What Is Tokenization?

February 15, 2019

Tokenization is an important security feature in payment processing. Designed to protect sensitive payment information, tokenization allows merchants to keep credit card information within their payment system without concern while protecting customer information. This buzzword gets a lot of attention, especially when it comes to mobile payments, but many consumers and merchants aren’t sure exactly how tokenization works. Here’s what you should know about tokenization.

How Does Tokenization Work?

Tokenization is a process that protects sensitive information by replacing it with a number or token generated by an algorithm. In payment processing, a customer’s 16-digit credit card number is replaced by randomly generated numbers that can pass through wireless networks or online to process the payment without the information being exposed. The actual card number will be stored securely in a token vault. A new token can be generated for every online retailer. If one retailer has a data breach, the tokens issued to that retailer can be disabled without getting a new card.

Tokenization may seem like encryption but these forms of technology are fairly different. Tokenization uses a token but encryption uses a secret key to protect sensitive information. When information is encrypted, the information is transformed with a set of unchanging steps or rule. Tokenization is considered a more secure, affordable, and flexible solution as it can’t be mathematically reversed and the 16-digit card number is never displayed.

The payments industry has adopted tokenization in many ways. Tokenization makes it secure and easy for a business to keep card information on file for subscription billing, recurring payments, and “one click” checkouts. It’s also used in NFC mobile wallets like Android Pay.

Benefits of Tokenization

Tokenization goes hand-in-hand with chip card technology to improve security in credit card payments. While chip technology fights fraud when paying at a physical credit card terminal, tokenization guards against online data breaches.

This technology offers several benefits for merchants and customers. With tokenization, merchants can access sensitive information without storing it themselves and even process recurring transactions without local storage of card information. Credit card information is kept safe from external and internal threats as even the merchant can’t see sensitive information.

With tokenization, merchants don’t need to invest as many resources in creating a secure payment infrastructure. By not storing financial data within your system, your system becomes more PCI-compliant.

Host Merchant Services recognizes the importance of security for consumers and merchants. We offer PCI-compliant tokenization to support the growth of your business while reducing your risk of a data breach.

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