How does card tokenization work and why has it become table stakes?

Have you ever looked at your receipt after making a purchase at the grocery store and noticed that the card number printed on it isn’t the same as your actual card number?

Maybe it’s just me, but then again I am a certified payments nerd. In this post, I'll explain exactly why that is.

With the rise of credit cards and digital payments, bad actors have more ways than ever to access personal financial information, including card details. Major retailers are prime targets for hackers since they store vast amounts of consumer payment data and are the weakest link in the payments chain.

Yet, despite all of the high-profile merchant data breaches, we don’t get frantic calls from our banks all the time. One of the major reasons for that is tokenization services.

Recognizing the growing threat of payments fraud, Visa and Mastercard introduced tokenization services in 2014. Their services had a simple aim: prevent fraudsters from ever gaining access to consumers’ real card information in the first place.

Every time you tap your card or phone for a transaction, these tokenization services are hard at work behind the scenes. Instead of transmitting real card details to merchants, the card networks use a card token and cryptogram (apple pay) or an encrypted data packet with real card data and a cryptogram generated by the chip (card tap), to provide the merchant with a unique, randomized set of numbers. This tokenized version of the card details is transaction or phone specific, meaning that it can’t be reused elsewhere.

By ensuring that merchants never store actual card credentials, tokenization significantly reduces the risk of widespread fraud. Even if hackers manage to steal these tokenized numbers, they are worthless for future transactions, as only the card networks can decode them.

Visa alone reported that its tokenization service saved consumers $650 million in fraud losses in 2023. As digital payments continue to grow, tokenization will continue to be an essential standard security measure across the payments industry, ensuring safer transactions for businesses and consumers alike.

So, next time you check your receipt and see a scrambled version of your card number, you’ll know it’s not a mistake, it’s a security feature hard at work, keeping your financial data safe.

P.S. The views and opinions expressed above are solely my own and do not represent the official views of The Clearing House.

P.P.S. Click on card information in your apple wallet and you can see the token used for each of your cards.

P.P.P.S. Thanks to Jeff Williams for the assist on this post.