What is tokenization and why is it key to online payments?

Here's how tokenization works and why it's key to securing your payments without complicating the payment experience.

What is tokenization?

Tokenization is a security process used in the online payment industry to protect sensitive customer data. It involves replacing sensitive data, such as credit card numbers or account numbers, with a series of unique characters called "tokens".

In some cases, this system is also used in the protection of data linked to technologies such as blockchain or the tokenization of digital assets from the art world, real estate and even non fungible tokens (NFT).

There are different types of tokens depending on their use and structure:

• Irreversible: they do not allow the original data to be recovered. They are ideal for analysis or environments where security takes precedence over the need to revert information.
• Reversible: they can be de-tokenized in specific contexts, such as the issuance of refunds or specific validations with payment processors where access to the original data is required.
• Preservation: they mimic the structure of the original data (such as the last 4 digits of a card), which facilitates integration with systems that depend on a specific format.

Differences between tokenization and encryption

Both tokenization and encryption protect sensitive information, but they work differently.

Encryption scrambles the data and requires a key to decrypt it, while tokenization replaces it directly with a value unrelated to the original. Since tokens have no intrinsic value and no direct relationship to the original data, they are useless to an attacker, even if they gain access. In many implementations, tokens are reversible, but only by authorized systems accessing the secure vault or correlation, according to the PCI DSS Information Guide.

 And because it cannot be reversed, it provides an even more robust layer of security.

How does tokenization work?

During a transaction, the customer's payment data is sent to a secure server, where it is replaced with a unique payment token. It is this token (and not the actual data) that is stored and used in future transactions. The actual data, on the other hand, is kept in a separate, secure environment.

An effective tokenization system is composed of several key elements:

• Token generator: it is in charge of creating unique identifiers to replace sensitive data.
• Correlation mechanism: securely associates each token with its original value, ensuring traceability without exposing the information.
• Token vault: is a database where the original data and its corresponding token are stored. There is also an alternative without a vault, where nothing sensitive is stored and everything is solved by algorithms.
• Key manager: manages and protects the cryptographic keys used throughout the process, ensuring their integrity.

Step-by-step tokenization process

1. The customer initiates a purchase in real time.
2. Your card data is sent to a secure platform.
3. The system generates a unique security token associated with this data.
4. The merchant stores only the token and not the actual data.
5. Future transactions use that token as the payment system and not the card.

How are tokens generated?

The tokens are generated using advanced cryptographic algorithms that ensure that each one is unique, unrepeatable and, above all, secure because it does not contain sensitive information. As they are unidirectional, it is impossible to revert the token to access the original data, which adds an extra layer of protection against fraud attempts or unauthorized access. 

And while some systems allow the token to be reversed in a controlled environment (such as in a secure vault), tokens do not expose the original data outside of that environment. 

Tokens can be stored on merchant systems, provided they comply with appropriate security standards such as PCI DSS. However, many platforms offer external tokenization services to reduce the compliance burden. The actual data, meanwhile, is stored in a separate environment, protected by firewalls, encryption and other cybersecurity measures.

What are the benefits of tokenization for payments?

Increased security in digital transactions

Tokenization replaces sensitive data with unique identifiers, so data leakage is not possible, because if someone accesses your information, they will not be able to do anything with it.

2. Regulatory compliance

In markets such as Brazil, where laws such as the LGPD require the protection of personal data, tokenization becomes key to operate without risk. If implemented through a certified provider, this system not only protects sensitive information, but also significantly reduces the scope of PCI DSS compliance by minimizing the storage of actual data in the merchant's systems. In addition, it makes it easier to adapt to global regulations such as GDPR if your business operates or scales in Europe.

3. Frictionless user experience

Tokenization enables more secure and seamless payments. When implemented correctly, it contributes to a seamless shopping experience, without unnecessary steps or interruptions. Although it does not directly reduce rejection rates, it does help prevent blockages due to suspected fraud, which avoids friction and improves user perception during the payment process.

4. Less operational burden

Unlike encryption, which involves constant encoding and decoding processes, tokenization only replaces and validates data. This makes it lighter on your systems and reduces points of failure.

5. Compatible with your current system

No need to replace your current infrastructure. Tokenization can be integrated with legacy systems, raising the level of data security and compliance without disrupting your operations.

Challenges in implementing tokenization

Technical complexity

Tokenization requires expertise in cybersecurity, server architecture and compliance. Not all companies have the internal resources to develop it on their own.

2. Initial costs

For small and medium-sized companies, the costs associated with secure servers and advanced technology may seem high. However, these expenses are balanced by the long-term benefits in terms of security and customer confidence.

Why is tokenization important in Latin America?

With the rapid growth of e-commerce in Latin America, securing digital transactions has become a priority. Tokenization helps reduce fraud, increases trust in local platforms and enables compliance with data protection laws in emerging markets such as Mexico, Colombia, Argentina and Brazil.

Payment tokenization is more than a technological trend: it is a strategic necessity for any company that accepts digital payments in Latin America. Implementing it today means guaranteeing customer security, complying with current regulations and positioning itself as a reliable brand in the digital ecosystem.

Protect your LATAM transactions with Rebill

If you are ready to guarantee the security of your payments, Rebill is your strategic ally. Our infrastructure allows us to accept payments in the main Latin American markets, integrating in less than an hour to your business.

With real human support and compatibility with the most used payment methods, we offer a complete experience for you to scale your operations without worries.

Contact us and ensure the growth of your online sales.