How tokenization works and its benefits for online payment security

Security is a top concern in Canadian eCommerce, as more consumers shop online and use digital payment methods for everyday purchases. Businesses must protect customer payment data during transactions while also providing fast and convenient checkout experiences. With global cybercrime damages projected to reach $10.5 trillion annually by 2025¹, the need for advanced payment security is clear.¹

One of the tools that helps businesses strike this balance is payment tokenization – a method that strengthens data protection while minimizing friction at checkout.

What is tokenization?

Payment tokenization helps businesses secure stored cardholder data when customers opt to save their payment details for future purchases. Instead of storing actual credit card numbers, tokenization replaces that information with a randomly generated string of characters, known as a “token.”

A key piece of data that tokenization protects is the primary account number (PAN), the unique number used to identify a cardholder’s account and issuing bank. This number is required to process card payments, but shouldn’t be stored in plain text.

Tokenization replaces that sensitive information with a token, and the original data is held in a secure vault maintained by the merchant, card network, or payment processor. This means that even if a malicious actor gains access to the token, they can’t use it to make purchases – it has no value outside of its specific system.

Any business that accepts card payments must comply with the Payment Card Industry Data Security Standards (PCI DSS). Tokenization supports PCI DSS compliance by reducing the amount of sensitive card data stored and transmitted. Many businesses outsource tokenization to a token service provider, such as a card network or processor, to limit their exposure and shift some of the responsibility for data protection.

IBM’s 2023 ‘Cost of a Data Breach Report’ estimates the average data breach cost in Canada at $6.9 million, which is significantly higher than the global average.² Tokenization helps reduce this risk by ensuring that the most sensitive data isn’t accessible, even if a system is compromised.

Today, tokenization is used across various industries – from Canadian online retailers to subscription services and digital platforms – to enhance payment security and streamline the handling of customer data.

How does tokenization work?

The tokenization process takes place in real-time and involves a few simple steps:

1. Cardholder enters information: A customer uses their credit card for an online transaction and chooses to ‘save’ their payment data with the merchant.

2. Tokenization occurs: The credit card number is sent to a secure tokenization system and stored in a vault. The system generates a unique token for the cardholder, a string of 16 random characters that replaces the original credit card number.

3. Replacement: The newly generated token is returned to the merchant or system that initiated the payment to replace the credit card number within that system.

4. Verification: When a transaction is processed, the token is sent to the payment processor, which maps it back to the original credit card information for verification.

Tokenization example

When a merchant processes a customer’s credit card information, the card number is replaced with a unique token. For example, 1234-5678-1234-5678 is replaced with 4!sf%gS68kfUa3fp. The merchant stores the token ID to retain records of the customer. For example, 4!sf%gS68kfUa3fp is connected to the customer Diane Williams.

The benefits of tokenization in online payment security

Improving data security and preventing fraud

Tokenization enhances data security by replacing sensitive information (which hackers could steal and use to make purchases) with non-sensitive tokens that have no intrinsic value. As a result, even if hackers gain access to a token, they can't access or misuse the original data.

Using tokenization also simplifies data management overall, as the tokens can be used over multiple systems without storing the sensitive data in various locations. Overall, tokenization minimizes exposure, reducing the risk of data breaches and allowing businesses to protect customer data while streamlining transaction functionality.

Simplifying PCI DSS compliance requirements

Tokenization reduces the scope of PCI-DSS compliance by reducing the number of virtual locations where sensitive data is held. When businesses outsource tokenization to a payment processor or card network, they reduce their burden of handling sensitive data, which in turn means they face less complexity in meeting security requirements, require fewer expensive audits, and lower their risk of non-compliance.

Fostering customer trust

Whether a business uses tokenization or not isn't usually public knowledge. However, customers trust (and want to buy from) companies that demonstrate a commitment to data security. Merchants without security breaches will also have better reputations, fostering loyalty from their customers. Displaying various security accreditations at checkout can also increase credibility and sales.

Tokenization enhances trust and facilitates easier purchasing from customers' favorite businesses. Tokens streamline payments for repeat customers, which can lead to increased conversions. For example, with the option to securely save payment information, customers won’t need to re-enter their payment details each time they check out or for recurring payments and subscriptions.

How does tokenization fit within payment security processes?

Tokenization is just one part of a multi-layered security strategy that all businesses accepting payments should implement. Encryption, multi-factor authentication (MFA), and fraud detection systems are additional security measures that merchants often employ, working in conjunction with tokenization to ensure the integrity of transactions. Together, these technologies strengthen a business’s overall payment security, mitigate risk, and create a better experience for customers.

Beyond the payment security process, tokenization improves the chance of repeat purchases and subscription sales by eliminating the need for customers to re-enter their financial information, streamlining future transactions. Merchants benefit from faster checkouts and improved customer retention, while customers enjoy a seamless, convenient, and secure purchasing experience that encourages them to make repeat purchases.

How Airwallex helps support secure global financial operations

Airwallex’s global platform includes tokenization support as part of its secure financial infrastructure, enabling businesses to manage sensitive payment data with confidence.

From global payouts to multi-currency transfers, Airwallex helps Canadian businesses scale securely across borders. With the launch of payment acceptance capabilities in Canada soon, our platform will continue to evolve to meet the needs of local businesses expanding internationally.

Source

1. https://www.esentire.com/resources/library/2023-official-cybercrime-report

2. https://www.ibm.com/reports/data-breach