Credit Card Tokenization: What It Is, How It Works & Its Benefits
In simple terms, credit card tokenization is a process of replacing a customer’s sensitive credit card information, such as the account number and expiration date, with a unique identifier or “token.” This token can be used in place of the actual credit card data to reduce the risk of fraud and data breaches.
Tokenization is often used in conjunction with point-of-sale (POS) systems, mobile payments, and ecommerce transactions. By using a token, businesses can avoid storing sensitive credit card information on their own servers or in their POS systems.
How Does Credit Card Tokenization Work?
There are a few different ways that tokenization can work, but the basic idea is that the credit card information is replaced with a randomized string of numbers or letters that has no real value.
The tokenization process typically works like this:
- A customer’s credit card information is entered into a point-of-sale system, mobile app, or ecommerce checkout page.
- The credit card data is sent to the payment processor or tokenization provider.
- The processor or provider replaces the credit card data with a token.
- The token is then stored on the business’s system or in the customer’s account profile.
- When the customer makes a future purchase, the token is used instead of the actual credit card information.
What Are the Benefits of Tokenization?
There are a few key benefits of using tokenization for credit card processing:
- Increased Security: One of the main advantages of tokenization is that it increases security by reducing the risk of data breaches and fraud. By using a token instead of actual credit card data, businesses can avoid storing sensitive information on their own systems.
- PCI Compliance: Tokenization can also help businesses become PCI compliant. The Payment Card Industry Data Security Standard (PCI DSS) is a set of security standards that businesses must follow if they store, process, or transmit credit card data. One of the requirements of PCI compliance is to not store certain sensitive credit card data, such as the full account number or expiration date. Tokenization can help businesses meet this requirement by replacing the sensitive data with a token.
- Simplified Payments: Tokenization can also simplify the payment process for customers. For example, if a customer wants to make a purchase on a mobile app, they can save their credit card information as a token on the app. Then, for future purchases, they can simply enter the token instead of re-entering their credit card information. This makes it easier and faster for customers to make purchases, which can lead to increased sales for businesses.
- Reduced Fraud: Tokenization can also help reduce fraud by making it more difficult for criminals to obtain and use credit card information. For example, if a business is using tokenization for mobile payments, a criminal would need to obtain the customer’s phone in order to steal their credit card information. This is much more difficult than stealing a credit card number from a database.
- Improved Customer Experience: In addition to simplifying the payment process, tokenization can also improve the customer experience by reducing the need for customers to input their credit card information multiple times.
For example, if a customer saves their credit card information as a token on an ecommerce site, they can use that token for future purchases without having to enter their credit card information again. This can provide a better experience for customers and lead to repeat business.
What Are the Disadvantages of Tokenization?
There are a few potential disadvantages of using tokenization:
- Increased Costs: One potential downside of using tokenization is that it can increase costs for businesses. This is because businesses will typically need to pay for a tokenization service or solution. In addition, businesses may need to upgrade their systems to be compatible with tokenization.
- Limited Compatibility: Tokenization is not always compatible with all types of credit cards and payment processors. For example, American Express uses a different method of tokenization than Visa and Mastercard. As a result, businesses may not be able to accept all types of credit cards if they use tokenization.
- Reduced Flexibility: Tokenization can also reduce flexibility for businesses. This is because businesses will typically need to use the same service or solution for all of their credit card processing needs. This can make it more difficult to switch services or add new features in the future.
- Potential for Fraud: Although tokenization can help reduce fraud, there is still a potential for fraud to occur. This is because criminals can still obtain tokens and use them to make unauthorized purchases. In addition, businesses may still need to store some sensitive data, such as the CVV code, which could be compromised in a data breach.
Overall, credit card tokenization is a secure way to store and process credit card information. However, there are a few potential disadvantages that businesses should be aware of before they implement a tokenization solution.