What is Tokenization and How It Works?

As consumers demand safer, faster and more convenient ways of paying for the purchases they make online or in-stores, the payment solutions providers are reinventing the wheel and coming up with new payment technologies to provide consumers with exactly the stuff they want.

Tokenization is an example of one such technological breakthrough.

Used in digital payment environments, tokenization makes card transactions secure and immune to digital breaches.


In its most basic sense, tokenization is replacing of sensitive credit card details with a uniquely assigned code (called token), which can then be passed around the payment processing channel. This code becomes your card’s identity and replaces the need for PAN utilization and other details.

Let’s try to understand how the technology works in real life…

Suppose you run this big and impressive online retail shop that sells sports merchandize. Consumers wishing to purchase an item from your store, enroll with your digital payment service by inputting their Visa card details into your shop’s portal. You acquire the details and you forward it to the consumer’s card issuer, requesting a payment token for the enrolled account. The card issuer processes your request and in turn asks for a confirmation from the consumer. On receiving a confirmation from the consumer, the card issuer replaces the consumer’s PAN with a token. That token is sent to you and you store it in your database.

technology of tokenization

The next time a consumer purchases an item from your online store, you’ll use the saved token to perform the transaction. Usually, this token has a limited validity to the number of purchases your customers can make with it. Once the token expires, a new token needs to be requested from the card issuer.

The technology of tokenization is also implemented in digital wallets such as Apple Pay or Android Pay.

Here, customers enter their card details into the Apple Pay app. Apple sends the details to the card issuing company and requests a token in exchange. The card issuing company sends the token to Apple, which programs it into the customer’s phone. When the customer makes a purchase at your store by tapping their smartphone on the EMV payment terminals, the terminal sends the token to the card issuing company. The card issuing company verifies the token information and accepts or declines the transaction. If accepted, it will route the payment to your bank for collection.

And that is how tokenization works.

Isn’t the technology simply amazing?

Do you want to implement a tokenization based payment system at your store?

Reach out to us; our POS solutions design experts will be happy to help you implement a customizable tokenization system at your store.

A BONUS read:Busting Myths About Cashless Payments

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