As the world increasingly moves online, it is essential to safeguard the information being stored and transferred over networks. Today, data is as important as currency and should be safeguarded as such. In 2022, there were 1802 instances of data compromise in America which affected 422 million people.
Loss, corruption, improper use, and unwanted access to a company’s data assets can lead to immense negative publicity, which in turn can cause irreparable reputation damage, fines, sanctions, and loss of profits. Moreover, companies need to follow data privacy and compliance requirements to stay in business.
There are various methods of enforcing data security, such as data masking, encryption, authentication, and data tokenization. In this article, we’ll take a closer look at what data tokenization means, how it works, and the role it plays in payment processing.
Let’s get started.
TL;DR
- Data tokenization is a substitution technique in which private or sensitive data elements are replaced with randomly generated alphanumeric strings. These strings or tokens have no value and can’t be exploited. The original value or dataset cannot be reverse-engineered from a token value.
- Payment tokenization is a subset of data tokenization where tokens replace confidential payment data such as customer credit card information. With payment tokenization, the actual credit card data isn’t stored thereby making digital payment transactions more secure. Besides the enhanced data security, other benefits include reduced risk of breaches, easier regulatory compliance, and compatibility with legacy systems.
- As businesses increasingly go online, software vendors looking to offer integrated payment processing must consider incorporating payment tokenization as one of their data security features. The good news is that with a solution like Stax Connect, this need not be difficult or complicated.
Understanding Data Tokenization
Put simply, data security is a set of policies, processes, and guidelines to protect information in the digital space. This helps to protect any sensitive company and customer digital data from theft, corruption, and unauthorized access.
The three main principles of data security are Integrity, Confidentiality, and Availability.
- Data that is accurate and immune to unwarranted changes is said to have Integrity.
- Confidentiality means that data should be accessible only to authorized users.
- Availability entails that data should be accessible, in a prompt and secure manner, to those who need it.
Data tokenization is a substitution technique to protect sensitive data in which valuable data components are substituted with meaningless sets of data generated by an algorithm.
Essentially, private or sensitive data elements are replaced with randomly generated alphanumeric strings. These data strings have no value and hence cannot be exploited. They are known as tokens. The original value or dataset cannot be reverse-engineered from a token value.
Tokenization, as a concept, has always existed—ever since the earliest monetary systems emerged. For example, in prehistoric times, valuable goods such as grain and livestock were often represented as clay tokens. The modern-day casino chips can be thought of as a great example of tokenization.
These are instances of tangible tokenization, but the intent is the same as in digital tokenization. A token acts as a stand-in for a far more valuable object.
Tokenization vs encryption
Data encryption is another popular data security technique where data is transformed into an illegible format. Encryption is widely used, especially by messaging apps for data obfuscation, where decryption keys restore the original messages once received by the correct recipient.
Data tokenization and encryption are both popular cryptographic and obfuscation techniques being used in the digital payments space. The main difference is that the encryption process is designed to be reversed once the original data reaches its intended destination. With the decryption key, the encrypted data is restored to its original form, and the strength of data security depends on the complexity of the encryption algorithm.
However, this also means that data encryption is breakable—hackers can illegally obtain the encryption key or have enough computational power to break complex encryption algorithms.
In contrast, tokenization does not depend on keys or encryption algorithms, as random data is mapped to and replaces sensitive data. The resulting token is essentially a proxy and has no real value. Plus, the token mappings are stored in a secure location and are never transferred over IT networks, unlike decryption keys.
It is also to be noted that encryption can change the type and length of the data that is being secured, which is not the case with tokenization. Businesses need an internet connection to implement data tokenization as it only works over the web. On the other hand, encryption can be applied on local systems with encryption tools and network connectivity is not a prerequisite.
How Does Data Tokenization Work?
Let’s use payment tokenization—a subset of data tokenization—to better understand how the tokenization process works.
When a merchant accepts a card payment from a customer, their personally identifiable information (PII) such as primary account number (PAN) is sent to the payment processing software that the merchant is using. If the payment processor uses tokenization, cardholder data is replaced with tokens.
Payment processors use complex algorithms to generate random tokens that are substituted for the original sensitive data as the payment is being processed. This means that even in the business’s internal systems, the real data is never stored. Instead, alphanumeric strings representing the original data—that are inherently meaningless—are stored in the system. The payment service provider would have their own secure storage where the PII is stored.
In other words, tokenization decouples sensitive information from the payment transaction thereby reducing the possibility of a data breach. PANs, customer information, credit card numbers, etc. are stored in a secure location by the payment processor.
When the payment needs to be verified and completed, the business sends the tokens to the payment processor who then maps the tokens to the original data in their secure data storage system (de-tokenization) and completes the transaction. The actual card information can be read only by the payment service provider or tokenization service and is kept away from intermediaries.
A token generated by a merchant can be used only by that merchant. This actually makes recurring payments simpler. Subscription-based businesses can use the same token to complete payments on a regular basis without having to collect any sensitive card information.
Benefits of Data Tokenization
Data tokenization offers a number of benefits including:
- Enhanced data security and reduced risk – In data tokenization, the personally identifiable information is stored in a secure database that is usually in a remote location. Moreover, only authorized personnel can access the original data. Hence, it inherently fulfills two main components of data security—Integrity and Confidentiality. Even if malicious organizations are able to obtain transaction information or break into a company’s systems, the substitution of sensitive card information with tokens means that they will only be in possession of nonsensitive tokens that have no value and cannot be mathematically reversed to reveal any useful information.
- Minimized data breach impact – Payment processors offering tokenization can protect their clients from data breaches as client systems don’t need to capture, store, or transmit any sensitive cardholder information. In a sense, clients are also protected from reputation loss and financial repercussions related to data breaches.
- Regulatory compliance and ease in meeting standards like PCI DSS – Payment Card Industry Data Security Standard (PCI DSS) compliance requirements are easier to fulfill and maintain as processing and storage of sensitive information is at a minimum with data tokenization. Compliance with such security standards is important for businesses to operate legally and win customer trust. Tokenized information does not need to be protected as per PCI standards.
- Compatibility with legacy systems – Unlike encryption, tokenization solutions are compatible with outdated and legacy systems. This can save a lot of money as systems need not be updated every time data tokenization services have to be set up or when supporting software and vendors need to be plugged in.
The Role of Data Tokenization in Payment Processing
Although digital tokenization emerged as early as the 1970s, it has become extremely popular of late in the payment industry to protect cardholder data. As discussed above, payment tokenization is a subset of data tokenization where tokens replace confidential payment data such as customer credit card information. With payment tokenization, the actual credit card data isn’t stored thereby making digital payment transactions more secure.
TrustCommerce is attributed to having first developed data tokenization to protect card data in 2001. As such, payment companies often prefer tokenization to encryption as the former is more cost-effective and secure.
As businesses increasingly go online, software vendors looking to offer integrated payment processing must consider incorporating payment tokenization as one of their data security features. The good news is that with a solution like Stax Connect, this need not be difficult or complicated.
Stax Connect has the capabilities to help you build a complete payments ecosystem from scratch in just a month’s time. You get to benefit from our long-standing relationship with the world’s leading sponsor bank and our built-in enrollment engine that takes care of all your risk and compliance requirements.
You can start facilitating payments for your sub-merchants in as little as 20 minutes of getting started. Accept a variety of payment methods while resting assured that all payment info is safely stored and secured via tokenization. To learn more, contact the Stax Connect team for a consultation or request a demo today.
Challenges and Limitations
Despite its many benefits, tokenization comes with a few challenges:
- Managing the token database – Unstructured and structured data can be encrypted but only structured fields can be tokenized. This is why the tokenization process works so well on data fields like PAN and credit card numbers. With encryption, a small encryption key can be used to encode and decode large volumes of data. A tokenization system does not allow this as unique tokens are generated for each data field and tokens are unique to a merchant. This means that a large number of tokens need to be stored and protected, limiting the scalability of tokens as the amount of data grows.
- Ensuring timely and accurate token retrieval – Storing all this sensitive data in a single, centralized token database or vault can lead to bottlenecks when it comes to data or token retrieval. This negatively affects the data availability component of data security.
- Potential performance impact on systems – Although many payment processing applications offer tokenization solutions, a tokenization system does increase the complexity of the IT infrastructure of a merchant. Coupling this with bottlenecks that can occur during retrieval and tokenization can impact the performance of a merchant’s computer infrastructure.
Choosing Between Tokenization and Encryption
Data tokenization does not require complex mathematical processes or algorithms to generate keys or transform data. Hence, tokenization can be technically easier to implement as long as a secure token vault can be established and maintained.
Also, just as tokenization is more compatible with legacy systems, it also works very well with new technologies such as contactless payments and mobile wallets. The fintech industry is seeing rapid innovation and tokenization may be more suitable with future emerging technologies as it is more adaptable.
If possible, it is best to use both tokenization and encryption in tandem to maximize data privacy and security. Encryption works best for data being transferred and tokenization works best for data storage cases.
For example, social security numbers are being replaced with tokens in a business’ data warehouses. If your business requires storage of original sensitive data for long periods of time, it is best to go with tokenization. It is also a better option if data analytics is important to your business as analytics tools can process tokenized data.
Final Words
Tokenization is an excellent option to secure payment data as it works well to mask structured data such as PANs, credit card data, and card numbers. Tokens ensure that original data isn’t stored or transferred by a business, which not only improves data protection but also makes it easier to comply with security standards. This makes it obvious that companies providing payment solutions should incorporate data tokenization in their broader data security strategy. To find out whether Stax Connect may be the right partner for you, contact us today.
FAQs about Data Tokenization
What is data tokenization?
Data tokenization is the process of substituting a sensitive data element with a non-sensitive equivalent, referred to as a “token,” which has no extrinsic or exploitable meaning or value. The token acts as a reference or pointer to the original data but cannot be used to deduce the actual sensitive data.
How is data tokenization different from encryption?
Encryption is a process of scrambling data so that it cannot be read without the correct decryption key. Tokenization, on the other hand, replaces sensitive data with non-sensitive tokens. This means that even if the tokens are intercepted, they cannot be used to access the original data without the tokenization system.
Another key difference between encryption and tokenization is that encryption can alter the format and length of the data, while tokenization does not. This makes tokenization more compatible with legacy systems and applications.
What is the role of data tokenization in payment processing?
Data tokenization is widely used in payment processing to protect sensitive payment data, such as credit card numbers and bank account numbers. When a customer makes a payment, their payment data is tokenized and stored in the merchant’s tokenization vault. The merchant then sends the token to the payment processor to process the payment.
What are the benefits of data tokenization?
Data tokenization offers a number of benefits, including improved data security, reduced risk for breaches, and increased compliance, particularly with data security regulations, such as the Payment Card Industry Data Security Standard (PCI DSS).
What are the limitations of data tokenization?
Data tokenization is not a perfect solution for data security. For one, data tokenization can be expensive to implement and maintain. In addition, once a data tokenization system is implemented, it can be difficult and expensive to switch to a different system.
