‘Tokenization’ came into existence when Trustcommerce first created it in 2001 for its client in the year 2001. Payment Tokenization plays an important role in card data security and to control debit and credit card frauds.
With the development in financial and payments technology, there is also a rise in the number of scams related to card payments and the sensitive data of the cardholders.
As per Statista, more than 1000 debit and credit card fraud cases were recorded in the year 2020.
The Crime in India 2020 report from National Crime Records Bureau (NCRB) states that in the middle of the pandemic the fraud cases increased at the rate of 225%. In 2019 the cases were 367 and they increased to 1194 in 2020.
Tokenization is the part of the payments card industry to protect the sensitive data of the cardholders against threats and loss. And also for compliance with government regulations and industry standards.
The government and the banking organizations are introducing certain regulations to curb the threats and to increase security. Card Tokenization is one such measure.
Let us understand the tokenization meaning, how it works, and its benefits.
What is Tokenization
It is one of the most efficient security measures to protect customer card data. It replaces sensitive details such as the primary account number or the credit card numbers with the Tokens. These tokens are randomly created with no meaning or purpose for the fraudsters however they would act as the actual card details.
As a result, the client requests are met, the reporting is done and the regular payment process or the operations is carried out without any disturbance in the most secure manner.
The tokenization meaning or purpose here is that the storing and usage of the sensitive card data are done almost nowhere in the payments environment.
Tokenization meaning can be essentially known through the examples of its tokenized formats. The Tokens can be format-preserving and non-format preserving.
The format-preserving token would keep the token look the same as the actual card data. For example: if the payment card number is 4111 1111 1111 1111 then the tokens in the format-preserving form would be 4111 7586 4356 1111
The Non-format preserving tokens would be different from the actual card data and would be in alpha-numeric form. For example, the above payment card number would be tokenized to 32a1b4h35j34k54rgh67
To make sure there are no issues related to the validation with the applications and the processes of the businesses, most entities use the format-preserving tokens.
How does tokenization work?
The process of Tokenization involves various parties such as the merchants, card networks, issuer, acquirer, customer, and token requestor.
Under the Tokenization process, the actual customer credit card details are replaced with the alphanumeric code or tokens using an algorithm. The generated code cannot take you to the original data.
The flow includes the below steps from making the credit card purchase to the end of the payment process:
- The customer makes a card purchase with the credit card details.
- The sensitive card details are sent to the tokenization system.
- Where the tokens (random code) are generated and replaced with the actual card details.
- The correlation is safely stored in the cloud space in a separate data vault.
- The generated tokens represent the actual card in the system and the payments are processed. Also, these tokens are used for future recurring transactions.
The primary benefit that the Tokenisation process provides is the security of the payments processing, its efficient accessibility, and resultant client satisfaction. The specified benefits include – protection against data breaches, useful in reducing the red-tape, gaining customer confidence, etc.
- The sensitive customer data is tokenized and protected. This is because the tokens are useless for hackers.
- The merchant need not manage this sensitive data. So this reduces the cost and minimizes the risk against data breaches.
- Customers need not enter their card details for repeat shopping. With tokenization, his tokenized card details can be safely used the next time. This will improve customer satisfaction and the resultant conversion rate due to the simplified payment process.
- The improved customer experience and satisfaction will be boosted due to the efficient security.
Tokenization and PCI DSS
The Information Supplement Document for the PCI DSS Tokenization Guidelines mentions its key principles and its PCI DSS relation as below:
Check out What is PCI DSS Compliance?
- Tokenization only helps in making the merchant’s validation steps simple by reducing the system components where the requirements of PCI DSS need to be applied. You cannot get rid of the need for PCI DSS compliance validations and maintenance requirements.
- The accuracy and effectiveness of the tokenization system need to be verified and checked. Also, it is necessary to ensure that the PAN or the sensitive card details cannot be retrieved from any system component which is not under the scope of PCI DSS.
- To enable a constant proficiency of the security controls and monitoring that is used for the protection of the tokenization system and process.
- As per the implementation, the tokenization solutions may differ. This includes tokenization and de-tokenization methods, technologies, processes, and differences in deployment models. The merchants should carry out a complete evaluation and risk analysis to find out and document the individual aspects related to their implementation, processes, and relation with the payment card data.
The way the tokenization process works i.e. it stores, processes, and transfers the sensitive card data, it is essential to install, configure and maintain it in the PCI DSS compliant way.
The document also mentions the characteristics of the tokenization system that fulfills the PCI DSS requirements.
Tokenization Vs. Encryption
What is the difference between Tokenisation and Encryption?
The encrypted data is also coded in a secret form like tokenization. The difference is that encryption uses the mathematical formula.
Whereas, under tokenization, the data is completely turned into random tokens with no meaning. The hackers would only get those meaningless strings of characters ensuring complete security.
Tokenization and RBI
To ensure the safety and security of the card transactions, saving the card details was prohibited. However, On September 7, 2021, the Reserve Bank of India announced that eCommerce companies are allowed for card-on-file tokenization.
The RBI permitted the card networks and aggregators to offer the tokenization as Token Service Providers (TSPs) as mentioned in the new digital payments guidelines. This will enable security as well as customer convenience in card transactions.
Check out this news about NPCI announced the launch of the NPCI Tokenization system
The article intends to clarify the tokenization meaning and its working. It explains its essential benefits and how it helps with PCI DSS compliance. It enables customer convenience through the safe storage and processing of sensitive card details while processing the payments. Resultantly, it lowers the risk of data breaches and fraudulent activities. The government and the Reserve Bank of India have banned saving the card details, however, tokenization is a useful measure to enable high security and customer convenience in various sectors such as eCommerce, banking, etc.