What Is Payment Tokenization and How Does It Work? [2023]

Understand what payment tokenization is and how it can benefit your business and secure your transactions. Our expert explains everything you need to know.

Payment tokenization adds a layer of security to your company's online transactions. This technology replaces sensitive customer data like credit card and Social Security numbers with software-generated codes called tokens. 

In this guide, I’ll answer some common questions about how tokenization can protect your small business customers from credit card fraud.


What Is Payment Tokenization?

Payment tokenization hides credit and debit card numbers by swapping out transaction data with software codes called tokens. Tokens were designed to prevent hackers and thieves from stealing financial information during credit card transactions. 

Algorithms randomly create these unique alphanumeric codes, which can't be deciphered if intercepted to commit credit card fraud. The tokens are useless without the original key securely held by the payment processing provider.

How Does Payment Tokenization Work?

When a customer enters their credit card info to buy something from your business, your payment service provider's software system automatically converts the number to a randomly-generated token. The actual credit card number stays safe in a secure vault, where it's matched with the token upon arrival at the customer's bank (known as the issuing bank). 

In addition to replacing debit and credit card numbers, you can use tokens to protect:

  • Bank account numbers
  • Card details, such as CVV codes and expiration dates
  • Cardholder identity
  • Addresses and contact information
  • Passwords

As the transaction information travels from your processor through the credit card network to the issuing bank, these data remain shielded from view. When the service provider receives the token, it's translated back to the original card number in a secure system. 

The Benefits of Payment Tokenization

Payment tokenization offers several important small business benefits:

  • Improving the user experience for your customers with options such as one-click payment. When your payment service provider enables tokenization, tokens may be used more than once for the same card data. Clients can securely save credit card numbers on your site and breeze through future checkouts.
  • Boosting your revenue through higher conversion rates. When customers can easily check out in seconds with a secure token, they're more likely to complete purchases and less likely to abandon the cart mid-transaction. 
  • Enhancing the level of security of your company's online transactions. Prioritizing customer safety creates strong client reliationships by building a reliable, trustworthy brand. Even if a data breach occurs, it won't compromise any actual credit card numbers - only transmitted tokens that can't be traced back to the original information.
  • Reducing the risk of fees and financial liability for data breaches. You can protect your business from these expenses and resulting reputation damage by choosing a PCI-compliant merchant services provider that tokenizes transactions and uses other high-level security measures.
  • Creating an affordable way to process secure payments. Pay.com includes the cost of tokenization and other PCI compliance measures in the flat fee for each transaction. 

Tokenization works well for companies of all sizes. Since token tech is so scalable, you'll remain PCI compliant even as your small business grows. 

Tokenization vs. Encryption

Although encryption and tokenization have some similarities, they also have a few important differences. Both are cryptographic data protection methods with basically the same use, but they don't work the same way. Many payment processors use encryption when sending information across unsecured networks and tokenization to encode payment data during transmission. 

Tokenization maintains the format and length of the original data. For example, the token given for your customer's credit card number will have the same number of characters. If the format or length varies, the tokenized data won't be readable. Conversely, encryption can change the data length or format during transmission. 

Tokenization is more flexible than encryption and doesn't require as much computing power. It's also more secure. Encryption uses a mathematical formula that someone with the right skills and knowledge can potentially decode. Since tokens are random, they can't be reverse engineered by bad actors. 

Tokenization and PCI Compliance

As a small business owner selling products or services online, you have to comply with Payment Card Industry Data Security Standard. Often called PCI DSS or simply PCI for short, these industry-wide standards require protection of stored cardholder information. 

Tokenization is one of the most common ways for merchants to meet this mandate. The PCI Council responsible for developing, updating and maintaining PCI guidelines supports the use of tokens to alleviate the risk associated with data breaches.

What's the Most Secure Way to Accept Credit Card Payments? 

Pay.com provides comprehensive PCI compliance, using tokens and other tech to shield your customer data from credit card fraud. We go through periodic independent auditing and testing to ensure we continue to meet Level 1 PCI DSS compliance standards. 

In addition to tokenizing credit card information during each transaction, Pay.com never stores customer numbers on our servers. That means sensitive data stays safe even if a hacking attack occurs. 

Beyond PCI compliance, we add another layer of security through 3D Secure 2.0 (3DS2) authentication. 3DS2 confirms customer identity to prevent credit card fraud for certain high-risk transactions, which vary depending on the amount of the purchase, the location and other factors determined by credit card companies. 

Click here to get started with Pay.com now.

The Bottom Line on Payment Tokenization 

Payment tokenization provides a solid foundation for online security. By replacing card numbers and other private information with randomized codes during transmission and storage, tokenization prevents credit card fraud even when data breaches do occur. 

Tokens are an increasingly common way for companies to achieve PCI compliance since they're more secure than encryption at a more affordable cost.

You don't have to be the one to set up and maintain token tech for your small business. Pay.com provides everything you need to become a PCI-compliant online merchant, including robust tokenization and authentication methods. You can sign up for our service and start accepting secure online payments in minutes. 


How can I accept payments securely?

Pay.com provides a secure payment infrastructure for your small business. We provide a full scope of PCI-compliant transaction services including tokenization for storing sensitive data such as credit card numbers. Click here to find out how you can get started.

How can I let my customers know my ecommerce website is secure?

When you partner with Pay.com, you get the benefit of Level 1 PCI DSS compliance (the highest available level). To show off your site's security measures, you can add an official PCI DSS compliance badge to your checkout page so customers know you prioritize their privacy.

Does using tokenization make me PCI compliant?

Your company can fulfill some of the requirements for PCI compliance by using tokens, but you'll still need to take other steps to be completely secure. Partnering with a PCI-compliant payment service provider simplifies the process since they'll take care of all your transactions. You won't be independently responsible for ensuring customer security.

What is an example of tokenization?

Digital wallets are an common example of tokenization. When you save your credit card details for convenient payments through a service like Apple Pay, the provider stores the data as a secure token. When you make a purchase, the token travels to the company's payment processing provider, where it's used to access your credit card info to complete the transaction.

Meet the author
Andrea Miller
Andrea Miller has been a writer and editor for more than two decades. Specializing in business and finance, she has written for some of the major websites in the financial sector. Outside of work, she spends most of her time with her family and enjoys hiking, yoga, and reading.
The Most Secure Way to Accept Payments

Pay.com provides a secure system for businesses like yours to accept credit and debit card payments. All financial details are tokenized in transit to protect your customers from hacking attempts.

Get started now

Ready to boost revenue for your business

Contact sales