data protection

What is Tokenization in Payments?

Posted: November 12, 2020 | Updated: February 8, 2021

If you accept credit card payments, security should be your utmost concern. Amid the PCI compliance issues, tokenization is one of the primary issues/concerns all businesses should know and understand.

What is Tokenization?

It sounds complicated by tokenization is literally replacing important numbers with ‘tokens’ or a string of numbers/characters for security purposes. The numbers are placeholders for important information, such as the credit card number or account number.

Tokenization is the direct replacement of the sensitive data that if revealed could put a customer’s information at risk. The token can be safely stored and if stolen, hackers wouldn’t’ be able to do anything with it.

How Does it Work?

Tokenization is a part of the payment process. You don’t have to do anything different – a token is assigned when the customer processes his/her payment. If you store the payment information, you’ll never see the customer’s account information. Instead, you’ll see the tokens, which protect the real information.

Here’s how it works:

  • The customer enters his/her payment data
  • The system immediately replaces the account data with a string of characters
  • The tokens are sent for authorization and immediately sent back
  • You can process the payment with the provided token

Why Tokenization is Important

There’s one reason tokenization is important – fraud. It’s reaching high levels and merchants have to do everything possible to stop it, starting with tokenization.

If you store customer data, you must use tokens to replace their ‘real information.’ While there are many benefits of storing customer’s data, including starting a loyalty program, using a customer’s buying history to advertise, and recommending future products, there’s such a high risk in storing the information that tokenization is crucial.

The good news is if anyone were to get their hands on the tokens, they are virtually useless to them. Sure, the data was hacked, but they can’t connect the tokens with anyone’s information, making it impossible to steal the credit card information.

Tokenization also increases customer loyalty. There’s something reassuring about knowing you can shop at a store and not have to enter your information. Think of Amazon – most people store payment information and even use their one-click purchasing, so all they have to do is click the button and the item is purchased. It’s convenient and smart.

They benefit merchants too because it enhances purchase power, and increases the likelihood of subscription-based purchases.

Bottom Line

If you accept recurring payments, want to store customer’s payment information for convenience and customer loyalty, or you just want to provide a quick way to check out, tokenization is the key to your success.

Work with a payment processor that offers tokenization and makes it easy for the merchant to implement. Running a business is hard enough, but adding the complexities of payment processing on top of it can be a lot for a business owner. Find a payment processor you can trust and that will have your back in all things credit card security.

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Categories: Payment Gateways, PCI Compliance, Security, Tokenization

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