What is Tokenization?
Tokenization is the process of exchanging sensitive data for nonsensitive data called “tokens” that can be used in a database or internal system without bringing it into PCI scope. Tokenization is an essential part of data security practices, especially for organizations that handle payment processing or other sensitive information, ensuring that critical data like financial assets, card details, and bank account numbers remain secure.
Tokenization systems create tokens using random number generation to replace real data, like account information or payment details.
Although the tokens are unrelated values, they can retain certain elements of the original data, such as length, format, and sometimes character tokenization, so they can be used for uninterrupted business operations. Each token is mapped to the original value, and the mapping process ensures the original value is protected.
The original sensitive data is then safely stored in a secure vault or off-site, separate from the internal systems to minimize risk.
Unlike encrypted data, where the original data can be restored with the appropriate encryption key, tokenized data is undecipherable and irreversible. In encryption, data is scrambled and requires a decryption key to access, whereas tokenization does not use a decryption key and protects data in a way that is irreversible, unlike traditional methods.
The key differentiator is that there is no mathematical relationship between the token values and the original sensitive data; tokens cannot be returned to their original form. As a result, tokenization dramatically reduces the likelihood of a data breach compromising original sensitive data—unlike traditional methods, tokenization offers a more secure approach to safeguarding real data from breaches.
What is a Token?
As described previously, a token is a piece of data that stands in for another, more valuable piece of information. A digital token serves as a secure substitute for sensitive information in digital systems. Tokens are placeholders that represent important data elements like a credit card PAN (primary account number) or Social Security number (SSN).
Tokens have virtually no value on their own; they are only useful because they represent something valuable, such as cardholder data, intellectual property, or financial data. A good analogy for tokenization is a poker chip. Instead of carrying cash (which can be easily lost or stolen), players use chips as placeholders.
However, chips can’t be used as cash unless they are exchanged for the real thing. In tokenization systems, the token mapping process securely links tokens to their related token values, ensuring that only authorized systems can retrieve the original data.
Tokenization works by removing valuable data from your environment and replacing it with these tokens. Many businesses hold at least some sensitive data elements within their systems, whether it be credit card data, bank account numbers, medical records, or other financial assets that require security and protection.
Using tokenization, organizations can continue to use this data for operational purposes without incurring the risks or PCI compliance scope of storing sensitive data internally.
How is a Token Created in the Tokenization Process?
When a business partners with a third-party tokenization provider, the following 4-step process is initiated:
1. Data Transformation
Sensitive data is exported and sent to the third-party tokenization provider, which then transforms it into non-sensitive placeholders called tokens. This process offers advantages over encryption, as tokenization does not rely on keys to modify the original data. This makes tokenization a more secure, irreversible option for data protection and is a core part of how tokenization works across industries.
2. Extraction from Internal Systems
Sensitive data is then extracted entirely from an organization’s internal systems and replaced with tokens. This ensures the original sensitive information is no longer present internally—meaning it no longer resides within the organization’s environment, reducing potential exposure to data theft.
3. Operational Use of Tokens
The tokens, which are mathematically unrelated to the original data, are retained within the organization for operational purposes. This allows businesses to continue using the tokens for various activities without the risk of exposing sensitive information.
4. Secure External Storage
The original sensitive data, which has been replaced by tokens internally, is securely stored outside the organization’s environment by the third-party tokenization provider. A token vault is used to securely store and manage the mapping between tokens and the original data, ensuring that only authorized access can reverse the process if needed.
Tokenization ensures that no sensitive data is stored on merchant systems, which means there is nothing valuable for potential attackers to steal. The risk of data theft is substantially reduced, providing a high level of security for sensitive information. Additionally, internal systems that hold tokens are no longer within the scope of PCI DSS, making compliance with the regulation much easier for businesses that store tokenized cardholder data for recurring purchases or subscriptions.
What is the Purpose of Tokenization?
The primary purpose of tokenization is to protect sensitive data while still enabling its use for critical business functions, such as payment systems, digital wallet transactions, and business processes. This is a critical distinction from encryption, where sensitive data is modified and stored using methods that prevent its continued use for business operations.
Tokenization allows sensitive data to be replaced with tokens that cannot be reversed or deciphered, ensuring that payment processing systems are not compromised even if attackers gain access to them. Tokenization essentially provides a more secure, irreversible alternative to encryption, making it ideal for businesses handling financial data or other regulated data types.
Benefits of Tokenization
By leveraging payment tokenization, businesses can benefit from enhanced security, cost efficiency, improved customer experiences, risk mitigation, and essential security measures for ecommerce operations.
Enhanced Security: Tokenization replaces sensitive payment data with tokens, making it less valuable to hackers while adding an extra layer of security for customers on your website. Tokenization services help organizations protect organizational data and meet compliance requirements such as PCI DSS and GDPR.
Flexibility and Cost Efficiency: Working with a tokenization provider like IXOPAY allows businesses to choose payment processors with competitive rates, low processing fees, and reliable uptime. Tokenization helps maintain PCI compliance, reducing time and costs for organizations while handling financial data securely. Additionally, tokenization can be integrated with legacy systems, allowing businesses to enhance security without overhauling existing infrastructure.
Improved Customer Experience: Tokenization accommodates diverse payment needs such as in-app purchases, recurring subscriptions, and multiple gateways. A flexible data security provider can adapt to changing requirements over time.
Risk Mitigation: Tokenization reduces the risk of data breaches, which can cost businesses an average of $4.24 million. In the event of a breach, tokenization protects customers’ valuable payment information.
Essential for Ecommerce: For online businesses, tokenization is essential for securing customers’ payment information during online transactions. It builds customer trust and confidence in the payment process and ensures that regulatory compliance standards like PCI DSS are met.
What is Tokenization Used For? A Look at Tokenization Examples
Tokenization is often used by businesses to protect cardholder data. When you process a payment using the token stored in your systems, only the original credit card tokenization system can swap the token with the corresponding primary account number (PAN) and send it to the payment processor for authorization. Your systems never record, transmit, or store the PAN, only the token.
Although no technology can guarantee the prevention of a data breach, a properly built and implemented cloud tokenization platform can prevent the exposure of sensitive data, stopping attackers from capturing any type of usable information, financial or personal.
Tokenization in Natural Language Processing
In the field of natural language processing (NLP), tokenization is a foundational technique that breaks down text into smaller units—such as words, phrases, or characters—known as tokens. This digital representation of language data allows computers to analyze, interpret, and generate human language, powering applications like text classification, sentiment analysis, and language translation.
Tokenization in NLP not only improves the accuracy and efficiency of language models but also plays a role in data security. By segmenting and processing text data, organizations can better protect sensitive information and intellectual property, ensuring that confidential content is handled securely throughout the data pipeline. For example, tokenization can help mask or anonymize sensitive information within large text datasets, reducing the risk of unauthorized access or data breaches.
The benefits of tokenization in natural language processing extend to enhanced language understanding, streamlined data processing, and the ability to train more effective machine learning models. By adopting tokenization techniques in NLP workflows, organizations can protect sensitive information, maintain data integrity, and unlock new insights from their language data while safeguarding intellectual property.
Who Uses Tokenizaiton? What Industries Should Use Tokenization?
Many different industries can benefit from tokenization. Here are several examples of industries that can use tokenization for credit card information:
Retail – For retail businesses, tokenization can secure and streamline transactions, ensuring customer data remains safe throughout the purchasing process. Tokenization can also help automate transactions, making asset transfers and payment processing faster and more efficient.
Travel – For the travel industry, tokenization excels at accepting and securing customer data from various sources like websites and mobile apps, all while keeping PCI scope in check. By tokenizing data before it enters your system, downstream systems are seamlessly removed from PCI scope.
Fintech – Provider agnostic platforms, like IXOPAY, offer universal tokens for secure cardholder data storage, striking a balance between security and usability.
Healthcare – Tokenization assists in secure data handling for the healthcare sector, reducing fraud risks and ensuring compliance.
Tokenizing with IXOPAY allows businesses to not only facilitate secure transactions but also to leverage multiprocessor routing, account updating for recurring transactions, network tokens to lower declines and fees, and 3-D Secure for chargeback liability shift. Across retail, travel, fintech, insurance, and healthcare, third-party tokenization solutions provide a versatile and secure framework for various industry needs.
Tokenization and PCI DSS
Tokenization is a powerful tool for organizations seeking PCI compliance, simplifying the management of sensitive payment data. By tokenizing cardholder data before it enters systems, like in retail and travel industries, businesses can reduce the scope of their PCI audits significantly. This means that only the tokenized data is within the audit scope, while the actual sensitive information is securely stored off-site.
For those in fintech, insurance, and healthcare, tokenization provides a secure framework for transactions, ensuring compliance with PCI DSS requirements. Through tokenization, companies can avoid the complexities of PCI audits and mitigate the risks associated with handling sensitive cardholder data, as showcased in success stories like Orvis, who reduced their PCI scope by 90% with tokenization solutions.
What is Detokenization?
Detokenization is the reverse process of tokenization, exchanging the token for the original data. Detokenization can be done only by the original tokenization system. There is no other way to obtain the original number from just the token.
Tokens can be single-use for operations such as one-time debit card transactions that don't need to be retained, or they can be persistent for items such as a repeat customer's credit card number that needs to be stored in a database for recurring transactions.
As described previously, a token is a piece of data that stands in for another, more valuable piece of information. Tokens have virtually no value on their own. They are only useful because they represent something valuable, such as a credit card primary account number (PAN) or Social Security number (SSN).
What is the Encryption Process?
Encryption is a process during which sensitive data is mathematically changed, but its original pattern is still present within the new code. This means encrypted numbers can be decrypted with the appropriate key, either through brute-force computing or a hacked/stolen key.
What is the Goal of Tokenization?
The goal of an effective tokenization platform is to remove any original sensitive payment or personal data from your business systems, replace each data set with an indecipherable token, and store the original data in a secure cloud environment, separate from your business systems.
Usable information is the key here. Tokenization is not a security system that stops hackers from penetrating your networks and information systems. There are many other security technologies designed for that purpose. Rather, it represents a data-centric approach to security that adheres to “Zero Trust” principles.
However, no defense has proven to be impenetrable. Whether through human error, malware, phishing emails, or brute force, cybercriminals have many ways to prey on vulnerable organizations. In many cases, it's a matter of when, not if, an attack will succeed. The advantage of cloud tokenization is that there is no information available to steal when a breach happens. As a result, it virtually eliminates the risk of data theft.
Does Tokenization Mask Data?
Data masking desensitizes sensitive data by changing pieces of the data until it cannot be traced back to the original data. Instead of erasing part of the data, or replacing it with blank values, it replaces sensitive sections with data masked to match the characteristics of the original data.
Tokenization is a form of masking data that not only creates a masked version of the data but also stores the original data in a secure location. This creates masked data tokens that cannot be traced back to the original data, while still providing access to the original data as needed.
Is Tokenized Data Pseudonymous Data?
Pseudonymized data is data that cannot be connected to a specific individual. Data pseudonymization is especially important for companies that work with protected individual data and need to be compliant with GDPR and CCPA.
In order for data to be pseudonymized, the personal reference in the original data must both be replaced by a pseudonym and decoupled from the assignment of that pseudonym. If the personally identifiable information (PII) has been replaced in a way that is untraceable, then the data has been pseudonymized.
Tokenization is a well-known and accepted pseudonymization tool. Tokenization is specifically an advanced form of pseudonymization that is used to protect the individuals' identity while maintaining the original data's functionality. Cloud-based tokenization providers enable organizations to remove the identifying data completely from their environments, decreasing both the scope and the cost of compliance.
Is Tokenization Right for My Data?
Tokenization works to not only increase security for sensitive data but also cut down on compliance scope and associated costs. The flexibility of tokenization allows companies to create customized solutions that help them balance their data utility needs with data security requirements.
If you're curious about tokenization for your organization, reach out to a IXOPAY representative today. We'd love to have a conversation about your unique data use case and discuss whether tokenization could support your data security goals.
Future of Tokenization
The future of tokenization is being shaped by rapid advancements in technology, with blockchain, artificial intelligence, and the Internet of Things (IoT) leading the way. As these technologies mature, tokenization will become even more integral to secure data processing, protecting sensitive data, and enabling innovative business models across industries.
Emerging tokenization techniques, such as homomorphic encryption and zero-knowledge proofs, promise to further enhance the privacy and security of tokenized data, allowing organizations to process and analyze sensitive information without exposing the original values.
The adoption of smart contracts and decentralized ledgers will expand the use of tokenization beyond payment processing and data security, enabling secure identity verification, transparent supply chain management, and automated business processes.
As tokenized data becomes more prevalent, organizations will need to stay informed about the latest developments and best practices to ensure they effectively protect sensitive information and maintain data security. By embracing new tokenization techniques and adapting to evolving regulatory requirements, businesses can future-proof their data protection strategies and unlock new opportunities in the digital economy.