Tokenization vs encryption – what is the difference?

Inez Bartosińska

Tokenization and encryption are often mentioned together or even confused. After all, they both are one of the most popular methods for protecting sensitive data. However, they are not the same. Based on a few significant factors like company size, resource availability, or security level, one of these methods may turn out to be a better fit. So, what is the difference between tokenization and encryption? Is tokenization better? Finally, what do we need it for?

What is tokenization and how does it work?

Before we move to the comparison between these techniques, let’s first clarify what tokenization is. 

As we already mentioned, tokenization is one of the methods invented to protect sensitive data. So, how does it happen? In the transferring process, sensitive data is replaced with a number generated with the help of algorithms and nominated as ‘token’. For example, while making an online purchase or paying with your mobile wallet, bank details stay hidden. It means that an account number remains secure in a token vault and is replaced with a set of random numbers that process the payment through the network. Thus, we can define tokenization as an extra layer that adds to data security and prevents it from being duplicated. 

What is encryption and how does it work?

Just like tokenization, encryption is a data protection strategy. It prevents electronic information from being stolen or seen by anyone unauthorized while transmitting over the internet. Nonetheless, encryption functions a bit differently than its alternative as it’s based on the process of encoding messages or information, so only entitled parties can get access to it. Once again, algorithms come in handy. They transfer sensitive information into cipher-text that needs to be decrypted if someone wants to read it. Therefore, the data is much less vulnerable and can be transmitted safely and securely through the network.

How is tokenization different from encryption?

Tokenization and encryption, both being data obfuscation technologies, are not the same thing, and even though their purpose is akin, they can’t be interchanged. Each method has its advantages and disadvantages, so before you decide which one is better for you, you should weigh them up and choose what’s more accurate given the circumstances. However, in some cases, you may learn that both technologies will work well. So, what are the differences?

Tokenization exchanges a plain text for a randomly generated value, called ‘token’, and stores mapping in a database. It is widely used for structured data fields. However, it might be difficult to exchange data or maintain performance as it requires direct access to a token base, and the database keeps on increasing in size. Tokenization is very safe as sensitive information never leaves the organization, and the format can be maintained without the risk of weakening the security measurements.

On the other hand, encryption transforms plain text into ciphertext using unique algorithms and keys. Other than its alternative, it can be used for both structured and unstructured fields, such as the whole files. Also, it is perfect for scaling large data volumes and exchanging them with authorized third parties as it uses encryption keys. In the encryption method, data leaves the organization but in encrypted form. However, it might be a problem to preserve the same format as it could diminish the strength of the security. 

Benefits of tokenization

First and foremost, the most important benefit of tokenization technology is that sensitive data transmitted over the network is protected from being revealed to any unauthorized party. Cybercrime is a severe problem, and only over the last year, have there been over one thousand cases of data breaches and 155.8 million individuals affected by the data exposure. With tokenization methods implemented, hackers can access nothing more but token numbers, so there is no risk any important information will be compromised. 

Moreover, by applying tokenization technology in your organization, you store the consumer data in a third-party database. You don’t need a team who manages the sensitive data, and, whereby, you take the burden of responsibility off your company’s shoulder. 

Finally, tokenization makes achieving and maintaining compliance with industry regulations such as PCI-DSS easier. By storing tokens in place of sensitive data, you can reduce your company’s hurdle with various policies and remain compliant. Also, you will probably save some time and money as tokenization can simplify required software tools and resources.

Is tokenization better than encryption?

Whether tokenization or encryption is better for your business is quite an individual matter that depends on your own requirements. There are many factors that you should weigh up before deciding which method to choose. 

Consider your company’s size, costs, protection level, security risks, compliance, and anything else that’s relevant to you. For example, if your goal is to protect credit card and account numbers, choose tokenization, but in securing entire databases, encryption is a better option. 

Let’s say you need to stay as compliant as possible and reduce your obligations under PCI DSS; it might be better to go for tokenization. After all, it all comes down to your specific needs and what will make more sense for your business. 

Can tokenization be hacked?

The tokenization process adds effectiveness to security measurements of your IT infrastructure. All the sensitive data must go through various processes of detokenization and retokenization, so it is safe and secure. However, as with every protection technology, it has its flaws. Even though it is a very robust technology, tokenization doesn’t eliminate all the risks, especially when third-party token vaults are involved. Thus, while storing data with TPPs simplifies the maintenance of the data and partly takes the responsibility you carry, it also means you have to make sure that the vendor of your choice is reliable. By trusting the wrong provider, you could risk data breach and exposure. 

Who uses tokenization?

Tokenization is most commonly used for protecting card payment data to ensure its safety and enable merchants to reduce their PCI DSS obligations. Besides security and compliant functionalities, tokens can streamline customer-friendly services such as online transactions that do not require using credit cards or sharing sensitive data. Thus, this protection technology finds its use in digital wallets like Google or Apple Pay, where a customer can make a purchase by creating a token and paying with a mobile device or smartwatch. The same happens with transactions handled from the inside of various applications where end-users can pay without exiting the app. 

Customers are not the only ones who benefit from tokenization technology. Merchants and e-commerce platforms, on the other side, can store various tokens and use them to initiate transactions instead of holding onto credit card details. Also, they get to establish payment buttons straight on their websites so that customers can pay with their previous tokens. 

Why do we need tokenization?

In today’s world, most of our banking services were moved from traditional banking to digitalized tools. Even though online banking is mostly safe, with technological development, the risk of security breaches grows too. Tokenization is one of the best methods to prevent them from happening. It was designed to improve mobile payment services and prevent sensitive data from being compromised. Thus, both customers and merchants need tokenization technology to reduce risks over online transactions and provide more customer-friendly services. 

What is tokenization payment in banking?

Tokenization payment is nothing else like a modern payment method implemented by banks to streamline transactions that happen over the network. It replaces sensitive data of your credit card or a bank account with a randomly generated code called ‘token’. It’s beneficial during online shopping and money transfers, as in the case that a data breach occurs, only useless information can be leaked. All important data stays secure in a token vault. 

Some banking applications keep an eye on these modern solutions and implement them in their services and tools as soon as possible. For example, BBVA uses tokenization and facilitates connecting its credit cards with third-party apps such as Google Pay or various e-commerce platforms. 

Future of tokenization and encryption

Whether you choose tokenization or encryption for the purpose of improving your mobile banking services security, it’s entirely up to you. However, these data protection methods are essential if you want to gain customers’ trust and run a successful business. Both technologies have their specific purpose and benefits, so the best way to choose would be by analyzing your company’s needs. 

Reports show that the tokenization market is estimated to grow from USD 1.9 billion in 2020 to USD 4.8 Billion by 2025. Therefore, encryption and tokenization seem to be worthy investments that will enable you to keep up with emerging security policies and dynamic financial market changes. 

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