How Does Tokenization Work?

The process of Tokenization involves various parties like the merchants, card networks, issuer, acquirer, customer, and token requestor.

By tokenizing assets and representing them as digital tokens on a blockchain, it allows for more efficient and transparent buying, selling, and trading of assets, as well as more efficient record-keeping and verification of ownership. Additionally, tokenization opens up the possibility for fractional ownership of assets, allowing a larger group of investors to participate in high-value investments. custom Blockchain solutions utilize blockchain development to facilitate the tokenization process and custom Blockchain solutions, allowing for the creation of digital assets and secure transfer of ownership.

Under the Tokenization process, the particular customer MasterCard details are replaced with the alphanumeric code or tokens using an algorithm. The generated code cannot take you to the first data.

The flow includes the below steps from making the MasterCard purchase to the top of the payment process.

  1. Collect payment details
  2. Generate a token
  3. Send token to the payment processor
  4. Send the token encrypted to the ACH network.
  5. Authorize and notify relevant parties

The good news is that with the proper systems in situ tokenization hardly requires additional resources to execute a secure payment process for thousands if not many transactions.

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With today’s innovations within the payments space, tokenization are often weakened into a general five-step process.

  1. Collect payment details
    At the primary step of the tokenization process, the customer provides their payment details. This will either happen through a web checkout process or a POS system.
    The process is that the same whether the transaction is occurring online, through an ecommerce payment gateway, or face to face through a point-of-sale system.
  2. Generate a token
    The checkout platform creates the necessary alphanumeric ID or "token" after receiving the payment information. So rather than Stone Mick’s data being processed as 123 456 789, the tokenization process turns it into something along the lines of HF6223785T7. The latter may be a kind of representation of Stone Mick’s real data, which is what to verify and finalize a transaction.
  3. Send token to the payment processor
    The token is encoded before being transmitted to the merchant's payment processor. Meanwhile, the critical payment information is kept safe in the transaction gateway's "vault." It's also how a payment service may connect the token to the original payment data.
    Other pertinent information is linked to the token during this procedure. This will be things just like the sort of payment wallet used or who the holder of that wallet is.
  4. Encrypt the token before sending it to the ACH network
    Once the encrypted token is received by the merchant’s payment provider, the knowledge is once more encrypted before being sent to the corresponding ACH network for verification.
  5. Authorize and notify relevant parties
    If the payment is permitted, confirmation of the finished transaction is shipped to all or any parties involved within the process. This involves both the merchant and the payment processor, as well as the client.

The customer's purchase is now complete, and they can proceed to the next phase of the purchasing process, if any. This five-step procedure occurs instantaneously, increasing the convenience factor of tokenization.


Tokenization provides several advantages for both the company and its clients. It may significantly increase the organization's productivity and performance while accepting payments. The cardboard payment is out of scope and not actually stored within the business’s systems, there's much less impact of a knowledge breach or loss of knowledge. The key goal is to scale back any risks involved around taking payments, especially after the increased fines and penalties incurred during a data breach following the introduction of GDPR. Rather than encrypted data and decryption keys being stored within the businesses’ systems, hackers only have access to reap tokens with no exploitable value.

Benefits for Organizations

  • A much quicker payment process for repeated purchases.
  • Less chance of abandoned sales or failed payments.
  • The choice to provide Payment Plans to assist spread the value of high value purchases.
  • Removes valuable data from the company network, reducing the impact if a knowledge breach was to occur.

Benefits for Customers

  • They’re not spending unnecessary time typing altogether their card data for each purchase.
  • They don’t necessarily need the cardboard at hand when making a sale.
  • There is a smaller amount chance for mistakes when providing card details again and again.
  • They can comfortable knowing their sensitive card data isn't directly interacting with the business they're making the payment to.



Tokenization is employed to secure many various sorts of sensitive data, including.

  • Payment card data
  • U.S. Other national identity numbers, such as Social Security numbers
  • Telephone numbers
  • Passport numbers
  • Driver’s license numbers
  • Email addresses
  • Bank account numbers
  • Names, addresses, birth dates

As data breaches rise and data security becomes increasingly important, organizations find tokenization appealing because it's easier to feature to existing applications than traditional encryption.

Next Article

Is Token-based Authentication Secure?


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