Tokenization

Tokenization is the process by which sensitive data, such as a credit card number, is replaced with unique identification symbols or a surrogate value known as a token.

The sensitive data usually needs to be stored securely in one centralized place for future reference and needs to be strongly protected. In this approach of tokenization, the security depends on the security of the sensitive values, the algorithm and the method used to create the surrogate value and map it back to the initial value.

Tokenization intends to eliminate the need for businesses to keep large amounts of data in hand. The process is used by small and medium-sized businesses to enhance the security of credit cards and e-commerce transactions while reducing the cost as well as the complexity of compliance with regulatory agencies.

Tokenization finds its applicability in bank accounts, financial statements, loan applications, criminal records, stock trades, and other forms of personally identifiable information (PII).

How tokenization works:

A customer gives their payment details at a point-of-sale (POS) system
The details, including data, are replaced with a randomly created token, mostly generated by the merchant’s payment gateway.
Later, this tokenized information is encrypted and transmitted to a payment processor. The initial sensitive payment information is collected in a token vault in the merchant’s payment gateway.
Before sending it for final verification, the tokenized information is encrypted again by the payment processor.

Payment Card Industry Data Security Standard and Tokenization:

In normal circumstances, Payment card industry (PCI) standards do not permit credit card numbers to be stored on a merchant’s POS terminal after a transaction is done unless an extraordinary situation prevails. The PCI has laid certain guidelines for this purpose.

To ensure compliance with PCI merchants should install costly, end-to-end expensive systems or they have to outsource their payment processing to a service provider who offers a tokenization option. The service provider manages the issuance of the token’s value and takes responsibility for preserving the cardholder data locked down. In this situation, the service provider gives a POS device driver system to the merchant which translates credit card numbers into randomly developed values called tokens. Since the token is different from a primary account number (PAN), it cannot be used beyond the context of a unique transaction with a particular merchant.

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