Tokenization and its Importance Explained

Technological developments, such as those involving the financial and payment systems that help streamline how we do things, have also led to a significant rise in scams related to sensitive data breaches like card payments. To protect users' sensitive data against cybersecurity threats and losses, governments and institutions can choose between encryption and tokenization to increase security, protect their data-at-rest and curb threats.

Read on to understand the concept of tokenization, its benefits, and how it works.

Let’s define tokenization

In simple terms, tokenization is a fraud-prevention mechanism that safeguards private, sensitive information in plaintext using a scrambled token. Once scrambled into a token, you can’t undo the process to return the information to its original state. Instead, the token replaces the original data during transactions.   

Banking and financial institutions, real estate firms, and regulatory agencies are among the sectors that heavily rely on the procedure. The mechanism can conceal important information, such as credit card details and social security numbers, to prevent hackers from accessing them. Nonetheless, you shouldn't get worried: even if a hacker managed to steal the tokens, which they often do, the information they steal is entirely worthless to them.

The technology substitutes all your crucial details with non-specific randomly generated IDs known as tokens whenever you supply payment information at the point of sale (POS). The tokens are designed to have no direct or explicit relationship between your personal details and the resulting token. For example, if your debit card number is 1234-478-244-3241, it could be converted into a shorter tokenized value like B%@7f6%3fhTu.

The use of tokens from days past 

While tokens have been used over the years to replace valuables – such as casino chips to replace money - they entered the digital age in the 2000s. Beginning during the 1990s, when the use of computers gained popularity, collecting and storing critical information such as legal names, addresses, phone numbers, social security numbers, and bank account numbers by organizations became the new standard - companies collecting such data stored it to use for various purposes.

Still, if hackers succeeded in moving past protective walls, they entered the databases and carted away the sensitive data to use for their criminal enterprises.  

As time has passed, the technology hasn't changed dramatically. It has become the go-to system for companies and regulatory agencies that still collect and similarly store critical data.

TrustCommerce introduced a new paradigm in 2021: a method for banking institutions to collect sensitive data used for recurrent payments from their clients but release tokenized details linked to a client’s account to be used for subsequent transactions. Instead of exposing the vital data over and over again in the open, the token would ensure all secondary transactions were secure.  

How tokenization technology works

This technology transforms pieces of sensitive, valuable, and usable data such as credit card details and replaces them with surrogate data known as a token that's still usable but much harder to steal.

The data is stored securely at a centralized location for future reference and requires strong safeguards. Tokenization is an integral part of blockchain technology as it involves issues like:

• Fungible tokens: Having identical values that are interchangeable.

• Non-fungible tokens: Without similar value representing ownership of digital data, real estate, or art. 

• Governance tokens: Tokens representing voting rights on blockchain systems

• Utility tokens: Giving users access to various services and products on specific blockchains.

Modern society recognizes two main categories of tokens. First are the front-end tokens people create when signing up for most online services. The problem with these tokens is that the user must understand how to make them and how they work if they're going to succeed.

Next is the back-end model, where tokens are created automatically, and tokenization occurs before identifiers are shared with other systems.

The following simple steps are required in token creation for both models:

Creation 

No computer program or algorithm scrambles the data. Instead, the system uses internal rules to replace some of your data set's numbers and letters. Alternatively, some tokens are selected randomly from a spreadsheet containing indiscriminate numbers and letters.

Replacement

The token replaces the original sensitive data, meaning you'll never have to enter it again. The system only transmits the token through online channels.

Storage

The system scrambles your sensitive data with some encryption and stores it in a vault.

Let's imagine you're going to make an online purchase. When signing up for the service, you most likely were required to input data like your credit card number, name, expiration date, CVV code, or bank account number.

The merchant's website takes this information and issues a token that sits within your gadget, perhaps your smartphone. The merchant's payment gateway is designed so that the POS matches the token against the debit card number, which is unintelligible to anyone else, including the merchant. Every time you use the payment processor's app to make an order, the token completes the transaction, leaving your account information intact within the vault.

Benefits of using tokenization

The processes involved in tokenization may sound more complicated than storing data in the traditional ways, but it comes with some tangible benefits for businesses, including:

Security

It doesn’t matter if any criminal intercepts a token in transit in an unsecured network. There’s no way anyone can reverse-engineer the tokenized information, and it’s therefore useless to them. Whether they intercept data in transit on the internet or when it comes to tokens that are impossible to decrypt, attacks stop before they start.

Speed

Tokens facilitate automation, making completing transactions faster, which can be beneficial, especially in blockchain or crypto-based industries. 

Regulatory compliance

Nowadays, industries like healthcare, payments, banking, and insurance that handle sensitive customer data are required to prove they safeguard sensitive data. Using tokenization is a surefire way to ensure they avoid facing heavy penalization.

Tokenization vs. encryption

Unlike encryption systems, where anyone with a secret key can decipher encrypted data, tokenization systems link original data to a token. Still, there’s no way anyone can decipher tokenized data to reveal the initial input. Encryption pushes raw data through an algorithm, and a key can be used to reverse the process. However, tokens don’t have keys, meaning you can’t decrypt the tokenized message.

Tokenization and peace of mind

While tokenization is not yet a legal requirement in any jurisdiction, most banks and merchants consider tokenization a serious fraud-prevention technology.

Coming at a time when cyber-attacks and data breaches are the cause of concern in an increasingly digitalized world, any company dealing with sensitive customer information had better consider using tokenization technology to enjoy unparalleled peace of mind.

When used correctly, the technology will conceal all sensitive customer data within a business's systems, liberating you from forever updating in-house IT department firewalls and worrying 24/7 about potential customer data leaks.