What is Payment Tokenisation and How Does It Work?

In the midst of rising cybercrime and privacy breaches, tokenisation technology is helping businesses and their customers stay cyber-secure.

What is Payment Tokenisation and How Does It Work?

Imagine walking into a casino and throwing a wad of cash down at the blackjack table. It’s a premise fraught with security concerns, right? Instead, in a casino, cash is exchanged for poker chips. The chips act as a token for the money they’re exchanged for. Otherwise worthless, the chips only represent value in a specific setting under specific rules. 

This type of tokenisation model isn’t new, but it’s being used more recently in a digital sense to ensure the security of all the players in a payment transaction. Digital payment tokenisation allows merchants to move data between networks without actually exposing customers’ sensitive information.

This means high-level security that doesn’t add friction to the payment journey and stands strong against even sophisticated threats.

How Do Tokens Work?

Payment tokenisation substitutes sensitive customer data with a one-time alphanumeric ID that has no value or connection to the original data.

The ID – a digital ‘token’ – is automatically and randomly generated via an algorithm in real-time and is used to access, pass, transmit and retrieve customers’ information securely. This information could be their credit card number, bank account details or similar.

A card number of 1284 4321 8744 5678 is replaced with, 5f72gf38hfUm, for example.

The tokens themselves don’t contain any of this sensitive data. Like a poker chip, the only value they hold is in a specific setting and under specific rules, acting like a map explaining where a customer’s bank is storing this sensitive data within their own systems.

Tokens can only be opened after a transaction is complete. Outside of the system that they operate within, they are worthless, with no value or meaning. Even if a hacker managed to intercept a token while it was being used to process a payment, they wouldn’t be able to use it for any gain. 

Why Is Payment Tokenisation So Important?

Tokenisation helps protect businesses and customers from data theft and its resulting financial losses. It also means companies can achieve PCI DSS compliance by reducing the amount of account data stored in-house. 

The Payment Card Industry Data Security Standard (PCI DSS) is set of security standards designed to ensure that companies that accept, process, store or transmit credit card information maintain a secure environment. Tokenisation allows merchants to replace a customer’s Primary Account Number (PAN) information, so it can be safely stored and processed outside of a PCI DSS compliant environment. This means that sensitive data never reaches the merchant’s servers.


According to Visa, tokenisation can reduce fraud by an average of 26% without creating additional payment friction.

The Benefits of Tokenisation

Tokenization boosts payment security significantly. It’s a reliable way to protect payment information from both outside digital hackers and potential internal problems. In more detail, the main benefits are: 

Increased security: Even if hackers are able to obtain tokenisation payment data, they cannot use the stolen tokens to pay online since they are unable to link the token to payment information stored securely by the payment partner.

Seamless CX: Increased security doesn’t need to mean friction in a customer’s purchase journey. Tokenisation allows merchants to offer customers the chance to securely save payment details, so that when making future payments, they don’t need to reenter data like card numbers and account information. Fewer clicks and therefore a shorter journey is proven to increase conversion rates and brand loyalty. 


The ability to recognise more legitimate repeat customers is proven to lift conversion rates by an average of 2.2%.

Reduced risks and costs: Because tokenisation reduces a business’s exposure to sensitive data, achieving PCI DSS compliance is more manageable and cost-effective. By not storing, processing, or transmitting cardholder data unless required for business, legal, or regulatory purposes, fraud risks and storage costs are reduced significantly. If the data isn’t there, it can’t be stolen. And with the average cost of a data breach reaching record highs of US$4.35 million in 2022, it’s easy to see why risk reduction is of such significance.

Tokenisation Vs. Encryption

Tokenisation replaces sensitive data with a token, while encryption encrypts or encodes the data so that it’s only hidden until the code is broken or decoded. 

“In simple terms, tokenisation cannot be cracked. Encryption can be cracked. For these reasons alone, tokenisation deserves a closer examination for its potential role in data security and in ensuring compliance with data protection regulations, such as PCI DSS, GDPR and CCPA/CPRA.”

Security Week

In summary, tokenisation is key to ensuring the type of seamless ecommerce experience that consumers and businesses expect in our increasingly digital world. With fewer clicks and less friction, customers can enjoy a speedy checkout that still remains secure and compliant with data security regulations.  

To find out more about Techcap’s security measures and how our BaaS model facilitates seamless payments, contact us today.


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