Carta Worldwide

Payment Tokenization Explained | How it Works

What is payment tokenization?

In simple terms, “tokenize” means to substitute something or turn it into something else. In online payments, credit card tokens are created to protect customers’ sensitive data – including credit card numbers, addresses, account numbers, etc. – by replacing them with a set of numbers and letters generated by an algorithm.

The tokenization process isn’t a new concept. For example, think of going to a casino and purchasing tokens to play slot machines. Money is exchanged for plastic coins that have zero value outside the casino. That’s how payment tokenization works too.

Credit card tokenization is a guaranteed way for merchants to move customers’ data between networks without exposing sensitive information.

Payment tokenization explained

When a cardholder initiates a transaction, entering their sensitive credit card data, the tokenization process substitutes that information with a one-time alphanumeric ID that has no value or connections to the account’s owners.

This token, which is generated at random, is used to safely access, pass, transmit and retrieve customers’ credit card information. In simple terms, the tokens act as a map to where the sensitive data is stored within the customers’ bank’s systems.

The tokens can only be opened after the transaction is complete; outside of the systems, the tokens have no meaning or value whatsoever.

Some of the largest ways tokenization is executed are with Apple Pay, Google Pay and Samsung Pay. Through their apps, they all create a token and a one-time security key corresponding to the customers’ account to ensure that the payment gets processed safely and securely.

Below is a step-by-step of how the tokenized credit card transaction works.

  1. Cardholder initiates the transaction and enters their credit card details.
  2. Details go to the merchant acquiring bank in the form of a token.
  3. Acquirer transmits the token to the credit card networks for authorization.
  4. The bank verifies the funds and either allows or declines the transaction.
  5. A unique token is returned to the merchant for current and future transactions if the authorisation is successful.

As the entire tokenized credit card payment process happens behind the scenes, it means that customers don’t need to do anything different – giving them a seamless, speedy and safe experience simultaneously.

Tokenization vs. Encryption

Encryption is a method of rearranging or altering data in a seemingly random way. It must use a cryptographic key or set of mathematical values that both the sender and receiver agree on.

Encrypted data usually appears random, but the encryption process works in a logical and predictable way so that the recipient of the encrypted data can decrypt it and return it to its original value. To be completely secure, encryption should use keys that are, for example, so complex that they are difficult to crack by guessing.

Unlike encryption, which is a security method in which information can be decrypted using the appropriate key, tokens have no mathematical relationship to the original account number.

They cannot be decrypted outside of the tokenization system. Tokens typically only contain the last four digits of the actual credit card used for a particular transaction, so hackers cannot access the cardholder’s entire account number.

Benefits of payment tokenization


Needless to say, card tokenization greatly improves payment security. Tokenization provides a way of protecting customers’ payment information from the risk of both external digital hackers and potential internal problems.

The payment processor can only read randomly generated tokens: even if the token is public, it cannot be monetized. As such, once tokens pass through the system, anonymous thieves and hackers have less opportunity to commit cybercrime. Tokenization allows merchants to comply with PCI DSS with minimal liability and security costs.

Passwords, addresses, confidential files, and customer accounts, can also be protected using payment tokenization.


Not only is this process quick and easy, but it also brings with it the ability to make recurring payments simpler and more efficient.

More and more people are embracing online shopping, and they have a growing preference for storing their payment details to make these purchases at the click of a button.

Tokens are a great way to achieve this convenience and simplify the buying process.

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Philippa Artus

Philippa Artus

Head of Marketing

Philippa is Head of Marketing at Carta Worldwide. Philippa has worked in payments and fintech for over four years across a number of different payment solution providers. She is especially interested in fintech innovation and investment, payments projects for good, and how technology can be used to benefit minority groups and the unbanked.