At Experian, one of our priorities is consumer credit and finance education. This post may contain links and references to one or more of our partners, but we provide an objective view to help you make the best decisions. For more information, see our Editorial Policy.
In this article:
When you're tapping your phone to pay in-store, saving your card for one-click payments or paying for a subscription online, tokenization is often working behind the scenes to help protect your payment information. Credit card tokenization is the process of replacing sensitive, 16-digit credit card numbers with a unique token to process transactions more securely.
By limiting how often your card details are exposed, tokenization helps lower credit card fraud risk and protect sensitive payment information. Here's more about credit card tokenization, how it works and the benefits.
What Is Credit Card Tokenization?
Credit card tokenization is a fraud prevention technology that protects sensitive payment information by replacing a credit card number with a unique randomly generated alphanumeric string called a token.
The token acts as a stand-in for your actual card data during a transaction. A token that's stolen or compromised in a data breach has no value to criminals because it typically can't be used outside the original transaction.
Learn more: What Is a Data Breach?
How Does Credit Card Tokenization Work?
Tokenization happens almost instantly behind the scenes during a credit card transaction. Here's an overview of the general steps involved.
1. You Use Your Credit Card
The process starts when you provide your payment information for a transaction. For example, you enter your card information online during checkout, save a card to a digital wallet or tap your phone to pay in-store.
2. The Payment Software Creates a Token
The payment processor, card network or token service provider replaces your real card number with a randomly generated token. The token typically contains no usable account information.
3. The Token Is Sent to the Payment Processor
Instead of sending your real account information through the payment process, the merchant sends the token to the payment processor to authorize the transaction.
4. The Transaction Is Processed
Behind the scenes the token is matched with your payment data to complete the transaction. Your card issuer will approve or deny the transaction just as it would with any other transaction. As a customer, the process feels identical to a regular payment since the security protections have been in the background.
5. The Merchant Stores Tokenized Information
This can happen when you save your payment information for future one-click purchases or recurring billing, for example. Since merchants store tokens instead of sensitive card data, there is less valuable payment data exposed if the company experiences a data breach.
Learn more: How to Avoid Identity Theft While Shopping Online
Where Is Credit Card Tokenization Used?
Credit card tokenization is used with many different types of digital and contactless payment systems.
- Digital wallets: When you add your credit card to a digital wallet, such as Apple Pay or Google Wallet, the system creates a unique token associated with your device instead of storing your actual card number on your phone or smartwatch. Then, when you make a purchase, the token is transmitted rather than your real card information to avoid exposing your actual card details.
- Saved cards on shopping websites: Online retailers who allow you to save payment information for faster future purchases store a token rather than your actual card data. This helps reduce the amount of sensitive information stored by the retailer, which can lower the impact of a potential data breach.
- Subscription billing: Subscription-based business like streaming services, gym memberships and software platforms often rely on tokenization to securely process recurring payments. Tokenized payment credentials can also be updated behind the scenes, helping your subscriptions continue when your card expires or is replaced.
- In-app purchases: Many mobile apps use tokenization to securely process payments within the app. Because your payment information is already securely stored as a token, you can complete purchases without entering your card details for every transaction.
- Contactless payments: Tap-to-pay credit cards often use tokenization during contactless transactions. Instead of transmitting your actual card number at the payment terminal, the transaction uses a tokenized version of your payment information to avoid exposing your card details.
Tip: When possible, use tap-to-pay or a digital wallet instead of swiping your card since these payments often use tokenization and are more secure than traditional swiped payments.
Credit Card Tokenization vs. Encryption
Credit card tokenization and encryption are both security technologies designed to protect sensitive payment information, but they work differently.
- Encryption protects data by scrambling it into unreadable code using a complex mathematical formula. The encrypted information can later be decrypted back into its original form using a special encryption key. Encryption is commonly used to protect payment information while it's being transmitted between systems.
- Tokenization works differently. Instead of scrambling your credit card number, tokenization replaces it entirely with a randomly generated token. The token itself has no mathematical relationship to the original card number, so it can't be reverse-engineered to uncover the original payment information.
Many payment systems use both encryption and tokenization for added security. For instance, your credit card number may be encrypted when it's transmitted during checkout and then later replaced with a token for storage.
Learn more: Red Flags to Look for When Shopping Online
Benefits of Credit Card Tokenization
Tokenization offers benefits to both businesses and consumers to protect sensitive payment information.
- Enhanced security and fraud protection: Tokenization reduces the risk of sensitive card information being exposed during transactions or data breaches. Since merchants often store tokens instead of actual card numbers, stolen payment data is typically less useful to criminals.
- Reduced hassle from data breaches: If a token is exposed during a data breach, consumers are less at risk than if actual credit card numbers were exposed. This means consumers may spend less time tracking and disputing fraudulent transactions stemming from a data breach.
- Improved shopping experience: Tokenization makes payments faster and more convenient, especially with tap-to-pay, digital wallets and stored payments. With many transactions, you can quickly make payments without having to enter your payment details.
- Continued card access: In some cases, payment systems can easily update your stored token if your card is expired or replaced. This allows you to continue to make payments while you wait for a new card to arrive.
The Bottom Line
Credit card tokenization plays an important role in payment security by reducing how often sensitive card information is stored or transmitted during transactions. By hiding your credit card number, your payment details are less likely to be exposed or intercepted. Whether you're using a digital wallet, shopping online or paying for a subscription, tokenization helps protect your payment data behind the scenes without adding steps to the checkout process.