What Is Tokenization And How It Works?

Tokenization is the process of replacing sensitive data with non-sensitive substitutes referred to as tokens. The token has no extrinsic or exploitable meaning or value. It allows organizations to collect, process, and store sensitive data like payment card information, Social Security numbers, driver's license numbers, or health records while reducing compliance scope.

It differs from encryption in that it does not use a mathematical algorithm to transform data into tokens. Rather, tokenization works by simply replacing a sensitive data element with a token that has no meaning. A tokenization system maintains a separate store that maps the token assigned to a particular data element back to the original value. This mapping allows the token to retain full utility and usefulness, enabling tokenized data to be processed as before.

The key benefits Of tokenization include:

• Minimizes risk and reduces compliance burden by removing sensitive data from systems
• Allows organizations to make use of and analyze sensitive data without increasing risk
• Enables compliance with data security regulations like PCI DSS more easily
• Cost-effective compared to full end-to-end encryption
• Preserves data format and utility while removing its value if stolen
• Easily integrates with existing applications and systems

In summary, It provides a simple and effective data security technique that enables organizations to protect sensitive data and reduce compliance requirements. By replacing data elements with meaningless tokens, risks are minimized while retaining utility and analytics.

How Does Tokenization Work?

Tokenization works by replacing sensitive data with non-sensitive substitutes called tokens. There are a few key steps in the tokenization process:

Token Generation

When a system needs to tokenize a piece of sensitive data like a credit card number, it will generate a random token to represent that data. Tokens are typically formatted to mimic the type of data they are replacing (credit card tokens will contain 16 numbers like a real credit card number), but the token has no mathematical relationship to the original data. Tokens are generated through encryption or random number generation.

Token Mapping

The system keeps a secure token mapping database that links each generated token to the real data it replaces. This mapping allows the token to be de-tokenized later to reveal the original data if needed. The token mapping database is highly protected since it contains all the sensitive data.

Token Storage

The generated tokens replace the original sensitive data and are then stored. For example, a retailer would store credit card tokens in their customer database instead of actual credit card numbers. Even if the database is compromised, the tokens are meaningless without the token mapping database. The tokens can be safely used for processing, analytics, etc without exposing real credit card numbers.

This separation of data and token makes the tokenized data safe for less secure environments outside the token vault. Only the token mapping database needs high-security measures.

Benefits Of Tokenization

Tokenization offers several key benefits for securing sensitive data:

Increased Data Security

It enhances data security in a few key ways. First, it protects sensitive data by replacing it with meaningless tokens with no extrinsic value. The token lookup process is isolated from the tokenized data, making a breach of the tokenized database essentially useless. Even if tokenized data is accessed or stolen, it does not reveal any meaningful information.

Second, tokenization limits data access to only authorized users and systems. The tokenization system acts as a gatekeeper, requiring the proper credentials to match tokens back to their original sensitive values. This minimizes the risk of bad actors gaining access to systems that interact with tokenized data.

Finally, It reduces the risk of malicious attacks by minimizing the amount of actual sensitive data that is present. By substituting tokens for real data, the attack surface is reduced.

Reduced Compliance Scope

Many compliance regulations require the protection of sensitive customer data like credit card numbers, social security numbers, names, and addresses. By tokenizing this regulated data, businesses can significantly reduce the scope of their compliance audits. Tokens have no extrinsic value, so they are not subject to the same regulatory controls as real sensitive data. Systems and applications that only contain tokens may be excluded from compliance scope. This can greatly simplify and reduce the cost of compliance.

Anonymization of Data

Tokenization provides a method to anonymize data by irreversibly replacing any personally identifiable information with tokens. This allows businesses to more freely analyze, profile, and share tokenized data, since it no longer contains any sensitive attributes. Anonymization enables new opportunities for deriving insights from customer data while still maintaining privacy protections.

Use Cases for Tokenization

Tokenization helps protect sensitive data in many industry verticals and use cases. Here are some of the most common:

Payment Processing

Tokenization is widely used in payment processing to secure credit and debit card data. When a customer makes an online purchase or uses a credit card in-store, the actual card number is replaced with a token. This token allows the transaction to go through without exposing card details. The token is meaningless outside of the payment system. This protects card data from compromise during transactions and storage.

Data Retention

Many businesses need to retain customer data for years due to legal, regulatory, or business requirements. Tokenization allows companies to remove sensitive elements from stored data. Customer names, addresses, Social Security numbers, and other fields can be tokenized. This reduces compliance obligations and data breach risks.

Securing Customer Data

Customers frequently provide sensitive personal information to businesses across industries. Healthcare providers, insurance companies, financial institutions, and retailers all collect data like customer names, birth dates, phone numbers, and more. Tokenizing this data before storage in databases and files protects customer privacy and reduces risks. If there is a breach, only tokens will be impacted rather than actual sensitive data.

Tokenization offers versatile protection of sensitive customer data for companies across sectors. Compliance, brand reputation, and avoiding costs associated with compromised data are key motivators for implementing tokenization. As data security risks grow, tokenization provides an important data protection capability for responsible stewardship of customer information.

Tokenization vs Encryption

Tokenization and encryption are two important tools used to protect sensitive data, but there are key differences between the two and reasons why one may be preferred over the other for some use cases.

Encryption scrambles data so it is not readable without the proper cryptographic keys to unencrypt it. The original sensitive data is transformed into cipher text, but the encrypted data remains persistent.

Tokenization replaces sensitive data with non-sensitive substitutes referred to as tokens. The token has no extrinsic or exploitable meaning or value. Tokenization generates the token via irreversible cryptographic hashing, so the original sensitive data cannot be derived from the token.

Some key differences between tokenization and encryption:

• Encrypted data can be unencrypted while tokens cannot be reverse engineered to reveal the original data.
• Encryption protects data in transit while tokenization protects data at rest.
• Tokens can be safely used in logs and backups for analytics and auditing while encrypted data cannot.
• Tokenization is preferable for systems that need to validate cardholder data without having access to it.

In general, encryption is better suited for protecting data in motion while tokenization is better for protecting data at rest. Tokenization avoids many of the key management challenges involved with encryption. For data analytics and operations that rely on accessing and using sensitive data in non-human readable form, tokenization is the preferred approach.

Implementing Tokenization

Tokenization can be implemented either in-house or through a third-party provider. Each approach has tradeoffs to consider:

In-house vs Third-Party

• In-house tokenization gives you full control over the solution but requires developing and maintaining it in-house. This involves upfront development costs and ongoing management of the tokenization software, vault, key management, etc.
• Third-party tokenization outsourcers the complexity to a provider. This reduces upfront costs and effort but relies on an external vendor and gives up some control. Popular third-party providers include TokenEx, Shift4, and Micro Focus Voltage.

Integration Requirements

To implement tokenization, it must integrate with applications and systems where sensitive data resides. This could include:

• Payment systems
• E-commerce platforms
• CRM and loyalty systems
• Databases
• Data warehouses
• Reporting and analytics tools

Proper integration allows tokenization to work seamlessly across systems.

Maintenance Considerations

Ongoing maintenance is required for activities like:

• Managing cryptographic keys
• Rotating and updating keys
• Ensuring high availability of the token vault
• Updating the tokenization algorithm if needed
• Monitoring the performance and security of the solution
• Applying patches and upgrades to fix vulnerabilities

With in-house tokenization, the organization handles all maintenance. For third-party solutions, the provider handles much of the maintenance according to the service contract.

Tokenization Standards

Tokenization solutions must adhere to certain standards to be effective and secure. Two of the most important standards are:

PCI DSS Compliance

The Payment Card Industry Data Security Standard (PCI DSS) provides a baseline of technical and operational requirements for organizations that handle payment card data. Tokenization is commonly used to help meet certain PCI DSS requirements around protecting stored cardholder data.

PCI DSS-validated tokenization solutions replace sensitive data (such as primary account numbers) with non-sensitive substitutes called tokens. The tokenization system stores the sensitive data securely and only associates tokens with their related data in a protected database. This helps reduce the organization's scope for PCI DSS compliance.

Format Preserving Tokenization (FPT)

Format preserving tokenization (FPT) generates tokens that preserve the length and format of the original sensitive data. This allows tokenized data to be used in applications without requiring any changes to process or store the substituted tokens.

For example, primary account numbers from credit cards have a specific format with a fixed length of 16 digits. FPT would output 16-digit numeric tokens that can seamlessly fill the role of the original PAN. This avoids disruptions that would be caused by introducing tokens in a different format.

FPT enables tokenization to work with legacy systems that require specific data formats to operate. It provides the benefits of tokenization without requiring changes to database schemas, application code, etc.

Challenges of Tokenization

Tokenization can provide many security and compliance benefits, but it also comes with some challenges that organizations need to address:

Key Management

With it, the token vault must be securely managed and protected. The encryption keys used to generate tokens must also be properly secured, typically using hardware security modules (HSMs). Proper key management processes must be in place to rotate keys periodically. If encryption keys are compromised, an attacker could reverse tokens back into their original values.

Token Mapping

The system needs to maintain a mapping of tokens to real data values. This mapping database must be secured, monitored, and backed up. Organizations need to ensure proper controls are in place so only authorized systems can access the mapping.

Ongoing Maintenance

Once it is implemented, there is ongoing work required for management and maintenance. As data changes, new tokens need to be generated. As encryption keys rotate, tokens need to be re-encrypted. The token mapping database needs to be monitored and updated. Proper controls and procedures are required for the full lifecycle management of tokenized data.

Future of Tokenization

Tokenization is poised to see increased adoption across many industries in the years ahead. As more companies recognize the benefits of tokenization for securing sensitive data, tokenization is expected to gain traction beyond current use cases in payment processing and healthcare.

New innovative use cases for tokenization will likely emerge. For example, it could potentially be applied in the automotive industry for securing vehicle identity data. Or retailers may adopt tokenization to tokenize customer loyalty program data. Startups and established vendors will continue finding novel ways to apply tokenization to new data protection challenges.

Developments in tokenization standards are also expected. While formats like FPE currently provide interoperability, improvements to these standards could further simplify tokenization across vendors and systems. Emerging standards like IEEE P3074 are aiming to provide a unified standard for tokenization across industries. Such standards could help propel more widespread adoption of tokenization.

In summary, the future looks bright for tokenization to become a standard data security practice across the enterprise. As more sectors realize the benefits and standardization improves, organizations are expected to embrace tokenization as part of their data protection strategy increasingly.

Summary

It is the process of replacing sensitive data like credit card numbers with non-sensitive tokens or surrogate values. It provides the benefit of keeping data usable while removing the risks associated with storing original sensitive values.

Some key points about tokenization:

• The token stands in for the original sensitive data. With the right keys, the token can be reverse-tokenized to retrieve the original data.
• It happens in real-time when data is captured, such as on eCommerce checkout. This removes the need to store original data.
• Tokens can be formatted to the same length as the original data, so they work seamlessly with existing systems.
• It is complementary to encryption, providing an extra layer of security. Tokens are meaningless on their own.
• Major card networks like Visa support tokenization for payment card data. It is a widely adopted security technique.
• Implementing tokenization requires selecting a solution from vendors like Thales, First Data, or OneSpan. Cloud services make it easier to deploy.

The main benefits of it are dramatically improved data security, reduced compliance obligations, and minimized risk of data breaches. For sensitive data like payments and identity information, it is an essential security technique for the modern age. It allows businesses to keep utilizing valuable data more safely.