Understanding payment tokenization
- Neil Mathieson
- Apr 28
- 3 min read
Updated: Apr 30
Take-Aways
Tokenization is the process of turning card data into random code during the payment journey.
Tokenization helps prevent financial crime in the event of unauthorised access and data breaches.
Tokenization increases sales by improving checkout experiences and supporting recurring payments
Tokenization helps eCommerce retailers build trust with clients and partners.
New usage cases emerge as tokens create easier scalability to multi-party marketplaces and new markets.
Quick Navigation
What is payment tokenization?
Tokenization in payments is a technique that replaces sensitive alphanumeric data such as name and primary account number (PAN) with a unique and random code, the ‘token’.
How does payment tokenization work?
Payment tokenization occurs at the point where a customer checks out using their credit and debit card. The payment gateway creates a token which is passed in real time between other stakeholders in the card payment journey:
Customer: Provides card details on checkout at website or mobile application.
Retailer: The payment gateway or PSP of the merchant/marketplace generates a token that is unique to that transaction.
Payment Acquirer: The token is passed to the payment acquirer who processes for the retailer.
Card Scheme: The payment acquirer passes the token to Visa, Mastercard ,etc which verifies the token (based on card validity).
Issuing Bank: The customer’s bank approves the transaction (based on available funds) and sends a response back along the chain.
Post-transaction, data is stored in the retailer’s system in tokenized form e.g. actual card numbers are not used nor stored. The tokenization service provider stores the original payment data in a secured system.
What are the benefits of payment tokenization?
Enhanced Data Security
Holding data in tokenized form in transit and at rest makes it illegible to external hackers and internal fraudsters who use card data for illicit purposes. As eCommerce volumes boom, tokenization and other measures such as velocity checks, help to reduce financial crime.
Better Customer Experience
Tokenization improves the checkout experience as it removes the need to re-key card details, in turn creating more successful conversions. Tokenization also protects customer data, a key trust factor in any purchase.
Enable Recurring Payments
Tokens are reusable within certain parameters. This makes them ideal for businesses where customers purchase repeatedly, have loyalty schemes, or where subscriptions and buy now pay later payment options create a recurring flow.
Omnichannel Capability
Tokenization can be applied to any card regardless of whether the transaction occurs in an eCommerce, POS, MOTO or digital wallet environment. Standardization across channels helps reduce complexity and costs.
Demonstrate PCI Compliance
Tokenization is a key criterion of the Payment Card Industry Data Security Standard (PCI DSS) that merchants, marketplaces, payment gateways, and PSPs are required to meet to process card payments.
Summary
In the dynamic world of retail, to succeed at scale requires the seamless integration of excellent customer experience with effective financial services and technology.
Tokens are a key enabler, supporting smooth omnichannel checkouts and recurring payments with high security for all stakeholders.
Further use cases emerge as tokens create scalability, whether it is new channels like platforms that involve multi-party transactions, or new markets that involve a customized payment mix.
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