TokenizationMaximizing Data Security for Merchants & Cardholders

January 3, 2023 | 10 min read

credit card tokenization

In a Nutshell

It’s the merchant’s responsibility to safeguard customers’ personal data. So wouldn’t it be smart to lock that information in a digital vault that isn’t even stored on your systems? That's the aim of tokenization: key data is replaced with a random code that can’t be traced back to the real info.

Tokenization: Why is This Now the Standard for Data Security?

Wouldn’t it be great if you had a decoy version of yourself that you could project online? Fraudsters that might be hunting for your personal information would pursue the decoy, while you go about your business unbothered. Well, in a sense, that’s the basic idea behind payment tokenization

With tokenized data, valuable transaction information stays protected. A one-time-use token, which will be totally useless to a scammer, is the only thing that is ever exposed. And, there is a practically infinite number of disposable tokens available.

That’s the simplified explanation, but what are tokens, exactly? Where do they come from? Are they really safe? In this post, we’ll cover how tokenization works, and why it’s one of the most secure data protection methods available.

What is Payment Card Tokenization?


[noun]/tō ● kən ● uh ● zey ● shuhn/

Tokenization refers to the process of protecting sensitive data by replacing it with a randomized placeholder number called a token.

Tokenization is the process of substituting a sensitive data element for a non-sensitive equivalent. An individual credit card token is an algorithmically generated alphanumeric code that serves as a proxy for real transaction data.

What’s that mean? Well, an easy way to explain this is to think back to when you were a kid.

You might’ve gotten a few bucks from your allowance, and so you decide to spend them at a video arcade. You walk into the arcade, insert a dollar into a machine, and in return, you receive a handful of arcade tokens. The little coins could be used in place of cash for games in the arcade, but they had no intrinsic value of their own.

Sure, it’s a silly metaphor… but it’s also an easy way to understand tokenization:

Arcade Token Payment Token
No intrinsic value on its own No intrinsic value on its own
Works only at the designated arcade Works only for the designated transaction
Restricts access to cash Restricts access to transaction data
Gone after one use Gone after one use

Tokenization cannot guarantee that transmissions won’t be hacked. If a hack occurs, however, the hacker would only score a random, valueless group of numbers, rather than one’s personal information.

How Does Payment Card Tokenization Work?

Sensitive consumer information like names and account numbers are replaced by a tokenized code. This allows data to move between networks without revealing customer details.

In a transaction involving payment card tokenization, for example, the cardholder’s primary account number (PAN) is exchanged for an algorithmically-generated token. A PAN of 1234 5678 9123 4567, for example, might end up with a completely random token like 3M747T4567.

The token is tied to the real account number, of course (the last four digits are usually the same). However, the customer’s actual data remains in a tokenization “vault;” a guarded database usually secured by a third-party vendor. Banks will know who the token represents, but merchants (and anyone else) looking at the data will see only the token.

Tokens are good for one use only. Once transmitted, the token is no longer valid. As this illustration shows, even if a customer uses the same card to make an identical purchase from the same merchant, the tokens connected to the transaction would be unique.

While specific details may vary, a typical tokenized credit card transaction might go through the following steps:

  • The cardholder “dips” their payment card information to make a purchase.
  • Cardholder data is substituted for a randomized, one-time-use token.
  • The token is sent to the merchant’s acquiring bank in place of actual card information.
  • The acquirer requests authorization based on the profile attached to the token.
  • The customer’s issuing bank validates the token. If it matches, the purchase can be authorized.
  • The issuer responds, using the token as a point of reference.
  • The purchase is completed using the attached token as a unique transaction identifier.
  • The token expires.

Tokenization can be deployed in a variety of situations:

Real-Time Shopping

Routine purchases from a brick-and-mortar store are often tokenized.

Subscription Billing

Vendors can use tokens for recurring payments without transmitting actual card info with each rebill.

In-App Purchases

Ordering pizza with the Domino's app? In-app purchases can use tokenized data as well.

Mobile Wallets

Payments through mobile wallet apps like Apple Pay happen through tokens transmitted via near-field communication (NFC).

What's the Difference Between Tokenization & Encryption?

Tokenization is sometimes confused with another security protocol, end-to-end data encryption (or “E2EE”). The two have similarities, but they’re not the same thing.

From a security standpoint, the most important distinction is that encryption can be mathematically reverse engineered (at least in theory). Under the right conditions, even encrypted account data could be exposed by an advanced decryption tool.

Encrypted data uses a complex algorithm, combined with an encryption key that works like a cypher to revert the data to its original state. So, if a hacker manages to compromise the key, they can read the transmission. That can’t happen with tokenization, though.

Tokenization completely removes transaction data from the equation, and replaces it with a token. Even if a criminal somehow managed to “hack” a particular token, there’s no information there to reverse engineer. The risk of data theft is effectively eliminated.


When comparing tokenization versus encryption, the question isn’t necessarily an “either/or” matter. Contemporary cybersecurity tools make it possible to take advantage of both end-to-end encryption and tokenization for optimal protection.

Encryption? Tokens? Financial technology jargon seems to get more confusing by the day. If security compliance is making your head hurt, talk to the people who speak fluent fintech.REQUEST A DEMO

The Benefits of Tokenization

As we’ve pointed out, the primary benefit of tokenization is data security. But there are also a few more perks to consider, too:

Easier to Comply With PCI Requirements

The Payment Card Industry Data Security Standard (PCI-DSS) has strict security requirements for businesses dealing with customer financial data. Adhering to PCI compliance requirements is one of the best ways to reduce liability. Achieving and maintaining PCI-DSS compliance is both time-consuming and expensive, though.

Merchants who take advantage of tokenization store much less customer information. This can reduce the scope of susceptible data, simplifies PCI-DSS compliance, and may lower security costs.

Avoid Fraud & False Declines

Card-not-present merchants need to take action to prevent fraudulent sales. However, some efforts in this area can actually make things worse.

False declines from overly-stringent fraud filters often cost merchants exponentially more than they save. Transmitting tokens instead of account numbers, however, means fewer factors for fraud filters to assess, potentially avoiding false declines.

Card network token products such as Visa Token Service (VTS) and the Mastercard Digital Enablement Service (MDES) allow merchants to simplify checkouts for regular customers, decreasing declines (including false ones) and increasing cardholder loyalty.

Customers Love It

As more and more consumers shift to eCommerce shopping, data security needs will only increase. At the same time, however, customers still want a simple, seamless, and omnichannel shopping experience.

Tokenization can deliver the convenience consumers want, plus the data security they demand. Information is safer, but shoppers still enjoy options like one-click buying and contactless payment. 

Are There Downsides to Tokenization?

Tokenization is powerful, but it’s not a perfect solution. The technology adds a layer of complexity to a merchant’s IT structure, which may require additional expert technical support. 

Also, not all payment processors support tokenization yet. A merchant may have to change vendors or systems, and may get stuck with a less efficient solution than they would like.

All that said, the biggest disadvantage to tokenization is probably what it doesn’t offer: comprehensive fraud protection.

Merchants often believe that extra data security means decreased fraudulent activity. It doesn’t work that way, though; tokenization reduces overall data security risk, but not fraud risk. This is especially true in the card-not-present space, where tokenization may not be an option, and where sellers cannot validate buyers’ identities in person.

Bottom line: even when handling tokenized data, merchants are still vulnerable to unauthorized transactions and the accompanying chargebacks.

Considerations When Implementing Tokenization

Tokenization generally makes transactions safer and less vulnerable to hacking. However, there are points that merchants will need to consider before implementing tokenization technology.

  • Tokenization is an all-or-nothing security measure. It can’t be implemented piecemeal.
  • There may be a lot more IT work involved, some of it specialized.
  • Some internal procedures/scripts may need to be updated.
  • The merchant must retain ownership of all tokenized data in case they change vendors or processors.
  • Data security is only as good as one’s data storage partner.
  • Tokenization may cause confusion for cardholders trying to identify transactions by account number.

By replacing sensitive debit card data with unique identifiers, tokenization is a powerful, cost-effective way to offer cardholders maximum transaction security. But, as we explained above, that still may not be enough.

Overall fraud protection requires an even broader strategy, one that addresses data security, fraud prevention, and post-transaction revenue recovery. That’s why the most effective method for keeping information safe is a combined approach that would include encryption, tokenization, and other secure practices.

If you’d like to learn more about keeping both your data and your revenue safe, let us know. Chargebacks911® offers turnkey services designed to produce long-term, sustainable growth.


What is tokenization?

Tokenization is the process of protecting sensitive data by temporarily substituting it with a unique randomized placeholder (or “token”). Transactions are transmitted using the token instead of the actual data.

What is a tokenization example?

When a merchant processes a credit card transaction, the card account number (12345) is substituted with a token such as (X68N%) for the duration of the transaction. Only parties with access to the key can connect the token to an actual cardholder.

Is tokenization the same as encryption?

No. While both tokenization and encryption use algorithms to generate a random “surrogate” transaction code, encryption is much less secure. This method stores information; while it cannot be decrypted without a key, the personal information may become vulnerable if the key is exposed.

By contrast, tokenization removes the data from an organization’s internal systems entirely, replacing it with a randomly generated token. Even if the token could be hacked, it would reveal no personal data.

Is tokenization the same as an NFT?

No. Both use unique tokens, but NFTs represent real-world items and have an intrinsic value (at least in theory). Payment tokens have no intrinsic value and can only be used for a single transaction before expiring.

What is tokenization in crypto?

Despite the name, Bitcoin and other brands of cryptocurrency have no physical representation. Crypto can be converted to cash, but each “coin” is a digital asset only – a token that can be exchanged for another of the same value. This differs from a transaction token, which has no intrinsic value and can only be used for a single transaction before expiring.

Like What You're Reading? Join our newsletter and stay up to date on the latest in payments and eCommerce trends.
Newsletter Signup
We’ll run the numbers; You’ll see the savings.
Please share a few details and we'll connect with you!
Over 18,000 companies recovered revenue with products from Chargebacks911
Close Form