Credit Card Processing Blog

Top 3 Important Questions About Payment Tokenization

September 15, 2016 12:00 PM / by Reliance Star

Tokenization is the innovative data encryption technology that has allowed making a payment, both in retail stores with mobile devices and on ecommerce websites, to evolve into the ultra-convenient and secure process that it is today. It also works towards making some of the latest payment processing methods, like digital wallets, PCI compliant. Both consumers and retailers have benefited tremendously from this data security technology, as now things like recurring payments and the fluid, contactless digital checkout are commonplace.

Here are three of the most important questions that you should have answers to, in order to fully understand payment tokenization.

How Does It Work?

Tokenization is a form of end to end encryption that is used for digital payment processing. Basically, when a customer enters their payment information, it is replaced by a random token. The token mirrors the format of the credit card number. This means that a consumer’s information is not actually stored on a store’s database, only the back-end of the token is. The front-end, which is what the consumer sees when making a purchase, looks like a series of placeholders, followed by the last four digits of the card number.

These tokens serve a vital purpose in maintaining a healthy and safe commerce ecosystem. Businesses, ranging from small ecommerce sites to enterprise companies, cannot store sensitive data under PCI compliance regulations. These strict rules, which are in place to protect the consumer, would make anything beyond in-store credit card processing impossible. With tokenization, online stores can process transactions without passing around sensitive customer data. Consumers can make digital payments securely, knowing that their payment information will not fall into the hands of thieves.

What Is It Used For?

Payment tokenization is used for safe, secure digital payments. Brick-and-mortar stores do not use tokenization, but rather end to end encryption. Right now, tokenization’s most widespread use is on ecommerce sites. Customers can enter their credit card information securely along with their customer profile so they can quickly make future purchases. The ecommerce merchant doesn’t actually have a customer’s credit card info. When a future purchase is made, the store simply sends the token to the gateway for processing.

In this same way, tokenization is also used for recurring payments, like subscriptions for gym memberships, video streaming, and other services. Customers also save their payment information in order to make app purchases. Just as with ecommerce sites, it is the token that is used for the payment transaction each time an app is purchased, not the credit card data.

When a customer pays with their digital wallet on their smartphone or Apple Watch through near field communications, tokenization also comes into play. With ewallets, a consumer enters their sensitive payment info in order to make a payment with their mobile device instead of having to carry around a credit card. Once the information is saved, it is made secure with a token. The merchant, nor the company that offers the digital wallet like Apple or Google, stores the credit card data.

Is It Safer?

The security that comes with tokenization is part of why digital payment methods are becoming more popular than traditional credit card processing. The tokens that are generated are random – if someone with malicious intentions were to capture the data, the information would be useless. No algorithms could be used to determine what the actual credit card number is; so no thieves can steal the credit card numbers.

Conclusion

Payment tokenization has made payment processing completely safe and secure online and with mobile devices. There still are more measures that stores have to take in order to be PCI compliant, but the generated tokens go a long way in protecting sensitive consumer information – and providing both businesses and consumers with peace of mind.