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What are the Three Common Types of Tokenization?

What is the Goal of Tokenization?

How Data Tokenization Works

What are the Benefits of Tokenization? 

FAQ: Everything You Should Know about Tokenization


What is Tokenization: Data & Payment Tokenization Explained

What is Tokenization: Data & Payment Tokenization Explained

What is Tokenization? It is the act of converting a sensitive piece of data into a different format to make it undecipherable. This new format is called a token and has no similarity to the original data. Tokenized data is meaningless to anyone that intercepts it. However, the token still retains the value of its original data. This tokenization definition might sound confusing to you. But there is a simpler way to look at it.

The credit card details that you submit to an e-commerce website can be tokenized. This will transform your card numbers into a randomly generated code. So, any hacker that intercepts that code would not be able to link it with your original credit card details.

Tokenization keeps sensitive information safe and is more secure than data encryption. When you encrypt data, the original form can be revealed by a secret key. This is impossible with tokenized data.

Companies or organizations need to tokenize people’s personal information. Some government bodies mandate that businesses protect sensitive information about their customers. For example, the United States has a federal law called the Financial Modernization Act of 1999. This law requires financial institutions to ensure their customers’ have financial privacy. And it is enforced by the Federal Trade Commission. Some of the information covered under this law include:

  • Bank account details
  • Credit card info
  • Social security numbers
  • Phone numbers
  •  Addresses
  • Data of birth, and so on

Key Takeaways

  • Tokenization protects data by converting it into a different format. You cannot link the new format to its original data.
  • Tokenized data is more secure than encrypted data. Hackers can decrypt the latter but it is almost impossible to decipher tokens.
  • Tokenization greatly benefits the financial system and guarantees payment protection.

What are the Three Common Types of Tokenization?

There are different types of tokenization, but the three main ones are in the Payment Card Industry (PCI). They are:

1. Gateway Tokenization

This occurs when you pay for products or services online. When you save your card details on an e-commerce platform, they will be passed on to a payment gateway. Those details will then be converted to a token. That token is what is used for subsequent transactions. In this case, however, your token will be locked to one gateway. If the business changes its payment gateway, they have to detokenize your data. After which, they will move it to the new gateway.

2. Pass-Through Tokenization

Pass-through tokenization makes payment service providers instantly route transactions to different payment gateways. Some tokenization service providers operate between e-commerce websites and their payment gateways. They use a website’s gateway integration code to transact on different gateways. This allows you to pay for items online through other means than just credit or debit cards. Also, service providers can connect to many APIs. And tokenize the details of your preferred payment method as the need arises.

3. Payment Service Tokenization

This tokenization method uses only one API. You need to first integrate this API into a website. Then, it will route transactions to different payment gateways as needed. It is ideal for businesses that receive money across international borders. The tokens here are provided by third-party companies. And they cannot be controlled by any individual payment gateway.

What is the Goal of Tokenization?

The goal of tokenization is to safeguard delicate data from third parties. It allows businesses to convert their customers’ sensitive data into tokens. This process keeps the original value of the data intact. Then, they can remove the original data from their computer network and save them with cloud storage.

The token formed from this process can still be used for its intended purpose. But it will look very different from its initial form. There is no way a hacker can revert it to its initial state. However, tokenization is not the same as encryption. Encryption masks sensitive data and can be reversed, while tokenization is irreversible.

How Data Tokenization Works

Data tokenization works by replacing raw data with a randomly generated token. No third-party platform can map this tokenized data to its raw form. This prevents it from being stolen or getting into the wrong hands. Tokenization platforms take the original data and replace them with random characters. Then, they sever all connections between the initial data and its corresponding token. Afterward, companies can transmit these tokens across their servers safely. Tokenization is vital for credit and debit card processing because of how secure it is.

Most e-commerce platforms have payment platforms built into them. The payment gateway's API will create a token when you enter your payment info into the online form. This token will then be sent to a server for authentication. When authenticated, the payment merchant will receive the token. It is that token the merchant will use to process the payment.

This is done to protect your information from the merchant or a hacker that might intercept it. For example, you can save your card details on Amazon. However, it is not the raw data that Amazon will keep in their database. Amazon’s payment gateway will convert it into a token. It is that token it will use for transactions the next time you want to pay for an item.

What are the Benefits of Tokenization? 

Here are ways in which tokenization can be beneficial:

  • Enhanced customer experience
    It lets you save your payment info on websites during checkout without it being exposed. The token formed will allow your card to be charged for subsequent transactions. And you would not need to submit the details again. It also allows merchants to deduct subscription fees at intervals and facilitates one-click payments.
  • Increased security and protection from breaches
    As mentioned earlier, tokenization improves data security. The resulting token is safe and will make no sense to any interceptor. This is because it is almost impossible to decipher. 
  • More secure credit card payments
    Tokenization ensures fraudsters cannot link a token to a credit card. This means you won’t be at risk if a merchant’s site gets compromised.

FAQ: Everything You Should Know about Tokenization

What is PCI Tokenization?

PCI Tokenization is the replacement of credit or debit card details with a new ID. This new ID is called a token. This is done to protect the data of the cardholder and reduce fraud.

What Does Tokenized Mean?

A tokenized item is one that has been transformed from its original state into another form. This is done without comprising its essential information.

What is Detokenization?

Detokenization is the act of reversing a token to its original state. This can only be done by the system that tokenized the data in the first place.

Does Tokenization mask data?

Yes, it does. Chunks of the original sensitive data will be changed. This is until the tokens can no longer be traced to their original form.

What is the difference between Tokenization and Encryption?

While both are means of masking data, they work in different ways. Tokenization randomly generates a value to represent the original data.  And the mapping data is kept in a secure database.

Meanwhile, encryption changes the original data into an unreadable code. However, the ciphered data can be decrypted by a secure key.

Is Tokenized data pseudonymous data?

Pseudonymized data is a form of data that cannot be linked to any particular person. Yes, tokenized data is pseudonymous and dissimilar to its original form. However, they retain the functionality of their initial form.


Protecting people’s payment information on the internet is essential. It can also be challenging. There are many hackers constantly trying to breach cybersecurity systems to steal them. That is why many companies use tokenization to mask their customers' data. The resulting tokens do not lose their initial utility. And they are useless to anyone that intercepts them. That is why businesses are comfortable using them for transactions on their network.

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