Tokenization payment technology guide

What is payment tokenization?

Tokenization is a process of replacing sensitive data with non-sensitive data. In the payments industry, it is used to safeguard a card’s PAN by replacing it with a unique string of numbers.

How does tokenization work?

The payment token itself is the unique string of numbers – a secure identifier generated from a PAN. Payment tokens are automatically issued in real-time and used online in predefined domains and/or payment environments. Examples include: only ecommerce, only for a specific merchant(s) and so on.

Therefore, tokenized payments are payments in which the PAN is substituted by a token while performing a payment transaction. With tokenized payments, the PAN is not transmitted during the transaction, making the payment more secure. This is the key strength of tokenization as a security measure.

Since the PAN is never compromised, there is very little possibility that the token can be used for fraudulent activity – even if a data breach occurs and payment tokens are accessed.

The tokenization payment flow

Adyen’s tokenization service securely stores customer card data and generates a token that can be used by the merchant to charge subsequent purchases, as shown in the diagram above.

Other Token Service Providers (TSPs) generate their own tokens. This is the case for the major card schemes and digital wallets.

As an acquirer, Adyen is able to accept tokenized payments for online and/or contactless payment methods. A good example of this is Apple Pay, which uses payment tokens both for online and (contactless) in-store transactions.

Does payment tokenization suit my business?

Tokenization is suited to any businesses with subscription- based business models or which generate significant business with repeat customers. Because tokens can be securely stored, and used to enable “one-click” payments for future transactions, tokenization is of particular interest to businesses that aim to give as smooth a shopper flow as possible at the checkout stage.

Key benefits to tokenization

There are a number of benefits to tokenization for merchants.

Cost savings: Tokenization by Adyen takes on the burden of managing cardholder data storage in a secured way, thus reducing the costs involved with meeting and monitoring Payment Card Industry (PCI) compliance.

Increased security: If fraudsters manage to steal tokenized payment data, they cannot use the stolen tokens to pay online since they are unable to link the token to payment information stored securely by the payment partner.

Enabling one-click (or even “0-click”) payments for shoppers: Tokenization enables merchants to offer shoppers the possibility to save their payment details it in a secure manner, so that the next time they make a purchase they do not need to re-enter their payment data. One-click payments significantly increase conversion at the checkout page through streamlining the payment process for shoppers.