Yash Mehta

Data tokenization: A new way of data masking

Jul 25, 2022
Data and Information SecurityData PrivacySecurity

Replacing sensitive data with tokenization technologies offers numerous security and compliance advantages for enterprises.

Email encryption  >  An encrypted binary 'at' symbol with a keyhole.
Credit: Warchi / Getty Images

While researchers examined the pandemic in relation to how companies managed to keep afloat in such an unprecedented situation, auditors assessed the increased data vulnerability, lack of data compliance, and costs incurred by such events. As businesses were forced to adapt new styles of working and adapt technologies, they struggled to meet security compliance standards like the General Data Protection Regulation (GDPR) and lagged in responding to data breaches. An IBM report stated that data breaches now cost companies $4.24 million per incident on average – the highest cost in the 17-year history of the report.

Thus, enterprises need robust data security strategies to anonymize data for usage and to prevent potential data security breaches. Data tokenization is a new kind of data security strategy meaning that enterprises can operate efficiently and securely while staying in full compliance with data regulations. Data tokenization has grown to be a well-liked method for small and midsize businesses to increase the security of credit card and e-commerce transactions while lowering the cost and complexity of compliance with industry standards and governmental regulations.

Tokenization is the process of swapping out sensitive data with one-of-a-kind identification symbols that keep all of the data’s necessary information without compromising its security. Tokenization replaces the data by creating entirely random characters in the same format.

How does data tokenization work for an enterprise?

Tokenization masks or substitutes sensitive data with unique identification data while retaining all the essential information about the data. This equivalent unique replacement data is called a token. Tokenization is a non-destructive form of data masking wherein the original data is recoverable via the unique replacement data i.e., token. Two main approaches enable data encryption through data tokenization:

  1. Vault-based Tokenization
  2. Vault-less Tokenization

In the first instance, a token vault serves as a dictionary of sensitive data values and maps them to token values, which replace the original data values in a database or data store. Thus, an application or user can access the original value in the dictionary to its associated token which can be reversed. The token vault is the only place where the original information can be mapped back to its associated token.

The second data tokenization approach involves no vault. In the case of vault-less tokenization, tokens are stored using an algorithm instead of a secure database to protect private data. The original sensitive information is typically not kept in a vault if the token is reversible.

To understand better, here is an example of how tokenization with a token vault works.

A customer provides their credit card number for any transaction. In a traditional transaction, the credit card number is sent to the payment processor and then stored in the merchant’s internal systems for later reuse. Now, let’s see how this transaction takes place after the implementation of data tokenization.

  • As the customer provides their credit card number for any transaction, the card number is sent to a token system or vault instead of the payment processor.
  • The token system or vault replaces the customer’s sensitive information, i.e., the credit card number, with a custom, randomly created alphanumeric ID, i.e., a token.
  • Next, after a token has been generated, it is returned to the merchant’s POS terminal and the payment processor in a safe form in order to complete the transaction successfully.

With data tokenization, enterprises can safely transmit data across wireless networks. However, for effective implementation of data tokenization, enterprises must employ a payment gateway to store sensitive data securely. Credit card information is safely stored and generated by a payment gateway.

Why do you need data tokenization?

For an enterprise, the aim is to secure any sensitive payment or personal information in business systems and store such data in a secure environment. Data tokenization helps enterprises to achieve that by replacing each data set with an indecipherable token.

Here are five reasons why tokenization matters to businesses:

1.   Reduce the risk of data breaches and penalties

Tokenization helps protect businesses from the negative financial impacts of data theft. The process of tokenization does not shield personal data, thus, protecting it from any kind of data breach.               

Compromised security often translates to direct revenue loss for businesses as customers tend to switch to alternative competitors who are taking better care of their payment data.

Businesses may also incur losses after a data breach by being sued. For instance, Zoom had to set up an $85 million fund to pay cash claims to U.S. users after a series of cybersecurity breaches, including misleading end-to-end encryption. Also, noncompliance with many payment and security standards can lead to heavy business fines and penalties. For instance, non-compliance with PCI can result in monthly fines ranging from $5,000 to $100,000, imposed by credit card companies.

2.     Build customer trust

Tokenization helps companies to establish trust with their customers. Tokenization helps to keep online transactions secure for both customers and businesses by ensuring correct formatting and safe transmission of data. This makes the sensitive data significantly less vulnerable to cyberattacks and payment fraud.

3.   Meet compliance regulations

Tokenization helps in meeting and maintaining compliance with industry regulations, for instance, businesses accepting debit and credit cards as methods need to adhere to or compile with Payment Card Industry Data Security Standard (PCI DSS). Tokenization meets the PCI DSS regulation requirement of masking the sensitive cardholder information and safely managing its storage and deletion. Thus, tokenization governs the security of the sensitive data associated with the cards as well as cuts down any compliance-associated costs.

4.   Boost subscription-based purchases

Subscription-based purchases can be improved by faster and better customer experience during checkout. The faster checkout process requires customers to store their payment information safely. Tokenization helps to secure this financial data such as credit card information as a non-sensitive token. This token value remains undecipherable by hackers and creates a safe environment for recurring payments. Some of the major mobile payment gateways such as Google Pay and Apple Pay are already leveraging the benefits of data tokenization, thus making the user experience both seamless and more secure. Security assurance is also helping businesses to convince more users to sign up.

5.   Ensure safe data sharing

Businesses often utilize sensitive data for other business purposes, such as marketing metrics, analytics or reporting. With the implementation of tokenization, businesses can minimize the locations where sensitive data is allowed and ensure that tokenized data is accessible to users and applications conducting data analysis or any other business process. Tokenization can be used to achieve least-privileged access to sensitive data by ensuring that individuals only have access to the specific data they need to complete a particular task. Thus, the tokenization process maintains the security of the original sensitive data.


Any organization’s compliance obligation is somewhat proportionate to the size of its systems —the more applications using sensitive data, the greater the force to rethink or update their data compliance check. For this reason, using a tokenization platform is becoming popular. Tokenization platforms help businesses to secure sensitive information while taking care of security regulation compliance.

Replacing sensitive data with tokenization technologies offers numerous security and compliance advantages. Reduced security risk and audit scope are two advantages that decrease compliance costs and ease regulatory data handling obligations. Data tokenization platforms offer a dependable way to satisfy compliance needs both now and in the future, allowing businesses to concentrate resources on gaining market share in unpredictable economic times.

Yash Mehta

Yash Mehta is an internationally recognized Internet of Things (IoT), machine to machine (M2M) communications and big data technology expert. He has written a number of widely acknowledged articles on data science, IoT, business innovation, tools, security technologies, business strategies, development, etc. His articles have been featured on the most authoritative publications and awarded as one of the most innovative and influential work in the connected technology industry by IBM and Cisco IoT department. His work has been featured on leading industry platforms that have a specialization in big data science and M2M. His work was published in the featured category of IEEE Journal (worldwide edition - March 2016) and he was highlighted as a business intelligence expert. The opinions expressed in this blog are those of Yash Mehta and do not necessarily represent those of IDG Communications, Inc., its parent, subsidiary or affiliated companies.

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