerful solution for securing payment data.
By replacing sensitive information, like payment account numbers (PAN), with non-sensitive tokens, payment tokenization minimizes the risk of fraud, streamlines compliance efforts, and enhances overall data security across both retail and e-commerce environments.
What is Payment Tokenization?
Payment tokenization is a security process that replaces sensitive payment information, such as credit card numbers, with a unique, randomly generated identifier called a "token."
This token has no intrinsic value, has no mathematical connection to the real credit card number and cannot be used outside of its specific payment system. It ensures that actual payment data is not exposed or stored during transactions, thereby reducing the risk of fraud and data breaches.
How Does Payment Tokenization Work?
Payment tokenization works by replacing sensitive payment data, such as credit card numbers, with a unique, nonsensitive token that can be securely stored and used for transactions. Overall, the process ensures that the original payment information is protected from security threats.
Here’s a breakdown of how payment tokenization works:
- Data Collection: When a consumer initiates a transaction, they provide their payment details, such as credit card information, to the business.
- Tokenization request: The sensitive payment data is sent to a tokenization service provider (e.g., third-party service provider). This request can happen automatically if the business uses tokenization software.
- Token generation: A unique token is created using an algorithm. This token is a random string of characters or numbers that has no intrinsic value or connection to the original data outside the specific payment system.
- Token storage: The token replaces the sensitive data in the business's system, while the original payment information is stored securely in the tokenization service's vault.
- Token usage: For transactions, the business sends the token to the payment processor. The service provider then maps the token back to the original payment data securely before it reaches the payment processor to complete the transaction.
- Token Reusability: Tokens can be reused for recurring payments, such as subscriptions or stored profiles, eliminating the need to repeatedly collect sensitive data.
Where is Tokenized Credit Card Processing Used?
Tokenized credit card processing is used when a customer purchases a product or service with their credit card online:
A payment data tokenization service replaces the sensitive data with a token between the point where the customer inputs their payment account number (PAN) and when that data goes to the merchant. The same service replaces the token with the PAN when the data goes from the merchant to the payment processor. So, in effect, the e-commerce merchant does not see or handle the customer’s PAN.
Benefits of Tokenization for Payments
Data Security
Tokenization enhances the security of payment data by replacing sensitive information, such as credit card numbers, with unique, nonsensitive tokens.
This process significantly reduces the risk of data breaches and fraud by ensuring that actual payment data is never exposed during transactions.
Reduced Compliance Scope
By minimizing the storage and processing of sensitive payment data, payment tokenization helps businesses comply with industry standards like the Payment Card Industry Data Security Standard (PCI DSS). This reduces the scope of compliance requirements, as fewer systems need to be secured. Learn more about how in our blog on PCI tokenization.
Risk Mitigation
Payment tokenization mitigates the risk of fraud by ensuring that sensitive data is never exposed. In the event of a data breach, payment tokenization limits the potential damage by ensuring that any compromised data is non-sensitive and cannot be used.
Data Management
Tokenization allows businesses to manage customer payment information more efficiently. Tokens can be reused for future transactions, streamlining the payment process and reducing the need to collect and store sensitive data repeatedly.
Tokenization enables secure payment data management across multiple channels and supports a consistent customer experience while maintaining security and compliance.
Why Payment Data Tokenization Matters in E-Commerce
Today’s e-commerce businesses face a growing threat landscape, including sophisticated cyberattacks like e-skimming and script-based attacks that target payment pages to steal sensitive customer data.
At the same time, compliance with the PCI DSS becomes increasingly complex as its rules evolve with the changing cyber threat landscape.
Payment tokenization offers a practical solution to address both challenges: enhancing security against emerging threats and streamlining compliance efforts.
Security Against Evolving Threats
Script-based attacks, such as Magecart-style e-skimming, exploit vulnerabilities in payment pages by injecting malicious code to capture sensitive payment data during transactions.
These attacks can lead to significant financial losses, regulatory penalties, and reputational damage for e-commerce businesses.
However, by substituting cardholder data (e.g., PANs) with tokens that lack any mathematical relationship to the original data, attackers can’t extract usable information, even if they breach your systems. They can’t steal what is not there as your system lacks real PANs.
Moreover, unlike encrypted data, which can be decrypted with a key, tokens are irreversible and hold no value outside the token vault. This ensures that malicious scripts injected into payment pages cannot access sensitive cardholder information.
Compliance Streamlining
PCI DSS compliance requires stringent controls for systems handling cardholder data (CHD). Payment data tokenization reduces compliance scope by removing the CHD from merchant environments, thereby lowering the number of systems subject to PCI DSS requirements.
For instance, DataStealth’s payment data tokenization solution replaces sensitive data with tokens before it enters merchant systems, drastically reducing audit scope and simplifying compliance efforts.
By transferring sensitive data storage and processing responsibilities to a PCI-compliant third-party service provider (TPSP), tokenization allows merchants to leverage the TPSP’s Attestation of Compliance (AoC). In turn, this reduces the complexity of meeting PCI DSS requirements such as encryption, access controls, and secure network segmentation.
Next Steps
Leveraging a Data Security Platform (DSP) like DataStealth (a Level 1 PCI DSS-compliant service provider) will equip you to integrate payment data tokenization into your e-commerce workflows without requiring any changes to your infrastructure or codebase.
Want to see our payment data tokenization solution in action? Book a demo today!
For More PCI DSS Guidance for E-Commerce, See:
- What QSAs Want to See for PCI DSS 6.4.3 and 11.6.1 Compliance
- Understanding SAQ A’s New Eligibility Criteria
- Why Payment Page Security Must Outweigh Compliance Checklists
Thomas Borrel
