
What is Payment Tokenisation and How Does it Work?
Learn how payment tokenisation enhances security, scalability, and efficiency for fast-growing businesses.
Payment tokenisation is a security process that replaces sensitive payment information, like a credit card number, with a unique identifier. This identifier is referred to as a token.
Tokens have no exploitable value outside of the original transaction context. This means that, with no meaningful data, the token reduces risk in case of a security breach.
An example of tokenisation
Here is an example of tokenisation at work to help you understand the process, before we outline the difference between encryption and tokenisation.
When a customer makes a payment, their details are transmitted to the tokenisation service. Here, a token is generated and replaces the card details.
The credit card’s sensitive data is now stored securely only with the payment processor. The merchant uses the token to allow the transaction to proceed without any need to handle sensitive data directly.
Tokenisation vs. encryption
While both tokenisation and encryption protect data, they operate differently.
Encryption encodes data into unreadable text using complex algorithms. You need a decryption key to access this information.
In contrast, tokenisation removes sensitive data totally from systems, making it accessible only to the payment processor. This process reduces compliance requirements for merchants and is effective for secure payment processing in e-commerce and subscription services.
By implementing tokenisation, your business will benefit from enhanced security and customer trust, as well as streamlined payment processing. In this guide, we’ll explain the process and the tools your business will need to benefit from it.
How does payment tokenisation work?
There are four key steps in the process:
- Transaction starts. The customer enters their payment details at the checkout.
- Token generation. Instead of storing these details, a tokenisation service generates a token – a unique identifier – linked to the sensitive card data.
- Secure storage. The original payment information is stored securely by the payment processor, not by the merchant.
- Transaction completes. Payment tokenisation transforms sensitive card data into a secure, unique token, which can be stored and used for transactions without exposing the original data. The token is used by the merchant to complete the transaction, with the payment processor mapping the token back to the original data securely.
This enables a stronger experience for customers, allowing secure "card-on-file" transactions for subscriptions, one-click payments, and repeat purchases.
What are the tokenisation use cases?
Tokenisation is versatile and benefits various types of transactions. Here are some practical applications that benefit from its use.
- E-commerce transactions: Tokenisation secures online purchases by protecting card information. Such information is not held by the merchant, leading to reduced risk and increased trust from customers. With the sheer scale of data breaches affecting e-commerce, many argue it is now essential for any business processing digital payments.
- Recurring billing: Ideal for subscription services, tokenisation enables secure, automated billing without the need to store sensitive card data on the merchant's systems.
- Mobile payments: Secure payments on mobile apps are enabled by tokenisation to deliver a smooth and safe mobile commerce experience.
- In-store purchases: Tokenisation is used as part of in Near Field Communication (NFC) payments, like Apple Pay, Google Pay, or contactless cards. Creating a unique token for each transaction ensures secure payments on compatible devices and terminals, minimising the risk of data theft.
For more on secure card handling, visit our guide to credit card payment systems.
What are the different types of payment tokenisation
Here’s an overview of the primary types of tokenisation and the business uses most suited to each.
- Vault-based tokenisation: Sensitive data is securely stored in an encrypted vault with tokens being generated for each transaction. This type of tokenisation is useful for businesses with centralised storage needs.
- Vault-less tokenisation: In vault-less tokenisation, tokens are created without requiring central storage. This enhances security by eliminating the vault, which is a single point of vulnerability.
- Payment network tokenisation: Payment networks, such as Visa and Mastercard, issue tokens associated with specific cards, ensuring compatibility across all platforms. This is highly useful for recurring payments, card-on-file transactions, and multi-channel merchants.
For more integration options, find out how Worldpay Dashboard can help your business.
What are the benefits for merchants?
Tokenisation offers numerous advantages for both online and offline businesses, including those working across multiple channels. The key benefits are outlined below.
- Enhanced security: Tokenisation minimises the risk of data breaches by replacing sensitive card data with non-sensitive tokens. This ensures that, even if intercepted, the data cannot be exploited.
- Increased customer trust: Customers feel more secure when their card details are safely managed, which helps build brand loyalty and more effective checkout conversion.
- Simplified PCI-DSS compliance: By reducing the handling of sensitive data, tokenisation makes for simpler PCI-DSS compliance requirements. Meeting relevant PCI-DSS demands is mandatory for businesses accepting card payments.
- Omnichannel payments: Tokenisation improves the customer experience by enabling transactions across multiple channels, including in-store, online, and mobile.
- International expansion: Tokenisation aids global growth by supporting multiple currencies and reducing friction for cross-border transactions. It makes it easier to reach and serve international customers.
- Fraud reduction: By securing payment data and making tokens unusable if stolen, tokenisation greatly reduces the risk of fraud and the severity of data breaches.
- Recurring billing: For subscription-based businesses, tokenisation simplifies recurring billing processes by securely storing customer payment information for future transactions.
- Global payments: Tokenisation streamlines the process for businesses to accept payments from anywhere in the world with minimal security concerns.
What are the tokenisation best practices?
Implementing payment tokenisation effectively requires careful planning and an understanding of the best practices to follow.
A good overview of evolving payment security standards can be found in a recent publication by the Bank of England. Explore the BOE’s approach to innovation in money and payments.
Here are some of the ways you can ensure a secure process:
- Choose the right payment service provider: Select a provider with robust tokenisation solutions that can be easily tailored to your business size, needs, and security requirements. More on this below.
- Ensure compatibility: Your systems and existing infrastructure should be compatible with the tokenisation technology you will adopt to ensure easy integration with your current payment and accounting systems.
- Implement strong security protocols: Regularly update security measures, using encryption where necessary, and follow industry standards for handling sensitive data.
- Stay informed about regulatory change: Maintain PCI-DSS compliance and stay updated on industry regulations to ensure you avoid vulnerabilities and continue to meet legal standards.
- Focus on scalability: Ensure the tokenisation solution you select can grow with your business, supporting higher transaction volumes and diverse payment channels.
Additionally, you can explore other highly effective ways to deliver enhanced transaction security for your business using Worldpay’s Fraud Protection.
How to choose the right payment tokenisation solution?
Choosing a payment tokenisation solution that aligns with your current and future needs of your business is crucial for enabling smooth, sustainable growth. Here are the core considerations to bear in mind when choosing a provider.
- Scalability: Tokenisation solutions should accommodate growth, whether this be plans to expand to new markets or to scale up transaction volumes. Make sure your provider can easily accommodate increased user loads, cross-border transactions, and can integrate with a range of payment systems. Worldpay offers tokenisation solutions designed for global scalability, providing reliable infrastructure and adaptable services to support businesses as they grow. It also offers the flexibility to add new features and functionality over time to ensure you can keep up with evolving payment needs.
- Enhanced security: Not all solutions offer the same level of security and protection. Look for advanced fraud prevention tools, such as real-time monitoring, PCI-DSS compliance, and data encryption, alongside security features like multi-factor authentication and device fingerprinting. These will all help minimise the risk of fraud and unauthorised access. Worldpay’s tokenisation solutions are built to deliver a high level of security as standard, ensuring sensitive data is protected across every transaction point.
- Cost efficiency: Tokenisation will reduce overall compliance and security costs, but it’s still important to evaluate a provider’s pricing structures and long-term affordability. Solutions with flexible pricing plans are best suited to meet your changing needs as your business grows. Worldpay offers competitive pricing models that are tailored to fit different business sizes and transaction volumes, ensuring cost-effective solutions for you as your business scales up.
- Integration: Your tokenisation solution should integrate easily with your existing systems, from e-commerce platforms to customer management software. Worldpay’s system supports flexible API integrations, allowing for a quick setup that doesn’t disrupt your operations. This flexibility helps streamline implementation, enabling your business to minimise downtime.
- Customer experience: You want to ensure that your tokenisation solution enhances customer satisfaction through a smoother, faster checkout process. It should support both one-click and recurring payments. Worldpay stores tokenisation payment details, allowing repeat customers to complete transactions with minimal friction.
Incorporating payment tokenisation into your payment strategy is a powerful tool to enable a fast-growing business. It enhances security and builds customer trust by protecting their sensitive data as well as simplifying your compliance with PCI standards.
Tokenisation is an essential tool for meeting expectations, scaling operations, and building customer trust. By adopting it, your business can create a secure, streamlined, and future-ready payment system.
For a deeper look into how tokenisation can support your business, explore our Token Management Service.
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