What is credit card tokenization?

Credit card tokenization is a digital security measure that protects sensitive credit card information during online transactions.

Tokenization randomly generates one-time digital "tokens" to replace real credit card information in each unique transaction. Tokens help prevent valuable personal details from being intercepted by potential hackers or leaked through data breaches.

This article dives into credit card tokenization, how transactions are tokenized, and how the process can help keep personal details secure.

How does credit card tokenization work?

A token is something that serves as a "stand-in," or temporary replacement, for something else of value. When it comes to credit card transactions, an individual's card account details are temporarily tokenized with a chain of randomized letters and numbers.

So, instead of sending a 16-digit credit card number (e.g., 4568 9845 2354 1209), the number is replaced by a random token sequence (e.g., %dnsPfNmcHPO), or a sequence not of value.

Consider the following credit card tokenization example:

• A customer uses their credit card to make a purchase online or at a merchant’s point of sale (POS).
• A transaction is initiated, and a token service provider generates a random string of numbers in the form of a unique token. This functions as a substitute identifier for the customer’s actual credit card information.
• The merchant’s bank receives the token and uses it to request secure authentication for the transaction from the credit card supplier.
• The credit card supplier digitally communicates this to the customer’s bank. If verified successfully, the token is returned to the merchant and the transaction is completed.

In credit card processing, tokenization means that personal card details are never revealed during a transaction and remain invisible to all parties including the merchant. The token cannot be reversed to reveal the original card details, keeping personal information safe.

Tokenization vs. encryption

Encryption is another form of digital protection that can help to keep personal financial information secure. With encryption, private credit card data is converted into an advanced algorithm, which can only be unlocked by a decryption key at the other end of the transaction.

A way to understand the difference between tokenization vs. encryption is that tokenization replaces sensitive data, while encryption scrambles it.

Why is credit card tokenization important?

Credit card tokenization helps to enable secure online shopping and safe online payments by obscuring personal financial data in a transaction.

One advantage of tokenization is that it keeps credit card information hidden — third parties have no way to access this data, helping prevent it from being intercepted by hackers and mitigating potential credit card fraud.

While data breaches can happen at the merchant level, one of the benefits of tokenization is that tokens are typically only valid at the time of transaction and do not reveal any usable information.

Learn about PayPal’s security benefits for safe online payments.