Tokenization is the process of replacing sensitive data with non-sensitive or anonymized data, often referred to as “tokens,” while retaining the essence of the data (for example, an account number or payment source) without compromising its security. The tokens used to replace or represent data have no value on their own, and only become meaningful when they are securely associated with the data they represent.

Tokenization offers the data security required by financial institutions, payment processing firms, and other private and public institutions handling sensitive details, such as medical records, bank account information, credit card information, Social Security numbers, and many more.

Types of tokenization

  1. Vault tokenization: In this form of tokenization, users keep a secure tokenization vault database where sensitive data and associated non-sensitive data are securely stored.
  2. Vaultless tokenization: Instead of using a database, a more cryptographic device is used in vaultless tokenization, making it more secured and reliable than the vault approach. To convert sensitive data into non-sensitive data or generate tokens, secure cryptographic devices use standards-based algorithms.

How tokenization works

There are various ways that tokens can be created:

  • Using cryptographic function with a key (mathematically reversible).
  • Using a hash function (a nonreversible function).
  • Using a randomly generated function (or an index function)

For instance, during credit card transactions, when users enter their payment information into a Point-on-Sale (POS) system, or an online checkout form, the merchant’s payment gateway, through a complex computational model, generates a random token that is used to replace the account-specific data (payment information). In essence, the data becomes tokenized.

Next, the tokenized data is encrypted and delivered to a payment processor. The merchant’s payment gateway stores the original sensitive payment information in a token vault—the only place where a token can be linked to the data it represents. Before being delivered for final verification, the payment processor encrypts the tokenized information once again. Once the tokenized encrypted data is delivered and verified, the transaction is confirmed to be successful.

What is the difference between tokenization and encryption?

While encryption has long been the chosen data security technique, tokenization has recently emerged as a more cost-effective and secure alternative.

When using tokens, the length and type of the original data remain unaltered. The original data is masked. However, in encryption, both the length and original data length are altered. Even if someone can access encrypted messages without the key, they will be unable to decrypt them. Tokenization does not use a key in this sense since a decryption key is not mathematically reversible. Thus, the approach represents secret data with undecryptable information.

Tokenization is a key technology being employed by emerging cybersecurity startups. See eSecurity Planet’s run-down of 22 cybersecurity startups to watch.

What are the benefits of tokenization?

  • Transparency is improved during transactions.
  • Assists firms in adhering to security standards and privacy legislation
  • Tokenization helps collectibles, microcap stocks, and other assets have more liquidity.
  • Is a cost-effective data security tool.
  • It covers not just credit card details but also passwords, files, and customer accounts.
  • Transactions are made faster and easier without sacrificing secure access to sensitive data.
  • Reduces the likelihood of hacking because there is rarely any meaningful data to steal.
  • Allows for recurring payments and other payment methods in a secure environment, making subscription-based operations easier to manage.
  • The possibility of a data breach is significantly reduced.
Chika C Uchendu
Chika Uchendu is a multi-niche content writer with years of experience in writing for diverse industries. He enjoys writing about technology, finance, small businesses, healthcare, and more. He has written content for Benzinga and Fractl among many others.

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