This guide covers payment tokenisation, an important component of preventing payment fraud and crafting an exceptional customer experience. We'll explain the relevance and benefits of tokenisation for a variety of business models, such as online retailers, subscription-based services, platform businesses and brick-and-mortar retailers.

What's in this article?

• What is a token?
  
• What is payment tokenisation?
  
• How does tokenisation work?
  
• Which types of businesses need to use tokenisation for payments?
  
• Benefits of payment tokenisation
  
• How Stripe Payments can help
  

What is a token?

A token is a random string of characters that replaces sensitive information. In payments, tokens can take the place of credit card numbers or primary account numbers (PANs) so the real numbers aren't visible.

What is payment tokenisation?

Payment tokenisation is a security technique that replaces sensitive payment information, such as credit card numbers, with a unique, random set of characters called a token. This process helps keep payment data safe during transactions, because the real card data is not used or stored. If someone were to access the token, they wouldn't be able to use it to make fraudulent purchases since it doesn't contain the real payment details. By using tokens instead of card information, businesses can provide a secure and seamless payment experience for their customers while reducing the risk of data breaches and fraud.

How does tokenisation work?

Tokenisation transforms sensitive payment data into a non-sensitive equivalent, which can be stored and transmitted safely, without exposing the original data to potential security threats. Here is how tokenisation works in the context of payment processing:

1. Data collection: When a customer initiates a transaction, they provide the business with their payment information, such as credit card details.

2. Tokenisation request: Depending on how the business' payment system is set up, they may send the sensitive data to a secure token service, typically provided by a payment processor or a third-party tokenisation vendor. If the business is using tokenisation-enabled payment hardware or software such as Stripe Terminal, tokenisation happens automatically as a basic part of payment processing.

3. Token generation: The tokenisation process uses a combination of algorithms, encryption methods and secure storage to generate a unique token that represents the original payment data. This token is typically a random string of characters or numbers with no inherent value or meaning outside the specific payment system.

4. Token storage: The token is stored in the business' system, replacing the sensitive payment data. The original payment data is securely stored in the tokenisation service's secure vault, which is designed to protect it from unauthorised access and data breaches.

5. Token usage: When the business needs to process the transaction, they can send the token to the payment processor or tokenisation service. The service securely maps the token back to the original payment data, allowing the transaction to be completed without exposing the sensitive information to the business or other intermediaries.

6. Token reusability: For recurring transactions, such as subscriptions or stored customer profiles, the same token can be used multiple times without collecting sensitive payment data again. This simplifies the payment process while maintaining security.

Which types of businesses need to use tokenisation for payments?

Tokenisation offers significant advantages for a variety of businesses that handle sensitive payment data. These include:

• E-commerce retailers
  Tokenisation helps to safeguard customer payment data and reduce the risk of breaches or fraud in online transactions.

• Subscription-based services
  Companies that offer recurring billing can use tokenisation to securely handle customer payment data for ongoing transactions.

• Brick-and-mortar retailers
  Although more common in online transactions, tokenisation can benefit physical stores using point-of-sale (POS) systems or mobile payment solutions, by providing an extra layer of security.

• Platforms and marketplaces
  Payment tokenisation enhances security and streamlines management of sensitive payment data for multiple parties involved in complex transactions, fostering trust and improving scalability for platform businesses.

Benefits of payment tokenisation

Payment tokenisation offers a range of benefits that extend across industries and business models. Most businesses that accept credit or debit card payments from customers would benefit by incorporating tokenisation. The advantages of tokenisation include:

• Enhanced security
  Tokenisation reduces the risk of data breaches and fraud by replacing sensitive payment data with non-sensitive tokens. This ensures that payment data is not exposed during transactions, minimising the likelihood of unauthorised access or misuse.

• PCI DSS compliance
  By minimising the storage and processing of sensitive payment data, tokenisation helps businesses adhere to industry standards such as the Payment Card Industry Data Security Standard (PCI DSS). Compliance with PCI DSS is important for maintaining customer trust and avoiding penalties.

• Simplified data management
  Tokenisation allows businesses to manage customer payment information more efficiently. Tokens can be reused for future transactions, streamlining the payment process and reducing the need to collect and store sensitive data repeatedly. This simplifies data management and lowers the associated costs.

• Improved customer experience
  Reducing the likelihood of fraud creates a smoother experience at checkout and builds trust in your company – in addition to protecting your customers' data. A simple payment experience, including the reuse of tokens for returning customers, can increase customer loyalty and drive repeat purchases.

• Reduced scope of data breaches
  In the event of a data breach, tokenisation limits the potential damage by ensuring that any compromised data is non-sensitive and cannot be used for fraudulent transactions. This mitigates the negative impact on your business and customers and preserves your brand's reputation.

• Unified commerce
  Tokenisation allows businesses to securely manage payment data securely across multiple channels, such as online and offline shops or customer loyalty programmes. This seamless integration promotes a consistent and secure customer experience, as well as back end data convergence, regardless of the channel used for transactions.

• Support for emerging payment technologies
  As payment methods continue to evolve, tokenisation can be applied to new technologies, such as digital wallets and contactless payments. This enables businesses to adopt innovative payment solutions while maintaining a high level of security.

E-commerce retailers, subscription-based businesses and brick-and-mortar retailers in particular can benefit from payment tokenisation due to the specific challenges and opportunities associated with their business models. Here's a closer look at the reasons why tokenisation is especially advantageous for these types of businesses:

E-commerce retailers

The benefits of using tokenisation for e-commerce businesses include:

• Enhanced security
  Since online transactions involve transmitting sensitive payment data over the internet, e-commerce retailers face a higher risk of data breaches and cyberattacks. Tokenisation significantly reduces this risk by replacing sensitive information with non-sensitive tokens, ensuring that payment data is not exposed during transactions.

• Compliance
  Online retailers need to adhere to industry standards such as PCI DSS to maintain customer trust and avoid penalties. Tokenisation helps e-commerce businesses achieve compliance by minimising the storage and processing of sensitive data within their systems.

• Elevated customer experience
  Secure transactions and the reduced risk of data breaches foster customer trust, leading to increased customer loyalty and repeat purchases. Tokenisation can also simplify the checkout process for returning customers, as tokens can be reused for future transactions without requiring customers to enter their payment details again.

Subscription-based businesses

Here are some of the advantages of tokenisation for subscription-based businesses:

• Recurring transactions
  Subscription-based businesses rely on recurring billing, which requires the secure storage and processing of customer payment data for ongoing transactions. Tokenisation ensures that sensitive information is replaced with tokens, mitigating the risks associated with storing payment data over an extended period of time.

• Optimisation for retention
  Tokenisation enables the smooth processing of recurring payments without requiring customers to provide their payment details repeatedly. This creates a frictionless customer experience, leading to higher customer retention rates.

• Streamlined account management
  Subscription businesses often have to handle changes in customer payment preferences, plan upgrades or downgrades and cancellations. Tokenisation simplifies account management by allowing the same token to be used for various transactions and accommodating changes without exposing sensitive data.

Brick-and-mortar retailers

Important benefits of tokenisation for brick-and-mortar retailers include:

• Point-of-sale security
  Although card-present transactions are generally considered more secure, physical stores can still be targeted by fraudulent actors who attempt to compromise POS systems. Tokenisation enhances payment security by ensuring that the cardholder's sensitive payment data is not stored within the POS system, reducing the risk of breaches or unauthorised access.

• Mobile payment solutions
  As brick-and-mortar retailers increasingly adopt mobile payment options, tokenisation is important for ensuring that transactions are simple and secure. Tokenisation works with digital wallets and contactless payment methods, providing an extra layer of security while supporting the adoption of new payment technologies.

• Omnichannel payment convergence
  Brick-and-mortar retailers often operate online shops or offer customer loyalty programmes that require them to manage payment data across multiple channels. Tokenisation allows for seamless integration of payment data between online and offline channels while maintaining security and compliance.

Platforms and marketplaces

These are a few of the unique advantages platform businesses can gain from tokenisation:

• Facilitated multi-party transactions
  Platforms often involve transactions between multiple parties, requiring sensitive payment data to be processed and stored securely for all users. Tokenisation replaces this sensitive data with non-sensitive tokens, ensuring a secure and seamless experience for all parties involved while reducing the risk of data breaches.

• Simplified payout management
  Platforms need to manage payouts to sellers, service providers and app developers, which can be a complex task due to varying commission structures and payout schedules. Tokenisation enables secure and easy payout management by allowing platforms to reuse tokens for recurring payments, reducing the need for users to provide their payment details repeatedly.

• Scalability
  As platform businesses grow and expand into new markets, they need to adapt their payments infrastructure to accommodate new users, currencies and payment methods. Tokenisation allows for the seamless integration of new payment technologies and methods, ensuring a secure and consistent payment experience across all markets.

• Customisation and flexibility
  Platforms often require unique payment flows to accommodate specific business models or user needs. Tokenisation enables secure and flexible payment processing, allowing platforms to design and implement custom payment flows without compromising data security.

• Reduced liability
  By implementing tokenisation, platforms reduce their exposure to sensitive payment data, effectively limiting their liability in the event of a data breach. This can protect the platform against potential financial and reputational damage.

Read our guide on understanding the benefits of network tokens to learn more about how tokenisation operates within Stripe's suite of payment solutions.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business – from scaling start-ups to global enterprises – accept payments online, in person and around the world.

Stripe Payments can help you:

• Optimise your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 125+ payment methods and Link, a wallet built by Stripe.
  
• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multi-currency management with cross-border payment options, available in 195 countries across 135+ currencies.
  
• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalise interactions, reward loyalty and grow revenue.
  
• Improve payments performance: Increase revenue with a range of customisable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorisation rates.
  
• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% uptime and industry-leading reliability.
  

Learn more about how Stripe Payments can power your online and in-person payments or get started today.