Importance of Data Tokenization in Secure Merchant Payment Systems

Digital payments have undoubtedly made our lives easier. Now, if we need to transfer funds to another account, we don’t have to wait in long queues at a bank. Instead, we can do so from the comfort of our living room by tapping a few buttons on our phones within seconds. We feel the benefits of financial digitization in all industry sectors. However, not everything is as rosy as it seems. Modern digital payment systems open businesses up to unforeseen online security risks. Luckily, successful implementation and secure payment technologies help merchants avoid most of these risks.

Technologies like data tokenization, encryption, account validation, check verification, and PCI-scope management help merchants secure their systems. This blog discusses one such important technology that merchants use to increase compliance and offer customers a more secure payment experience. 

Additionally, we discuss:


What is Data Tokenization?

Data tokenization is the practice of converting sensitive data into randomly generated numbers and letters. Let’s say that you try to login into your email account using the following credentials:

  • Username: 
  • Password: Myphonepassword#123

Now, no entity except your email provider can view these exact details you used to log in. In fact, on most websites, your username and password will likely be masked and not visible to you too (unless you explicitly select the option “view my password.” The practice of data tokenization takes the characters in your username and password and converts them into something like:

  • Username: DsdF!@#$1234aSd
  • Password: 1234!@#$asdFaSfagWewr

As you see, this string of characters, called tokens) makes no sense in an easily decipherable way. The algorithm that generates this string of characters is advanced and ever-changing on the most advanced secure payment and login systems. 

Organizations often convert the following data into tokens:

  • Login details
  • Payment information
  • Personal information
  • Banking data
  • Financial data
  • Pertinent parcel tracking data

In simple terms, data tokenization is the practice of storing data in the form of a randomly generated algorithmic string of characters to protect sensitive information.


How Does Payment Tokenization Work?

Tokenization has significant applications for financial operations. Payment processors, financial institutions, and third-party service providers often store sensitive customer payment information in tokens. Using tokenization helps the merchant and service provider reduce liability for the customers carrying out transactions and helps the customers prevent fraud and misuse of sensitive information. Here’s a brief on how payment tokenization works.

  • Step 1: The consumer enters sensitive payment data (such as credit card numbers or hosted payment portal login credentials) on the payment page. 
  • Step 2: The PCI-compliant payment processor or third-party tech provider converts that information into a token to the merchant’s bank.
  • Step 3: The bank transfers that token to the credit card provider for authorization.
  • Step 4: After authorization, the customer’s banking data stored in another token is verified and matched with the token that holds the customer’s bank account number.
  • Step 5: If matched successfully, the customer’s bank accepts the payment instruction and transfers the suggested amount to the merchant’s bank account. 
  • Step 6: After a successful transaction, the payment processor either deletes the token (one-time payment) or sends it to the merchant for further processing (recurring payment).

During this entire process, the customer’s sensitive information never leaves the host system without first getting converted into a safe token.


Top Benefits of Tokenization

Payment Security:  With an additional layer of data protection, customer login and payment details are locked behind a vault after tokenization. Studies by Visa from June 2020 show how Visa token-based transactions reduced fraud by 26% compared to conventional PAN (primary account number) based transactions. 

Minimal Liability for the Merchant: An ideal tokenization process ensures that the merchants never store sensitive customer information on their servers. It increases the network’s information security and reduces the merchant’s liability. Tokenization systems help business owners protect customer data in case of a brute force attack or unintentional data breach.

Lesser Security Expenses for the Merchant: Tokenization is much more affordable than costly conventional data protection tools. That said, merchants should ideally not rely solely on tokenization for all their information security needs. They should adopt asymmetric encryption and other data masking technologies to improve their security standards. 

Increased Customer Satisfaction: Tokenization, and other technologies like account validation, check verification, and PCI-compliant hosted payment portals help consumers conduct online business transactions with the merchant securely.

Quicker Transactions for the Consumer: Studies by Visa show that 69% of U.S. customers preferred keeping a card on file while shopping with their frequented retail outlets. Saving a card on file helps the consumers conduct one-click transactions securely. Tokenization and data masking helps the payment processors keep their customer’s sensitive data safe while adopting faster payment technologies. Learn how merchants can adopt faster technologies while detecting and preventing fraud.


Differences Between Tokenization and Encryption

Tokenization and encryption are the two most preferred data protection measures adopted by financial institutions. They seem similar; however, they are different in one critical aspect.

  • Tokenization: Tokenization replaces critical sensitive information such as credit card numbers, bank account numbers, routing numbers, and social security numbers with a temporary alphanumeric ID. While parsing information, a token automatically sends the information to the relevant fields on a form when the system produces the correct matching token. Tokenization preserves the integrity of the original data and does not use keys to alter it.
  • Encryption: The encryption process converts sensitive information into alphanumeric characters using data algorithms. Most organizations use Advanced Encryption Standard (AES) to carry out asymmetric or symmetric encryption. To access the encrypted information, the receiving party needs a symmetric key that decrypts the message into its original form. The entire process of encrypting and decrypting information is super effective and usually happens on the back end. 

Usually, tokenization is considered slightly more secure since it deletes the sensitive data from the organization’s internal systems to exchange it for a randomly generated nonsensitive placeholder (aka a token). 


Examples of Data Tokenization

Mobile Wallets

Mobile wallet applications like Google Pay, Apple Pay, and Samsung Pay use tokenization to save critical sensitive information. They also carry out additional encryption work on the server end to further protect customer data. A mobile wallet is an excellent payment method for customers to complete transactions during a credit card outage

Contactless Payment Technologies

The need for contactless payment technologies has grown multifold since the pandemic first hit. Modern contactless technologies such as NFC-enabled cards and wearable technologies use tokenization to store less-sensitive data for a quicker transaction.

Recurring Payments

Most advanced payment processors help merchants serve returning customers with tokenization for recurring payments. With tokenization technology, merchants can store their confidential customer data in token vaults. An additional layer of asymmetric encryption often protects these vaults to increase security standards further.

One-Click Payments

If used without the right tokenization services, one-click payment technologies pose a massive risk on both the customer and merchant front. Both eCommerce and offline stores offer one-click payment services to speed up the transaction process, thereby reducing cart abandonment chances.


Which Merchants Need Tokens?

Practically, all merchants that want to accept secure digital payments should leverage tokenization services to protect themselves against unnecessary liability issues. However, such data security services are more prominently necessary for the following cases:

  • Merchants conducting business online: Merchants that accept online payments should ideally partner with a PCI-compliant payment processor to reduce liability. They should adopt iFrame and hosted payment portal technologies to ensure that no sensitive payment details stay on their networks after the customer completes the transaction.
  • Merchants that accept payments via digital wallets: Merchants that accept payments via QR codes and digital wallets should use encryption and tokenization technologies to protect customer payment details.
  • Merchants that want to offer one-click payment services: One-click payments require merchants to save cardholder data on their networks. Tokenization helps them ensure that their customer data stays safe even during a data breach.
  • Merchants that serve a large base of recurring customers: Repeat customers that carry out multiple recurring transactions with the same merchants prefer the convenience of not entering payment data every time. Merchants can use tokenization to protect the payment data of such customers.
  • Merchants that accept crypto payments: The use of cryptocurrencies for retail transactions is still developing. Tokenization and encryption help merchants safely accept payments via crypto using the blockchain technology.


How to Get Started with Merchant Tokenization?

Step 1: Evaluate Current Data Security Measures

Before adopting new data security measures, you need to do a pulse check of the existing systems at the organization. Identify room for improvement in the current technology stack and see if you need additional systems. 

Step 2: Make a List of Additional Security Measures You Need to Adopt

Once you have identified loopholes or potential for a payment data breach in your current systems, you should list all technologies you can adopt to make the network more secure.

Step 3: Partner with a Reliable Third-Party Service/Technology Provider

It is a good idea to partner with cybersecurity experts and reliable third-party PCI-compliant payment gateway providers to identify the best security solutions for your payment systems. These experts have the resources to thoroughly analyze your existing strategies with ethical hacking to identify and plug loopholes. They also bring a vast collection of solutions for you to choose from. 

Step 4: Evaluate Additional Technology and Scope for Growth

A payments partner never wants to hear that their merchant had a security breach. So adopting additional technologies with proper due diligence is advisable. Merchants should look for scalability while implemeting the core payment security and gateway solutions. A reevaluation and the process of replacing the entire payment processing security every time you want to adopt new technology is time-consuming and expensive.

Step 5: Prepare Security Documentation

A reliable partner will help you set up the necessary technologies from the get-go. They will also help you prepare security documentation that correctly highlights the roles of various members within the organization. This document also contains details on the security measures you must take in case of a data breach.

Step 6: Go Live

Once you have chosen and successfully tested the security systems, it is time to go live. You can now start advertising additional security on your social media and customer engagement channels to attract more customers.


Other Important Data Security Measures 

In an ideal world, encryption and tokenization are enough to safeguard all transaction processes. However, we need to develop and adopt new technologies as hackers get more advanced and find ways to breach complicated security systems. Merchants should adopt a combination of the following systems and tokenization to stay one step ahead of hackers.

  • Account Validation: This helps merchants identify and report fraudulent accounts in real-time.
  • Negative-Data Database: An actively updating negative-data database helps merchants catch fraudsters and prevent them from conducting transactions. 
  • Check Verification: Real-time check verification helps merchants verify the identity of their customers and reduce the chances of a chargeback. 
  • Hosted Payment Portals: Hosted payment portals ensure that no sensitive customer data stays on your merchant network after completing a transaction.
  • iFrame Technologies: iFrame technologies reduce the liability of handling card payment information for the merchants.


Combining the right payment technologies and secure systems helps businesses scale quickly without compromising their customers’ or internal data. Organizations that want to leverage the eCommerce space and grow their business on the internet must adopt secure payment technologies immediately. Conventional brick-and-mortar stores should also adopt faster payment solutions to offer a better and safer customer experience. Business owners with little or no experience in cybersecurity should partner with reliable third-party service providers before making changes to their security stack. They should also consider periodic maintenance and upgrades to protect their systems against brute force attacks.

If you need help adopting the latest and most secure payment solutions in the market, reach out to us today.

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