The ABCs of Credit Card Tokenization

As cyberspace keeps expanding, with billions of users worldwide, online payments are becoming more versatile. This doesn’t necessarily mean only positive occurrences. 

Payment fraud, mainly due to data theft, unauthorized access, and security breaches, is the main threat to pleasant digital transactions.

Financial institutions and tech professionals work together on innovative solutions for leveling up those security elements. 

This article explains one of the most practical and contemporary ways of keeping cardholders’ information safe – credit card tokenization. 

What Is Credit Card Tokenization in Digital Transactions?

Credit card tokenization refers to a procedure in which a consumer’s payment information, such as a credit card number, becomes an arbitrary and unique combination of characters. This set of symbols is called a token

But why should we complicate the straightforward process of sending a cardholder’s data directly to the acquiring bank? 

First, a token is hard to break into, meaning that the buyer’s payment information is more secure when tokenized. There’s no numerical or logical relation to the payment data or personally identifiable information (PII) the token conveys. 

Second, tokens make the payment process easier for consumers. Once the token is created, they don’t have to re-enter their credit card number for each new purchase but use the token instead. 

Who Creates Tokens? 

The payment service provider (PSP) in charge of payment processing creates a token once the credit card payment has been initiated from the cardholder’s account. Called a token service provider (TSP) for this occasion, this entity generates, validates, and stores the token. Tokens are kept in a token vault, in which they’re linked to a consumer’s primary account number (PAN). 

Benefits of Payment Tokens

We’ve already mentioned payment data security and consumer convenience. Let’s now dig a bit deeper into the further benefits of payment tokenization:

  • Merchants don’t have to handle sensitive transaction data, such as their buyers’ PANs anymore. When their customers’ data are vaulted inside a token, they don’t store that information directly on their websites anymore, adding to easier business operations.
  • Tokens are handy for mobile payments and in-app purchases.
  • Consumers create a token for future purchases from their respective devices and accounts without needing to provide payment details for every new purchase. The number of token is not limited; one PAN and bank card, various payment gateways and devices for making transactions.
  • Even if a token is tampered with, the consumer doesn’t have to make a new credit card. 
  • The level of PCI Compliance is lower, i.e., less stringent for merchants. 

The increased level of payment security and user-friendliness lets merchants invest time and assets in advanced business services while revenue and conversion rates keep growing. 

Payment Tokens in Practice

Merchants operating in the digital realm rely on tokens for saving consumers’ payment credentials for repeat or recurring payments. 

Since many customers are switching to digital wallets and wearables as their payment devices, they don’t use credit cards directly anymore. 

For instance, Armando wants to simplify his shopping experience and start using Google Pay for purchases. As he enters the required credit card information into this digital wallet, a token is created on their smartphone. After that, Armando can simply carry out contactless payments in brick-and-mortar stores only via the phone. 

But Armando doesn’t want to even think about his smartphone when he goes jogging in the morning. As he wears only his smartwatch to track his progress in real time, Armando generates another Google Pay token, this time for his watch. When his jogging session is over, he waves his smartwatch over the POS terminal and gets his protein bar. Software POS is also one of the payment features expected to keep trending in 2024.

As he comes back from work in the evening, Armando wishes to watch an episode of Ozark (TV-show). He makes another payment token on his tablet, so that he doesn’t have to include his payment data every time the streaming-service subscription is to be renewed. 

TTP Intel: We can expect that device-specific tokens will be further combined with multi-factor authentication (especially biometric parameters) for additionally advanced and secured digital payments. Think sitting in your electric car and generating a token to pay for a new version of multimedia software or order a spare part for your futuristic four-wheeler. 

Encryption vs. Tokenization

Encryption and tokenization are two invaluable security measures that are applied together for processing digital payments. Let’s now explain the main difference between these two. 

Encryption is a type of ciphering, in which a certain data set is converted into a coded combination of characters. When a consumer starts a transaction, modern payment systems encrypt the emitted information. As the acquiring bank receives this intel, the message is deciphered to get the payment data. 

Tokenization, on the other hand, is the action of replacing the payment data with an impenetrable software unit called a token. 

Intercepting a merely encrypted payment message could lead to compromising data, i.e., the risk is higher. 

But when payment information is first encapsulated within a token, and then encrypted, the hazard of data theft and fraud is much lower. 

How Are Tokenization and Compliance Related?

First and foremost, using tokenization for payments is not one of the standards required by the PCI DSS regulations. The Payment Card Industry Data Security Standards (PCI DSS) are the set of principles that ensure an organization using consumer card data follows a stringent number of regulations. A merchant that doesn’t comply with the PCI DSS regulations can face legal penalties, fines, and, eventually, losing the right to accept bank card payments. 

It has been pointed out above that tokenization boosts merchant’s security level by decreasing the actual sensitive data they accept, keep, and forward. Hence, tokens additionally reduce the number of PCI DSS principles that merchants need to follow. 

Working with PSPs that provide tokenization allows merchants to go through PCI audits with flying colors while keeping the related expenses low. 


Thanks to tokens (and encryption), our eCommerce and online payment experiences are already smoother and safer. The further tech growth and its practical implementation will make it even more comfortable for consumers worldwide to enjoy web-based purchases. Reach out to us if you need any assistance with payment risk mitigation or any other kind of online payment services. We’re here to help you give your customers the best possible digital buying experience.