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How Does Tokenization Work?

How Does Tokenization Work?Tokenization is a highly effective data security measure designed to protect sensitive information from prying eyes. When applied to financial transactions, tokenization frees merchants from having to keep credit card data within their payment systems. This helps to reduce their PCI scope and expense.

But how does tokenization actually work?

Tokenization at a Glance

Typical consumer credit cards come with names, 16-digit personal account numbers (PANs), expiration dates and security codes — any of which can be "tokenized."

Let's use the 16-digit PAN as an example.

When a merchant swipes a customer's credit card, the PAN is automatically replaced with a randomly generated alphanumeric ID (“token”).

  • 4321-1234-5678-8765 becomes something like a7f6%gf83fhAu on the merchant’s end

Note that the original PAN never enters the merchant's payment system. Only the token ID does. The merchant can use this special token ID to keep records of the customer (i.e. a7f6%gf83fhAu = John Smith).

This token then gets transmitted to the payment processor who de-tokenizes the ID and authorizes payment.

  • a7f6%gf83fhAu becomes 4321-1234-5678-8765 on the processor’s end

This token is only readable by the payment processor — it is meaningless to any other party (including the merchant). Someone who manages to get his hands on this ID has no way of linking the token back to the original personal account number.

Moreover, this randomly generated token is only valid with that single merchant. The ID can never be used to initiate payment with another retailer.

Download the Tokenization Infographic 

The Main Benefits of Tokenization

The primary advantage of tokenization is that it keeps credit card data safe — both from internal and external threats. Because the payment processor is the only party that is able to decode the token, this security measure is extremely effective at reducing consumer credit card fraud.

But tokenization doesn't simply benefit the customer. It also helps you, the merchant. You don't have to invest as many resources making your payment infrastructure secure. Your entire system becomes more PCI-compliant since you're not storing as much financial data within your system.

Another major advantage of tokenization is that it can be used for any type of personally identifiable information. U.S. retailers primarily use the technology to protect financial data. But in countries with stricter consumer privacy laws, organizations are often required to protect a much broader range of consumer information. In Europe, for example, many businesses rely on tokenization for:

  • Patient records
  • Employee files
  • Usernames
  • Passwords
  • Email addresses
  • Customer accounts

Learn more about tokenization outside of the US here

Want to Learn More about Tokenization?

Tokenization is a secure and cost-effective way to protect all of your customers' information from thieves and hackers — especially sensitive financial data. And at BluePay, we make implementing this feature extremely easy.

If you'd like to learn more about tokenization (and its many benefits), use the free links below:

Get a free consultation today!

Topics: PCI Compliance and Fraud Prevention

Welcome to the BluePay Blog!

Whether you're a small business, an enterprise corporation, a financial institution, or a software partner, we have created a series of blog posts to help you and your customers, learn more about the complex nature of payments. Take a look to learn how payments can help to simplify your business operation, and may even help to grow your revenue.

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