What Is Tokenization and Why Does It Matter?

In an age where data and monetary security are an absolute must, organizations continuously develop innovative ways to protect sensitive information during digital transactions. While encryption is available to protect stored data in servers or databases, other methods like tokenization bolster data security further.

What is tokenization, and why does it matter? Read on to explore the ins and outs of the security method, terminology, and its importance to sensitive information.

What Is Tokenization and Its Purpose?

Like encryption, tokenization is a security method that safeguards consumer information from data breaches and other exposure. However, tokenization hides information by replacing sensitive data with randomized variations [GS1] to de-identify material.

The purpose of tokenization is to protect sensitive data in a server from unauthorized usage while preserving its utility within the business.

What Are Some Examples of Tokenized Information?

Companies and businesses often rely on tokenization to obscure and protect credit card information. However, other personally identifiable data is applicable:

• Social security number
• Bank account numbers
• Driver’s license number
• Passport information
• Date of birth
• Addresses
• Telephone numbers

What Are the Different Types of Tokenization?

There are three types of tokenization methods that businesses should be aware of.

Gateway Tokenization

Gateway tokenization is most familiar to e-commerce businesses. Gateways may have technology enabling businesses to save card information in their system by assigning tokens in place of data. The token will then pass to the system’s gateway instead of the credit card number, allowing for data removal.

Pass-Through Tokenization

Pass-through tokenization is unique technology serving as a bridge between a site and its gateway. This model allows existing integration code to tokenize data other than credit card information.

Payment Service Tokenization

The payment service tokenization model utilizes an interface to route payments to several gateways. This model works best for companies with expansive payment needs, whether to service multiple regions or accept various currencies.

What Is the History of Tokenization?

Tokenization has a history dating back to the beginning of early currency systems. Otherwise known as physical tokenization, these systems would also use tokens as their replacement for banknotes and coins. For example, subway and casino tokens would serve as substitutes for actual currency.

On the other hand, digital tokenization first appeared in the 1970s and served to separate specific data bits from one another.

How Does Tokenization Work?

Using a credit card as an example, imagine running your card through an establishment’s point-of-sale (POS) system; the system stores your card information. Despite having future access to this data through their servers, the business will protect their data and cardholder information by converting plaintext into token values.

The plaintext can refer to anything you can make sense of, such as simple English sentences, Java code, or a script.

What Are Tokens?

Tokens are pieces of data that work to replace other valuable parts of identifiable data. While tokens virtually have no monetary value, their usage is invaluable when representing account numbers and social security numbers.

Say you’re looking at a poker table and chips. Instead of using dollar bills as placeholders, players rely on chips. However, the chips hold no value in the event of theft or breach. Using tokens as a business owner protects your customers’ data and finances while still allowing you to complete transactions.

What Types of Tokens Are There?

• Security/Asset Token: These pieces of data are similar to bonds and equities.
• Utility Token: These tokens can act as alternative means of payment. Utility tokens can grant access to a particular product or platform or serve as a discount on future goods.
• Payment/Currency Token: Currency tokens are means of payment for external products and services other than where they exist.

What Is the Token Vault?

Once the token replaces the sensitive data, it replaces the exposed information while the sensitive information transfers to the token vault. The token vault is the vital location for original information storage where you can map it to its corresponding token.

What Are Vaultless Tokens?

It’s possible to come across “vaultless tokenization”; these pieces of data are part of an algorithm instead of storage in a secure database.

Tokenization vs. Encryption

While most people may believe tokenization and encryption are the same, they are two different cryptographic data security methods. Tokenization and encryption differ in that the former does not alter the length or type of data under protection, whereas the latter does.

Since encryption changes the type of information and data length, it can make information unreadable without access to a key. While tokenization also utilizes keys, the method does not use keys to decrypt data. It uses non-decryptable information to represent obscured details and values, making it mathematically irreversible.

What Are the Benefits of Tokenization?

Since decryption is not an option with tokenization, it can make it more difficult for hackers to access cardholder data than older databases. The main benefits of tokenization can also include the following:

• There’s a higher chance of compatibility with legacy systems than encryption.
• Tokenization uses fewer resources.
• There is less risk of data fallout as the result of a breach.
• It introduces convenient features like mobile wallets, cryptocurrency, and one-click payment technologies that boost security and customer trust.
• Tokenization can reduce the steps involved with Payment Card Industry Data Security Standard (PCI DSS). This set of security standards ensures all businesses that accept and process cardholder information engage in safe storage practices.

What About Tokenization and Blockchain?

In simplest terms, blockchain is a system of recording data in a calculated way that makes it difficult for hackers to access, cheat, or change. It is a duplicated ledger of transactions kept and distributed across the network.

Tokenization in blockchain refers to tokens that are digital representations of assets in the real world. The blockchain links cryptocurrencies together and provides an unchangeable record of transactions that depends on verification.

Knowing what tokenization is and why it matters is essential to safeguarding sensitive information and separating data from business systems. While no technology can fully guarantee the prevention of data breaches, tokenization can significantly reduce the risk of data exposure and stop unauthorized parties from capturing any usable financial or personal information.

Electronic Transfer is a trusted and accredited credit card processing company. We take pride in our services to ensure you receive the best help available! To learn more about FFL credit card processing, please fill out our short form on our website.