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What Is Tokenization And How Does It Work?

Tokenization is a highly effective data security measure that is designed to protect sensitive information from prying eyes. When it's applied to financial transactions, tokenization relieves businesses from having to store credit card data within their payment systems. This helps to drastically reduce their PCI Compliance scope and expense.

So how does tokenization actually work?

Tokenization at a Glance

Typical consumer credit cards are issued with names, 16-digit personal account numbers (PANs), expiration dates and security codes — all of which can be "tokenized."

Let's use the 16-digit personal account number (PAN) as an example.

When a merchant swipes a customer's credit card, the PAN is automatically replaced with a randomly generated alphanumeric ID (“token”).

  • 4321-1234-5678-8765 becomes something like a7f6%gf83fhAu on the merchant’s end

Note that the original PAN never enters the merchant's payment system. Only the token ID does. The merchant can use this special token ID to keep records of the customer (i.e. a7f6%gf83fhAu = John Smith).

This token then gets transmitted to their payment processor who de-tokenizes the ID and authorizes the payment.

  • a7f6%gf83fhAu becomes 4321-1234-5678-8765 on the processor’s end

This token is only readable by the payment processor — it is meaningless to any other party (including the merchant). Someone who manages to get his hands on this token ID has no way of linking the token back to the original personal account number.

This randomly generated token is only valid with that single merchant. That specific token ID can never be used to initiate payment with another retailer.

The Primary Advantages of Tokenization

The primary advantage of tokenization is that it keeps your customers credit card information safe — both from internal and external threats. Because the payment processor is the only party that is able to decode the token ID, this security measure is extremely effective at reducing consumer credit card fraud.

But tokenization doesn't only benefit the customer. It also helps you, the business owner. You don't have to invest as many resources making your payment infrastructure secure. Your entire system becomes more PCI-compliant since you're not storing as much financial data within your POS system.

Another major advantage of tokenization is that it can be used to protect any type of personally identifiable information. U.S. retailers primarily use the technology to protect financial data. But in other countries with stricter consumer privacy laws, organizations are often required to protect a much broader range of consumer information. In Europe, for example, many businesses rely on tokenization to protect:

  • Patient records
  • Employee files
  • Usernames
  • Passwords
  • Email addresses
  • Customer accounts

Want to Learn More about Tokenization?

Tokenization is a highly secure and cost-effective way to protect all of your customers' information from potential thieves and hackers — especially sensitive financial data. And at Tailored Transactions, we make implementing this security feature extremely easy.

If you'd like to learn more about tokenization (and its many benefits), contact us today!

Visit us online at or call us direct at (888) 669.1686