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What Is Tokenization, and How Is It Different from Encryption?


8 min read

What if we picture our world as a place where all the input data on any device flows through fiber-optic cables and servers in its original form? Although the roots of encryption reach Ancient Egypt of about 1900 BCE, its digital variant emerges on a par with first computers. Already in 1977, the U.S. National Bureau of Standards approved the first encryption standard. By the way, it has already become outdated and entirely insecure. Having been withdrawn and replaced by a new standard in 2005, any type of data encryption was then subjected to regular analysis, revising, and adapting to more up-to-date technologies. With each new revolution in hardware, anti-fraud solutions used in encryption software require reconsideration as hackers receive more computing power to decrypt what’s hidden behind digital keys.

Be it an innocent email you send to your friend, a keyword typed in a search box, or bank account information used for transactions, your Internet traffic has to be encrypted in order to minimize security risks. Hacks, data leakage, and chargeback frauds constitute only the bare minimum of what an individual or a company with dozens of servers is likely to encounter today.

You probably already know that data breaches have become events whose damage is equivalent to a national bank robbery (or even worse). In 2020, 155.8m Internet users fell victim to data exposures, which led to sensitive information disclosure. While data leakage is distressful and psychologically harmful for individuals, it may cost billions of dollars for hacked corporations to redeem their reputations. According to recent research, 59% of enterprises in 2021 encountered security issues due to unencrypted data in traffic, 67% — thanks to unencrypted cloud services, and 44% faced data breaches related to unencrypted databases.

What Is Tokenization — More Helpful Than It Sounds

Tokenization definition boils down to a technology responsible for substituting your account number or any other important information with a randomized alphanumeric row of characters. Unlike encryption, which is reversible and can be returned to its plaintext form, tokenization involves referring to random characters without any keys. Instead of ensuring data security by means of a breakable encryption algorithm, tokens replace original information with signs that have no meaning at all. In this relation, the possibility of data theft is minimized because tokens themselves have no value. If a hacker wants to exchange them for original data, they’ll need to undergo other security layers.

Serving as representatives of real data (like credit card numbers), tokens are stored in specific digital vaults. Required by the Payment Card Industry Council (PCI), card tokenization is considered one of the most secure payment processing methods. Given that the cybersecurity industry continually evolves, engineers have come up with multiple PCI tokenization types, including:

  • Pass-Through Tokenization (applied to tokenize not only credit card information but also connect to many APIs simultaneously);
  • Payment Service Tokenization (used for complex payment scenarios);
  • Gateway Tokenization (most advantageous for e-commerce businesses).

Speaking about tokenization from a broader perspective, experts usually distinguish between the vault and vaultless tokenization. The vault database stores original customer information that has been previously removed from the internal system of a certain organization or an individual and exchanged for a nonsensitive randomized token. As a safer method, vaultless tokenization relies on cryptographic devices powered by algorithms that convert sensitive information into non-sensitive. What’s more significant — they can be decrypted without any token vault databases.

How Does Tokenization Work?

Aside from security aspects, another tokenization’s primary benefit involves its convenience, inasmuch as this payment processing system works best with mobile devices. As statistics prove, the market size of mobile wallet transactions is expected to reach $80b by 2026 in Europe, North America, and the Asia-Pacific region. This means that the current focus of fintech players on the mobile side of banking is dictated by the social demand as well as the industry’s natural shift toward smartphone transactions.

So how does tokenization work in real-life conditions? Let’s suppose you order a pair of headphones on Apple’s website. Reaching the payment section, you type in sensitive information like a credit card number, expiration date, cardholder name, etc. All this data travels to the tokenization server and is never stored on any of Apple’s servers. For this to function, an organization that sells you a specific product needs to have an agreement with a certain tokenization provider — be it TokenEx, Fiserv, American Express, or any other.

Once your data reaches the token vault, the merchant’s bank receives a randomized token, which is further passed to a credit card network and then to a customer’s account number. When this information approaches the issuing bank, its specialists either authorize or deny your transaction, depending on the balance. As soon as everything is confirmed, the merchant receives the token. Consequently, Apple doesn’t have any clue of your sensitive card information since it’s replaced by a token from a provider’s server.

Benefits and Downsides of Tokenization

In light of the debate regarding tokenization pros and cons, this payment processing technology is undoubtedly the most secure thanks to its flexibility and multidimensional nature.

Tokenization payments offer the following pros:

  1. By utilizing this technology, you considerably reduce the exposure to data breaches;
  2. When your business employs tokenization, it’s less likely to face issues related to red tape because this payment processing method simplifies compliance with PCI DSS;
  3. Due to a transparent system, tokenization facilitates building trust with customers;
  4. It helps optimize transactions and drive fintech innovations;
  5. In addition to credit card numbers, tokenization applies to any type of sensitive information, which is a helpful tool for recurring transactions as well as ensuring safety for accounts, files, passwords, and the like.
  6. Using tokenization, you and your organization reduce the responsibility of managing private customer information as it’s stored on a third-party server.

Despite a broad range of positive implications, tokenization also has a list of cons:

  1. Once you agree to employ tokenization, you should be ready that it’ll complicate your organization’s infrastructure;
  2. While applying this data security system, you need to make sure that your payment processor supports it;
  3. If you choose the vault tokenization method, it’s better to spend extra time searching for the best possible vendor because third-party token vaults will be used to store your customers’ data.

As evident from the list, there are twice more benefits of tokenization than its downsides. Accordingly, if you’re looking for the best data security system, tokenization is probably your choice. Or not? Let’s move on and see!

What Is Encryption: A Mathematical Shield Against Cybercrime

Simply put, encryption presupposes turning plaintext data into its non-readable counterpart referred to as ciphertext by using one or more keys. Nowadays, this procedure (or its alternatives like masking or tokenization) is a must for any organization operating in the digital realm. As a rule, organizations refer to encryption in order to obscure multiple data types, including personal information, cardholder data, payment card information, financial account numbers, and the rest.

For merchants to ensure the safety of their customers’ sensitive data, it’s essential to get acquainted with the two basic types of encryption:

1. Symmetric key cryptography:

When merchants apply this method, they use the same key for both encryption and decryption. Therefore, all parties involved in either the payment or communication process must have access to a single key. Interestingly, as a cipher device exploited by Nazi Germany, the famous Enigma machine utilized the symmetric key system, thereby encoding as well as decoding messages with the help of only one daily generated key.

2. Asymmetric (public) key cryptography:

Although this encryption technique may sound insecure due to the word ‘public,’ it features a more complex set of actions performed to protect data. More specifically, an encryption key is indeed public and any party can use it to hide sensitive information. However, only individuals directly engaged in transactions or any other important process have access to a decryption key, which significantly reduces the odds of fraud and data leakage. Introduced in the 1970s, asymmetric key cryptography offers many benefits as parties don’t need any secure channels for exchanging keys, not to mention that multiple individuals can use one encryption key simultaneously.

How Does Encryption Work: Any Cracks in this Shield?

From a mathematical perspective, encryption implies employing algorithms like RSA, 3DES, Blowfish, AES, or any other to convert plaintext into ciphertext. In turn, keys constitute random strings of bits generated by selected algorithms. Concerning common or private keys, they usually weigh between 182 and 256 bits, whereas their public alternatives amount to 2048 bits. Encryption works in a way that doesn’t allow anyone to access private data without an appropriate algorithm and a decryption key. Since decrypted information turns into an unreadable binary string, you can be sure that your information is relatively secure. Why relatively? Because encryption also has drawbacks.

  • If you somehow lose a decryption key, be ready to forget about your data (in most cases);
  • Organizations must be prepared to invest more resources in encryption because this technology requires notable changes in the corporate infrastructure and fixing compatibility issues;
  • When you create simple keys, they’re less likely to be forgotten or lost, but thus you decrease their resistance to hacker attacks;
  • Without a clear understanding of the system as well as its limitations, your organization may jeopardize data encryption, simultaneously losing resources spent on its incorporation.

Which Payment Processing Method Fits Your Business?

In the digital world, encryption of any kind is the new normal. We already know that tokenization and encryption help ensure the security of various data types, be it files or messages. But what method fits your business when it’s time for processing payments? Unfortunately, the answer can’t be simplified to a single sentence, inasmuch as these technologies depend on a variety of aspects. Nevertheless, if briefly, your organization should try to avail itself of both methods at once.

While the most significant weakness of encryption involves its mathematical reversibility (protected data can be decrypted to plaintext), tokenization features scalability problems. In other words — the more tokens used within an organization’s infrastructure, the more collisions occur with a higher frequency. Even though tokenization serves as an encryption form, there are many differences between the two systems. Most PCI DSS auditors more frequently choose tokenization instead of encryption, explaining that the former’s primary advantage is that it doesn’t presuppose any mathematical relationship between plaintext and a random token.

The choice between encryption and tokenization depends on whether your operations are local or remote. For instance, tokenization is usually most preferred for dealing with web services because a high number of endpoints must be tokenized as well as detokenized, meaning that they require an ultimate control point set on a database. Subsequently, encryption can be used for local and web-based services. If used locally, keys are downloaded from a related server, which minimizes the latency. The encryption’s multidimensional system doesn’t offer guaranteed protection since its incorrect implementation entails data breaches.

When to Encrypt, and in What Cases to Tokenize?

If you need a protective layer for large unstructured data volumes without worrying too much about compliance requirements, encryption can become the best choice. This payment processing technology offers good value for most companies thanks to convenience, security, and simplicity. While researching software encryption solutions for, let’s say — corporate email encryption, pay attention to these:

  • Microsoft BitLocker;
  • FileVault;
  • Official G2 Survey.

Examining the pros and cons of tokenization, keep in mind that it works best in business environments with strict compliance requirements. Tokenization is a proven technology for well-structured data. Digital wallets and credit card numbers can be perfectly obfuscated with tokens. The most helpful software solutions for this encryption technology are:

  • PolyMath;
  • Securitize;
  • TokenEx.

If you’re facing difficulties regarding the encryption method for your business, don’t hesitate to contact DashDevs. We’re here to help you with IT solutions!

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