Card tokenization is one of the most important security tools for modern digital payments. In this article, we explain what it means to tokenize a card, including how it works, its advantages for payment security, and its differences from traditional encryption. We also explain how the revised Payment Services Directive (PSD2) fits into this context and how tokenization can increase customer confidence and reduce security risks.

What’s in this article?

• What is card tokenization, and what is it used for?
  
• Key benefits of card tokenization for payment security
  
• Differences between card tokenization and card encryption
  
• PSD2 and card tokenization
  
• How card tokenization works
  
• Improved customer confidence and transaction security with card tokenization
  
• Card tokenization with Stripe Payments
  

What is card tokenization, and what is it used for?

Card tokenization is the process by which sensitive payment card data (e.g., card number, expiration date, and card verification value [CVV]) are replaced by a token. Tokens are unique identifiers with no informational value for unauthorized parties. They can be used to authorize transactions securely without exposing the actual card details. In practice, a token represents the encrypted form of the original information and allows payment transactions to be conducted only within systems that have the keys or authorizations necessary to trace it back to the actual data.

The purpose of card tokenization is to protect the customer and business from exposing sensitive data. Even if a system is compromised, tokenized data (e.g., a tokenized card) would be unusable by fraudulent actors. This mechanism reduces the attack surface and simplifies compliance requirements under the Payment Card Industry Data Security Standard (PCI DSS), since the business doesn’t store or directly handle actual card data. This can help make digital payments more secure.

What does it mean to tokenize a credit card?

Tokenizing a credit card means replacing the actual card details (e.g., card number, expiration date, CVV code) with a unique code called a token. This token can be used to authorize payments without exposing the original information. This can increase the security of online transactions.

Key benefits of card tokenization for payment security

Card tokenization offers several benefits for those making and receiving payments. In addition to protecting sensitive customer data, this system helps reduce payment fraud, simplify compliance management, and improve overall confidence in the payment experience. The key security benefits are as follows:

• Risk reduction during data breaches
  If fraudulent actors hacked into a business’s database, they would only find tokens, which are randomly generated sequences of numbers with no direct links to the actual card details. Even if the tokens were intercepted or stolen, they could not be traced to the actual card numbers without access to the secure system that manages the associations between tokens and original data. This way, a potential cyberattack would not yield any useful information because sensitive data is never stored or directly exposed.

• Reduced PCI DSS compliance obligations and lower costs
  The business doesn’t store or directly handle the actual card data. This reduces the scope of the checks required by the PCI DSS. In other words, card tokenization simplifies compliance requirements and lowers security-related costs while maintaining a high level of protection.

• More secure transactions and customer confidence
  When customers see that a business uses modern technology such as card tokenization, they might trust that the company is protecting their data. Therefore, tokenization can increase brand trust, which can translate to higher conversion rates and reduced cart abandonment.

• Flexibility in recurring payments and memory storage
  Businesses can store tokens instead of the actual card numbers for future transactions, such as recurring payments, subscriptions, or one-click purchases (i.e., transactions where customers complete payments with a single click without re-entering card details each time). This can ensure a swift and simple shopping experience without compromising security.

• Support for emerging technologies such as digital wallets
  Many digital wallets (e.g., Apple Pay, Google Pay) use tokenization as part of their internal security systems to protect card data during payments. Therefore, credit card tokenization is also important in these scenarios. Adoption by businesses can allow for easier and more secure digital wallet integration, offering customers a smooth and secure payment experience.

Differences between card tokenization and card encryption

Card tokenization and card data encryption are similar concepts with substantial differences. Below, we examine the key differences.

Encryption

Encryption is a technique used to protect sensitive data by transforming it into a sequence of characters that is unreadable without the key needed to decrypt it. The card number, expiration date, and security code are converted into an encrypted code using a mathematical algorithm. Only the decryption key can restore that code to its original form.

This system is widely used to protect information when it is transmitted (e.g., when entering card details on a website) or when it needs to be stored securely in a digital archive. However, the security of encryption depends largely on key protection. If the key is stolen or compromised, a fraudulent actor could decrypt the data and trace it back to the actual card numbers.

Furthermore, encryption does not completely eliminate the need to store sensitive data. Instead, encryption makes data less accessible. Even though it is a fundamental measure, encryption is less effective than card tokenization in reducing the attack surface. Encryption “masks” data, while tokenization replaces it completely, preventing it from being stored or processed in plain text.

What is an encrypted card?

These cards convert sensitive data (e.g., number, expiration date, security code) into an encrypted code using encryption algorithms. This ensures that the original information remains unreadable and protected from unauthorized access during transmission or storage.

Tokenization

This process involves replacing sensitive card data with an alternative value, called a token. The token has no meaning outside of the system that generated it. Essentially, the token is a created identifier that represents the actual card only within a controlled and secure environment.

When a transaction is initiated, the payment system uses the token instead of the actual card details. The payment service provider (PSP) manages the so-called “digital safe” that stores the correspondences between tokens and real data. Only the PSP can trace that token back to the original card.

Even if a token were intercepted by fraudulent actors, it could not be used to trace the card data or make fraudulent payments. In fact, the token has no value outside of the system that created it and cannot be decrypted or reused elsewhere.

In this way, card tokenization can drastically reduce the risk of data theft and limit the exposure of sensitive information. This can ensure a higher level of security than simple encryption.

Differences between encryption and tokenization

PSD2 and card tokenization

PSD2—the evolution of European legislation on digital payments—introduced stringent security requirements (e.g., Strong Customer Authentication [SCA]) and responsibilities for operators in payment processes. In this context, tokenization takes on a strategic role.

Strong authentication and reduced risk

In many situations, PSD2 requires that customers are authenticated using a two-factor system, choosing from three possible verification categories:

• Owned items: Smartphones or security tokens
  
• Personal information: Passwords or personal identification numbers (PINs)
  
• Biometric data: Fingerprints or facial recognition
  

Card tokenization helps reduce risks associated with data exposure and simplifies the adoption of secure authentication techniques.

Reduction of risk for PSPs and businesses

In accordance with PSD2, PSPs and businesses must implement appropriate security controls. If card tokenization has already been implemented, many of the responsibilities related to protecting sensitive data are transferred to the provider that manages the tokens and the vault, reducing compliance workload.

Tokenization and SCA exemption

PSD2 does not always require SCA to be applied. This is the case for transactions involving small amounts or ones considered low risk. In such cases, the use of tokenization with risk assessment systems adopted by the PSP can help demonstrate that the transaction is secure and eligible for exemption.

Cooperation between the issuer and acquiring bank

PSD2 promotes greater interoperability between payment system actors (e.g., the issuer, acquiring bank, PSP). Credit card tokenization can help standardize data protection across different entities, which can reduce fragmentation in security systems.

How card tokenization works

Here, we explain how card tokenization works in a payment platform. This includes how the corresponding cycle is managed—from token generation to transaction.

Token generation

When a customer enters their card details, they are sent securely to the payment system. The system verifies the validity of the information by communicating with the card circuit, such as Visa, Mastercard, or American Express. Once the check is complete, the system generates a unique token (i.e., an alphanumeric identifier) that represents the tokenized card.

Association between token and actual data

The tokenization system maintains a vault or secure database where the token is associated with the actual card data. Only the secure internal system can trace the token back to the actual data. This operation can only be performed during the transaction authorization process by systems equipped with the necessary security credentials.

Token use in the transaction

When a payment is made—such as a recurring purchase—the business sends the token to the payment gateway instead of the actual data. The gateway decrypts it internally to obtain the actual data, forwards the authorization request to the card circuit, and receives a response (i.e., approval or rejection).

Token validity and scope of use

The token might have validity restrictions. For example, it could be limited to a specific business, context (e.g., for recurring payments only), or period. These limitations make it even more secure: even if the token were exposed, it would not automatically be usable elsewhere.

Token renewal and rotation

Periodically or upon request, the system can regenerate new tokens for the same card. This invalidates the old ones, which can improve security in the long term. If the card changes—because it expired or was replaced—the system can generate a new token.

When cards can’t be tokenized

In some cases, the card might not be tokenized because of technical issues or rules related to the card circuit or issuer. For instance, tokenization can be declined if the card details are invalid or incorrectly formatted, the card has expired, or it does not comply with the issuing company’s rules. This can be the case for some prepaid cards or unsupported local circuits.

The problem can also occur if the tokenization service is temporarily unavailable or if anti-fraud checks are activated that block the transaction for security reasons during the process.

In other words, when a message such as “unable to tokenize credit card” appears, the system is reporting that it was unable to create a valid token due to one of these technical or compliance factors.

Improved customer confidence and transaction security with card tokenization

Adopting card tokenization is a technical issue that can have a direct impact on customer confidence and brand perception. Below, we explain how.

Communication of security

When a business clearly communicates how it protects customer data, it can help build trust. When customers know that their card information is never stored in readable form but is managed through tokenization and advanced encryption systems, they could feel a sense of security and reliability. Customers know that every payment is made in a controlled and secure environment, which could reduce fears related to online fraud.

Reduced fraud and chargebacks

Tokenization reduces the risk of stolen card numbers being used in a business’s system. If a token is compromised, it cannot be used outside of the context for which it was generated. This translates into fewer fraudulent transactions and chargebacks, which can lower dispute management costs.

Simplified customer experience and secure memory storage

Businesses can securely store customers’ cards. This means that customers don’t have to re-enter their details with each purchase: the token is sufficient. This can improve the fluidity of the purchasing process, reduce friction, and increase conversion in the long term.

Omnichannel strategies

If a business accepts various payment methods—such as online, via mobile app, or in-store—card tokenization can help the business uniformly and securely manage payments across all channels. The business can offer customers consistent payment experiences, regardless of where they make their purchases. Tokenization can also provide a centralized infrastructure that is easy for businesses to manage.

Differentiation in the market

In a competitive environment, businesses can use security features to set themselves apart from competitors. Ecommerce sites that use tokenization can stand out, especially in sectors where trust is important (e.g., fintech, neobanking, and marketplaces).

Compatibility with modern services

Many digital wallets (e.g., Apple Pay, Google Pay) rely on tokenization to generate virtual card numbers. If a business already has a system that tokenizes credit cards, it is easier and more secure to integrate with these digital wallets.

Card tokenization with Stripe Payments

Stripe Payments works directly with major credit card networks—such as Visa, Mastercard, and American Express—to tokenize each customer’s primary account number (PAN) and convert it to a secure network token. This system automatically keeps tokens up-to-date, even if card details change. For instance, if a customer loses their card or receives a new one, the card network notifies Stripe and updates the token in real time. Payments can continue to work without the customer having to change their information.

With integrated circuit token management, the solution is ready to use for all businesses using Payments. Integration with circuits is fully automated. Stripe requests and manages tokens on your behalf. This eliminates months of technical development. Regular updates to the system can also help your business keep pace with changes in the circuits without your intervention.

Learn more about how Stripe Payments can help you tokenize cards and make your online payments more secure.