What is Payment Tokenization and How Does it Work?

Payment tokenization is a security process that replaces sensitive payment information, like a credit card number, with a unique identifier. This identifier is referred to as a token.

Tokens have no exploitable value outside of the original transaction context. This means that, with no meaningful data, the token reduces risk in case of a security breach.

An example of tokenization

Here is an example of tokenization at work to help you understand the process, before we outline the difference between encryption and tokenization.

When a customer makes a payment, their details are transmitted to the tokenization service. Here, a token is generated and replaces the card details.

The credit card’s sensitive data is now stored securely only with the payment processor. The merchant uses the token to allow the transaction to proceed without any need to handle sensitive data directly.

Tokenization vs. encryption

While both tokenization and encryption protect data, they operate differently.

Encryption encodes data into unreadable text using complex algorithms. You need a decryption key to access this information.

In contrast, tokenization removes sensitive data totally from systems, making it accessible only to the payment processor. This process reduces compliance requirements for merchants and is effective for secure payment processing in e-commerce and subscription services.

By implementing tokenization, your business will benefit from enhanced security and customer trust, as well as streamlined payment processing. In this guide, we’ll explain the process and the tools your business will need to benefit from it.

How does payment tokenization work?

There are four key steps in the process:

1. Transaction starts. The customer enters their payment details at the checkout.
2. Token generation. Instead of storing these details, a tokenization service generates a token – a unique identifier – linked to the sensitive card data.
3. Secure storage. The original payment information is stored securely by the payment processor, not by the merchant.
4. Transaction completes. Payment tokenization transforms sensitive card data into a secure, unique token, which can be stored and used for transactions without exposing the original data. The token is used by the merchant to complete the transaction, with the payment processor mapping the token back to the original data securely.

This enables a stronger experience for customers, allowing secure "card-on-file" transactions for subscriptions, one-click payments, and repeat purchases.

What are the tokenization use cases?

Tokenization is versatile and benefits various types of transactions. Here are some practical applications that benefit from its use.

• E-commerce transactions: Tokenization secures online purchases by protecting card information. Such information is not held by the merchant, leading to reduced risk and increased trust from customers. With the sheer scale of data breaches affecting e-commerce, many argue it is now essential for any business processing digital payments.
• Recurring billing: Ideal for subscription services, tokenization enables secure, automated billing without the need to store sensitive card data on the merchant's systems.
• Mobile payments: Secure payments on mobile apps are enabled by tokenization to deliver a smooth and safe mobile commerce experience.
• In-store purchases: Tokenization is used as part of in Near Field Communication (NFC) payments, like Apple Pay, Google Pay, or contactless cards. Creating a unique token for each transaction ensures secure payments on compatible devices and terminals, minimizing the risk of data theft.

For more on secure card handling, visit our guide to credit card payment systems.

What are the different types of payment tokenization

Here’s an overview of the primary types of tokenization and the business uses most suited to each.

• Vault-based tokenization: Sensitive data is securely stored in an encrypted vault with tokens being generated for each transaction. This type of tokenization is useful for businesses with centralised storage needs.
• Vault-less tokenization: In vault-less tokenization, tokens are created without requiring central storage. This enhances security by eliminating the vault, which is a single point of vulnerability.
• Payment network tokenization: Payment networks, such as Visa and Mastercard, issue tokens associated with specific cards, ensuring compatibility across all platforms. This is highly useful for recurring payments, card-on-file transactions, and multi-channel merchants.

For more integration options, find out how Worldpay Dashboard can help your business.

What are the benefits for merchants?

Tokenization offers numerous advantages for both online and offline businesses, including those working across multiple channels. The key benefits are outlined below.

1. Enhanced security: Tokenization minimizes the risk of data breaches by replacing sensitive card data with non-sensitive tokens. This ensures that, even if intercepted, the data cannot be exploited.
2. Increased customer trust: Customers feel more secure when their card details are safely managed, which helps build brand loyalty and more effective checkout conversion.
3. Simplified PCI-DSS compliance: By reducing the handling of sensitive data, tokenization makes for simpler PCI-DSS compliance requirements. Meeting relevant PCI-DSS demands is mandatory for businesses accepting card payments.
4. Omnichannel payments: Tokenization improves the customer experience by enabling transactions across multiple channels, including in-store, online, and mobile.
5. International expansion: Tokenization aids global growth by supporting multiple currencies and reducing friction for cross-border transactions. It makes it easier to reach and serve international customers.
6. Fraud reduction: By securing payment data and making tokens unusable if stolen, tokenization greatly reduces the risk of fraud and the severity of data breaches.
7. Recurring billing: For subscription-based businesses, tokenization simplifies recurring billing processes by securely storing customer payment information for future transactions.
8. Global payments: Tokenization streamlines the process for businesses to accept payments from anywhere in the world with minimal security concerns.

What are the tokenization best practices?

Implementing payment tokenization effectively requires careful planning and an understanding of the best practices to follow.

A good overview of evolving payment security standards can be found in a recent publication by the Bank of England. Explore the BOE’s approach to innovation in money and payments.

Here are some of the ways you can ensure a secure process:

1. Choose the right payment service provider: Select a provider with robust tokenization solutions that can be easily tailored to your business size, needs, and security requirements. More on this below.
2. Ensure compatibility: Your systems and existing infrastructure should be compatible with the tokenization technology you will adopt to ensure easy integration with your current payment and accounting systems.
3. Implement strong security protocols: Regularly update security measures, using encryption where necessary, and follow industry standards for handling sensitive data.
4. Stay informed about regulatory change: Maintain PCI-DSS compliance and stay updated on industry regulations to ensure you avoid vulnerabilities and continue to meet legal standards.
5. Focus on scalability: Ensure the tokenization solution you select can grow with your business, supporting higher transaction volumes and diverse payment channels.

Additionally, you can explore other highly effective ways to deliver enhanced transaction security for your business using Worldpay’s Fraud Protection.

How to choose the right payment tokenization solution?

Choosing a payment tokenization solution that aligns with your current and future needs of your business is crucial for enabling smooth, sustainable growth. Here are the core considerations to bear in mind when choosing a provider.

1. Scalability: Tokenization solutions should accommodate growth, whether this be plans to expand to new markets or to scale up transaction volumes. Make sure your provider can easily accommodate increased user loads, cross-border transactions, and can integrate with a range of payment systems. Worldpay offers tokenization solutions designed for global scalability, providing reliable infrastructure and adaptable services to support businesses as they grow. It also offers the flexibility to add new features and functionality over time to ensure you can keep up with evolving payment needs.
2. Enhanced security: Not all solutions offer the same level of security and protection. Look for advanced fraud prevention tools, such as real-time monitoring, PCI-DSS compliance, and data encryption, alongside security features like multi-factor authentication and device fingerprinting. These will all help minimize the risk of fraud and unauthorized access. Worldpay’s tokenization solutions are built to deliver a high level of security as standard, ensuring sensitive data is protected across every transaction point.
3. Cost efficiency: Tokenization will reduce overall compliance and security costs, but it’s still important to evaluate a provider’s pricing structures and long-term affordability. Solutions with flexible pricing plans are best suited to meet your changing needs as your business grows. Worldpay offers competitive pricing models that are tailored to fit different business sizes and transaction volumes, ensuring cost-effective solutions for you as your business scales up.
4. Integration: Your tokenization solution should integrate easily with your existing systems, from e-commerce platforms to customer management software. Worldpay’s system supports flexible API integrations, allowing for a quick setup that doesn’t disrupt your operations. This flexibility helps streamline implementation, enabling your business to minimize downtime.
5. Customer experience: You want to ensure that your tokenization solution enhances customer satisfaction through a smoother, faster checkout process. It should support both one-click and recurring payments. Worldpay stores tokenization payment details, allowing repeat customers to complete transactions with minimal friction.

Incorporating payment tokenization into your payment strategy is a powerful tool to enable a fast-growing business. It enhances security and builds customer trust by protecting their sensitive data as well as simplifying your compliance with PCI standards.

Tokenization is an essential tool for meeting expectations, scaling operations, and building customer trust. By adopting it, your business can create a secure, streamlined, and future-ready payment system.

For a deeper look into how tokenization can support your business, explore our Token Management Service.