Why tokenization is here to stay
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Anne Willem de Vries is the Co-founder and CEO of payment processing platform Silverflow. He previously worked with Bain & Company, private equity, and payments giant Adyen.
All that’s needed for a payment to go through is a little information. It used to be that a card number, expiry date and name were all that was required to buy goods online. Then, CCVs (credit card verification numbers) were introduced, and today, depending on where you’re shopping, you might also be sharing your IP address, location and even your recent social media activity.
This increasing demand for information is driven by a need for security. According to research from Nord VPN, stolen payment details can be purchased for as little as $10 on the dark web. Payment processors know fraudsters are unlikely to have access to all the data required to impersonate a genuine customer. Consequently, the more data, the better the fraud prevention. However, this approach also introduces significant risks. Sharing vast amounts of personal data digitally creates opportunities for bad actors to intercept and misuse sensitive information.
What if there were a way to secure your card information so that even if it were stolen, it would be useless? Enter tokenization: a technology transforming how we think about payment security.
What Is tokenization?
Tokenization replaces your 16-digit card number with a unique, randomized sequence known as a “token.” Unlike the original card number, these tokens are meaningless outside the payment network that issued them. If hackers access a database containing tokens, they’ll find them useless because only the payment network can decrypt and process them.
First introduced in 2013 as a security standard, tokenization gained traction quickly. By 2014, Mastercard launched its Digital Enablement Service to secure billions of transactions annually. Today, tokenization is a cornerstone of secure digital payments.
How tokenization works
When you input your card details into a digital wallet or an online merchant’s site, the payment system requests a token from the payment network. This token is stored in place of your actual card number.
For example, if you save your card details with an e-commerce site, the site stores the token rather than your real card data. During a transaction, the token is combined with a one-time cryptogram generated by your device or merchant account to authenticate the payment securely.
Benefits of tokenization
Tokenization offers multiple benefits for consumers and merchants alike:
Enhanced security: Tokens eliminate the need for merchants to store sensitive card details, reducing the risk of data breaches. Even if a hacker gains access to stored tokens, they’re useless without the corresponding payment network.
Improved fraud prevention: Transactions using tokens are less likely to be fraudulent. This also means fewer false declines, leading to a smoother checkout experience for customers.
Seamless continuity: If your physical card is lost or expires, tokenized transactions can continue uninterrupted. The payment network updates the token automatically when your card details change.
Simplified compliance: Merchants using tokenization reduce their burden of complying with Payment Card Industry Data Security Standards (PCI DSS), saving time and resources.
The evolution of tokenization
Initially, tokenization systems were proprietary and limited in scope. Merchants had to rely on specific payment processors, creating “walled gardens” of tokens that lacked interoperability. This often led to inefficiencies and restricted merchants’ ability to optimize their payment systems.
Today, network tokens — issued directly by payment networks like Mastercard — have revolutionized the process. Unlike traditional tokens, network tokens are interoperable across platforms, gateways and merchants. They provide additional benefits, such as lower processing fees and automatic updates when card details change.
The role of network tokenization
Network tokenization reduces fraud by as much as 26% without adding friction for customers. It also ensures that expired cards don’t disrupt transactions. When a card’s expiration date changes, the network token updates automatically, eliminating the need for customers to re-enter their information.
This seamless experience benefits merchants, too. Higher authorization rates, typically ranging from 3% to 13%, can significantly impact revenue in high-volume sectors like e-commerce and digital goods. Network tokens also enable advanced features like “Click to Pay” and biometric authentication, creating a frictionless payment experience for customers.
Tokenization in action: Solidgate
Tokenization doesn’t just enhance security — it also simplifies operations for merchants. Storing tokens instead of raw card data reduces PCI DSS compliance challenges and protects customer information in the event of a breach. Additionally, the ability of network tokenization to maintain seamless transactions helps merchants retain customers and improve conversion rates.
Solidgate is a great example of what tokenization can do: It’s an ambitious payment processor, laser-focused on the goal of processing $100 billion USD in transactions in the next five years. Subscriptions are a major source of their revenue, and that comes with challenges. On one hand, subscriptions should mean predictable sources of revenue, but in practice, they are complex and difficult to master, hence why there is so much emphasis on controlling ‘churn’. Having a repeat payment fail significantly raises the possibility of a customer deciding to discontinue their subscription, so it is really important that acceptance rates are as high as possible. Tokenization can be a major part of this — the increase in authorization rates also decreases customer churn, and each customer can be worth hundreds or thousands of dollars per year.
What’s next for tokenization?
As digital payments evolve, tokenization will continue to play a pivotal role. Emerging technologies like passkeys, biometric authentication and customer whitelisting are integrating with tokenization to create even more secure and convenient payment methods. Mobile devices, in particular, are becoming the epicenter of this innovation, combining these technologies into cohesive, user-friendly systems.
For merchants and payment providers, the message is clear. Investing in tokenization is essential not just to prevent fraud, but also to meet growing consumer expectations for secure, seamless transactions. By adopting network tokenization and related innovations, businesses can futureproof their payment systems and build trust with their customers. In a rapidly digitizing world, tokenization isn’t just a security feature; it’s a major part of a new standard in payments.
