Over the last few years, we have seen an array of innovations in payment data security. Now, this movement is becoming more significant than ever. What is leading the charge in these innovations? The answer comes in the form of a technology that is seen as a game-changer for the industry: ‘tokenization’.
Saying that security is an important component when it comes to data is definitely not a groundbreaking observation. With our daily lives gradually becoming more dependent on technology, of course, we want the best security to protect our data, whatever it may be. For the purposes of this article, the data we will be focusing on correlates with payments.
Now, it’s possible that you have heard this term before. However, it is unlikely that you know the nitty-gritty of it. It is a popular payment term, thanks to the gradual increase in attention on mobile payment apps such as Apple Pay. As is the case with a lot of these innovations that are taking the world by storm, how it works is a bit complex. Contrary to what this fact may have you believe, what tokenization does is actually pretty simple. In essence, it adds an extra level of security to sensitive credit card data.
The element that is propelling the importance of tokenization is the rise of data breaches. Not just on a national but on an international scale as well. This is coinciding with a noticeable increase in CNP purchases across an ever-growing digital world. This tokenization ability, particularly in relation to payment credentials, is creating discussions regarding the best way to process payment data.
What is it?
Let’s start at the beginning with what ‘tokenization’ actually is. Put simply, it is the process of protecting sensitive data. The way it does this is by effectively replacing the data with a number whose creation is from algorithmic generation. In other words, what replaces the data is a ‘token’. Oftentimes, tokenization is a common method that aids in preventing credit card fraud.
In the case of credit card tokenization, what replaces the customer’s primary account number (PAN) is a series of tokens. It’s possible to pass these tokens through the Internet or the wide variety of wireless networks that process the payment. Moreover, they can do so without ever exposing bank details of any kind. The actual bank account number is in safe storage within a secure token vault.
The core intent of tokenization is to prevent malicious individuals or groups from tampering with your personal data. Specifically, they want to stop them from duplicating your bank information onto another card. It is true that chip cards provide protection against fraudulent activities that occur when someone pays at a physical store. However, the primary design of tokenization is to fight breaches that are online or digital.
Understanding the technology
There are two answers to the question, “What is tokenization?” You have a simple answer and a complex answer. In basic terms, tokenization is a highly-secure method of properly protecting your payment credentials. For the most part, we covered a simple explanation in the previous section. Now, we need to get into the details.
The complex answer will involve digging into the specifications of the technology behind this process. To reiterate, in the world of payments, tokenization involves the substitution of sensitive data with a token. It is important to note that these tokens possess no real value or connection to a person or their account. Instead of the customer’s 16-digit PAN, there is a randomly generated alphanumeric ID in its place. This transaction severs the link to sensitive data, so tokens are what diminish exposure to breaches in credit card processing.
In essence, tokenization provides protection for bank account numbers and credit card numbers alike. This protection comes in the form of a secure, virtual vault. This vault is capable of transmitting across an array of wireless networks without adding any needless risk. In order for the tokenization to work, there needs to be a payment gateway. This will effectively store sensitive data, allowing for the generation of a random token.
When it comes to merchants, tokenization is a technology that is as necessary as it is intricate. There is almost a requirement for them to be embedded in their payment processing. Furthermore, it is especially crucial for businesses that typically allow customers to have cards on file for recurring payments and subscription billing. Tokenization plays a key role in the activities of online merchants. In particular, ones that offer one-click checkout options or mobile payments. Examples of this include Apple Pay, Samsung Pay, and Android Pay.
Encryption: what’s the difference?
Another term you will have no doubt come across is ‘encryption’. Tokenization and encryption are often believed to be interchangeable. There are times when they are used together as a means to secure information during its transmittance on the Internet. Alternatively, when it is put into storage.
Now, the belief that these two processes are the same thing are not without substance. Both help you meet the requirements of the organization’s own data security policies. In addition, they can help satisfy regulatory requirements, like those under PCI DSS, HIPAA-HITECH, GLBA, ITAR, and the EU GDPR.
Indeed, tokenization and encryption both operate as effective data obfuscation technologies. They are, however, not the same thing. And they are most certainly not interchangeable.
Encryption is the process that focuses on the use of an algorithm for transforming plain text information into a non-readable form. This illegible type of text is ‘ciphertext’. Decrypting the information requires both an algorithm and an encryption key. These tools will also allow you to return it to its original plain text format. Nowadays, USING SSL encryption is a much more common way of protecting information as it transfers on the Internet.
Millions of people utilize built-in encryption capabilities of operating systems or third-party encryption tools. With these advantages, they are able to encrypt data on their computers. They have the ability to prevent any accidental loss of sensitive data in the event of someone stealing their computer. What’s more, it is possible to use encryption to help hinder government surveillance and robbery of sensitive corporate data.
Which is best for me?
Each piece of technology has their fair share of strengths and weaknesses. When you look at tokenization and encryption, you will find no shortage of differences. Whichever method to the better one to secure data is up to you; it all depends on the circumstances. Sometimes, like with electronic payment data, both encryption and tokenization help secure the end-to-end process.
Some differences between the two include the following:
- Encryption scales to large data volumes simply with the use of a small encryption key in order to decrypt data. Tokenization is difficult to scale securely and maintain performance as the database’s size continues to increase.
- It is common to use encryption for structured fields, as well as unstructured data like entire files. Tokenization is useful for structured data fields, with some examples including payment cards or social security numbers.
- Encryption is ideal for exchanging sensitive data with third parties who are in possession of the encryption key. With tokenization, it is quite difficult to exchange data. This is mostly because it requires direct access to a token vault mapping token values.
- For encryption, original data leaves the organization, but it does so in encrypted form. For tokenization, original data will never leave the organization, which effectively satisfies certain compliance requirements.
The bottom line is that tokenization and encryption are their own processes. However, one has to wonder, if encryption is as beneficial as tokenization, why are people suddenly flocking to tokenization?
Transitioning to tokenization
Substitution techniques similar to tokenization are an ongoing practice that has been prevalent for decades. Its popularity stems from its ability to completely isolate data in ecosystems like databases. Historically speaking, encryption with reversible cryptographic ‘keys’ was once the dominant method of sensitive data protection.
According to an encryption expert from Stanford University:
“Encryption is the transformation of data into a form unreadable by anyone without a secret decryption key. Its purpose is to ensure privacy by keeping the information hidden from anyone for whom it is not intended, even those who can see the encrypted data. For example, one may wish to encrypt files on a hard disk to prevent an intruder from reading them.”
There are a wide variety of use cases for encryption. These often range from concealing private messages in peer-to-peer apps to transferring sensitive information within a defenceless environment. However, more recently, there has been a noticeable shift in focus. Many payment experts are seeing the number of organizations moving from encryption to tokenization gradually increase. They are now seeing tokenization as a more cost-effective – not to mention secure – way of protecting and safeguarding sensitive information.
Among the various tokenization use cases, one of the more widespread uses nowadays is in the payments processing industry. Tokenization provides users with high grade security that keeps their data safe. It allows users to store credit card information in an array of locations. These include mobile wallets, e-commerce solutions, and POS terminals. By using this, they permit the card to undergo recharging without ever exposing the original card information.
Assets on a blockchain
In relation to crypto, tokenization is the process of converting both physical and non-physical assets into digital tokens on a blockchain. Over time, the concept would grow in popularity in the world of cryptocurrency. Moreover, it is starting to inch its way into traditional industries, too.
Tokenization, in the traditional sense, revolves around data. That we already know. However, blockchain tokenization focuses more on assets than it does data. Admittedly, though, many people consider data a form of personal asset. In this particular industry, tokenization pertains to the creation of cryptocurrency tokens that represent physical and digital assets alike.
Many people wish to dabble in the real estate industry. For the most part, these people don’t have the funds to purchase one property, let alone several. For simplifying this explanation, let’s imagine a fortunate outcome for them. Suppose that someone ends up tokenizing one of the properties they show interest in. The seller creates one hundred tokens on Ethereum, with each one representing a 1% ownership of the house. They value the house at $1,000,000 and sell each token for $10,000. Someone showing interest decides to purchase two tokens. As long as they hold those two tokens, they have concrete proof that you own 2% of the house.
These asset tokens reside on the Ethereum blockchain. Because of this, one can easily trace their provenance – or their ownership – back to the original owner. The immutability and transparency of the blockchain ensure the ownership authenticity of whoever possesses the tokens.
Liquidity
A one million dollar price tag will obviously place a huge limit on the number of potential home buyers. When you apply tokenization of the property, the seller will open the market to buyers who once could not afford to participate. Rather than needing a $200,000 (20%) down payment, you can engage with just $10,000; perhaps even less.
Generally speaking, liquidity will rise when there are more potential buyers. That noticeable increase effectively removes the liquidity discount that frequently plagues illiquid assets. What’s more, it will trigger a comparatively more prosperous market. Beyond real estate, financial markets, venture capital, and fine art can also benefit from tokenization liquidity.
Liquidity is not the only benefit! If you are knowledgeable about blockchain technology, you might already know this, but it is worth mentioning again. Blockchain transactions get rid of the need for most intermediaries (i.e. middlemen). This results in lower costs and faster transaction times. You don’t need any paperwork or in-between's that most assets typically require. You can exchange a token without these components.
Conclusion
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