What is credit card tokenization?

on Mar5
credit card tokenization
Written by
James Davis
Written by James Davis
Senior Technical Writer at United Thinkers
Author of the Paylosophy blog, a veteran writer, and a stock analyst with extensive knowledge and experience in the financial services industry that allows me to cover the latest payment industry news, developments, and insights. Read more
credit card tokenization
Reviewed by
Kathrine Pensatori
Product Specialist at United Thinkers
Product specialist with more than 10 years of experience in the Payment Processing Industry. I help payment facilitators and PSPs solve their various payment processing issues. Read more

What is a credit card tokenization and payment tokenization?

Credit card tokenization is an approach used by businesses, which process credit card payments, to reduce their PCI scope. In order to ensure cardholder data protection, PCI requires credit card numbers to be handled in a special way. Basically, the more contact with actual credit card numbers your payment system has, the higher your PCI scope is, and, consequently, you have undergone the more extensive annual PCI audit. Credit card tokenization service allows merchants to reduce their PCI scope by replacing real credit card numbers with tokens, which are generated using special hashing (and other) algorithms. The actual card numbers are stored by a tokenization service provider, and not by the merchant, so if the merchant’s system is ever compromised, the card numbers cannot be stolen. The term “credit card tokenization” is more accurate than “payment tokenization”, because it is a card number that is actually replaced by a token.

How can credit card tokenization be implemented?

From a conceptual viewpoint, there are two approaches to credit card tokenization. They can be called pure tokenization and customer profiling. Under the first credit card tokenization approach only the customer’s credit card number is tokenized when a transaction is processed. Under the second approach the whole profile of a customer is maintained and when a transaction is processed, all the data (card expiration date, billing address) which is necessary for the transaction to come through, is “pulled” from that profile.
From a hardware viewpoint, there are also two approaches to credit card tokenization implementation. They are tokenization through appliance and tokenization as service. Under the first approach, the company needs a special PCI-compliant hardware device, to perform tokenization. Under the second approach credit card tokenization service is delegated to the payment gateway, credit card processor, or some third party. The second approach (credit card tokenization as service) can actually get the merchant out of PCI scope, although it requires more integration-related efforts. More information on credit card tokenization and its implementation can be found here.

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