What is credit card tokenization? Here's how it works

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

In a world where every online purchase risks exposing real card details, tokenization mitigates that risk, offering peace of mind and enhancing secure online payments.

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 and how the process can help keep personal details secure.

Table of contents

• What is credit card tokenization?
• How does credit card tokenization work?
• Credit card tokenization examples
• Why is credit card tokenization important?
• Trust PayPal for secure credit card transactions
• Frequently asked questions

What is credit card tokenization?

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, a unique chain of randomized letters and numbers, or a "token," temporarily tokenizes an individual's card account details.

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

How does credit card tokenization work?

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:

• Customer makes a purchase: A customer uses their credit card to make a purchase online or at a merchant’s point of sale (POS).
• Transaction is initiated: 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.
• Merchant's bank receives token: The merchant’s bank uses the token to request secure authentication for the transaction from the credit card supplier.
• Credit card supplier communicates verification: If verified successfully, the issuer returns the token to the merchant, completing the transaction.

Credit card tokenization vs. encryption

Encryption is another form of digital protection that can help to keep personal financial information secure when shopping online. It converts private credit card data into an advanced algorithm that recipients can only unlock using 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.

Credit card tokenization examples

Tokenization is useful in various everyday scenarios. Here are a couple of common examples:

• Online card-on-file payments: When the user stores a credit card on file with an online merchant, the transaction often uses tokenization. The merchant's system requests a token from a token service provider, which replaces the user's actual card details.
• Mobile payments: With digital wallet security, every card gets a unique token. All transactions the user makes with this wallet use these tokens, shielding their sensitive information from potential risks.

Why is credit card tokenization important?

Credit card tokenization helps 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 can't access this data, helping prevent hackers from intercepting 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.

Prioritize secure credit card transactions with PayPal

For users looking for reliable and secure payment options, PayPal offers robust security measures, including credit card tokenization and payment verification.

Consider PayPal for managing cards and money today.