Recently, I was renting a bicycle in a quiet midwestern town when I came face to face with a device I hadn’t seen in roughly twenty years. “We just need to take a copy for security, and then we’ll throw it away when you come back to pay,” the employee assured me. I handed her my card and the clunky machine slammed down with a metallic clank, leaving an imprint of my financial information on the carbon paper beneath it.
It felt as nostalgic as the hand-churned ice cream I was eating at the time. I mused that maybe the rental shop wanted to heighten the vibe of this idyllic little town with some old-school fintech. After all, this device was once a mainstay in hotels and department stores around the country. In 2024, all I could think about was the security risk!
We’ve come a long way since the days of leaving our credit card information stacked in the drawers of hundreds of businesses. Tokenization is the newest in a long line of measures to better enhance the security and efficiency of our financial transactions. The best POS providers are using it to increase security, reduce risk, and provide a better payment experience.
What is Tokenization?
Tokenization is a process that replaces sensitive digital information, such as your medical records or your credit card number, with a randomly generated jumble of letters and numbers, called a token. This token becomes a stand-in for the sensitive data. The tokenization system then stores the token, mapping it to the real card information but not storing them together.
Tokenization is impacting all systems that deal with large amounts of sensitive data, from real estate to medicine to our industry and payment processing. Asset tokenization is expected to revolutionize global finance, making large international transfers of money and assets much more efficient by the 2030s.
When you make a credit card purchase with a POS system that supports tokenization, the token replaces your personal card information. When the merchant needs to charge the card, it references the token rather than the card information. The bank knows which account the token represents, and the POS provider knows the bank, so no sensitive card data needs to be shared between them.
What’s New?
Tokenization is similar to other forms of security, like data encryption, but has some important differences as well.
Unlike encryption, which basically ties a complicated (virtually unsolvable) math problem between the encrypted data and its original form, tokenization assigns a completely random “codeword” to the data, called a token, and then separates the original data from the token. The token is more of a reference number than an encryption key, useful only when the POS provider communicates it to the customer’s financial institution.
Encrypted credit card transactions traditionally involved sending and storing the original card data, such as the customer’s credit card information and billing address, in encrypted form. Non-tokenized encryption comes into play when a customer enters her account information on a website, or when the POS provider communicates her financial account information to her bank, or if the merchant keeps a card on file for the customer. Though encrypted, the original data is still stored, sent, and saved throughout the process, over and over again.
When it comes to tokenization, only tokens (that long alphanumeric codeword) are stored for each payment method. When a customer wants to pay with a card on file, the POS system sends the connected token to her bank. The bank references the token, and the transaction is approved. Rather than storing, encrypting, and transmitting it, the merchant and POS provider don’t even know the client’s financial information after the token is created.
Benefits of Tokenization
Tokenization has a number of benefits over other ways of conducting POS transactions. One of the most attractive benefits, both for merchants and the clients they serve, is the greater security it provides.
Lower PCI Scope, Higher Security
Like those credit card sheets from the bike shop in a locked drawer, encryption should keep snoopers from opening the box, but those documents may still be readable if they do get it open. Tokenization turns each card sheet in that drawer into a single line of gibberish, unusable to anyone but the customer’s bank to confirm a transaction.
By storing only a representative codename, and then referencing that codename in a totally separate database, POS providers and merchants no longer are burdened with directly storing and transmitting sensitive credit card data, encrypted or otherwise. This reduces PCI scope (and headaches) for merchants and POS providers.
Flexible Payments, One-Click Buying
Tokenization offers greater payment flexibility as well. POS providers that use tokenization give customers peace of mind for recurring payments; the customer knows that the merchant doesn’t actually have their card information in the event of a data breach.
Tokenization drives the technology behind convenient digital solutions like Apple Pay. By associating a payment method with a simple token, a POS system can immediately receive the “green light” from a financial institution for a transaction without the transfer of any sensitive card data between the customer, POS provider, and bank.
Lower Costs
Additionally, since less data needs to be stored and sent for each transaction, and the security risks are lower for that data, tokenization is cheaper! That helps drive down the cost per transaction for the POS provider. Good POS providers like COCARD pass those savings along to our merchants, allowing them to further invest in their business and other CRM software solutions.
COCARD: Leading in Tomorrow’s Tech
COCARD has watched the payment landscape transform since its inception roughly 25 years ago. The changes keep getting faster, more dramatic, and more exciting, and we are proud to not only keep up but to stay ahead of the competition.
We will continue to incorporate exciting new technologies like tokenization into our payment suite, to drive a better experience for our merchants and the customers they serve. Get in touch today to learn how tokenization drives safer, more efficient transactions.