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What is a payment token generator?

In order to offer an exceptional customer experience and boost customer loyalty, merchants must safeguard their customers’ sensitive cardholder information. This information includes their credit or debit card details or details related to digital wallets such as Apple Pay or Android Pay.

For this reason, their payment processing must be absolutely secure and comply with the Payment Card Industry (PCI) Security Standards Council requirements. One of these requirements involves payment tokenization, a concept that has existed for over twenty years.

Despite this, few merchants fully understand tokenization and why it is relevant to their business. In this article, we explore what tokenization means in the context of payments, how it works, which businesses need it, and its benefits. Let’s take a closer look.

What is a token in payment authentication?

For payments to be considered secure and partially compliant with PCI DSS standards, payment tokenization is a security measure that operates by replacing sensitive data from cardholders (such as credit card primary account numbers — PANs) with non-sensitive data in the form of a “token”.

This token consists of a unique and random set of characters that cannot be reverse-engineered. By replacing sensitive information as part of the tokenization process, cardholder data is not only stored securely but also “jumbled up.”

This is done to such an extent that no malicious actors can use this string of characters to make fraudulent transactions with the cardholder’s details, as it doesn’t contain any real payment details.

Therefore, tokens have no real value or significance beyond payment transactions. In short, tokenization is the process of using tokens as opposed to real card information to provide merchants and customers with a secure payment experience while minimising the risks of data breaches and reducing fraud.

What is a payment token generator, and how does it work?

A payment token generator is the technology that makes issuing tokens possible. It can be used for both in-store and online purchases.

Here’s a brief breakdown of how the process works:

  • A transaction takes place when a customer initiates a transaction and provides a merchant with their debit card or credit card details, alternatively, a digital wallet.
  • The merchant’s payment gateway sends a request to their payment service provider (PSP), which then tokenizes the credit or debit card’s information.
  • The token generator steps in, and its algorithm generates a token to replace the customer’s PAN.
  • The PCI-compliant PSP returns the token reference to the merchant and stores the token mapping with the payment credential data.
  • Then, the merchant’s payment gateway will use the token to request payment authorisation from a card scheme such as Visa or Mastercard and the customer’s bank.
  • The issuing bank will authorise the payment and notify the merchant. The payment is then considered complete.
  • The token, a unique string of characters, is issued in real time. It replaces or acts as a “surrogate” for the PAN. As such, the PAN is not transmitted, preventing potential losses in the case of a data breach
  • The token can be stored for future transactions from the same customer. This includes instances of recurring payments, refunds, one-click payments, etc.
  • It is worth noting that not every payment is tokenized by default. It is an added measure for maintaining security.

In short, the process above may seem complex and challenging. However, tokenization is often a very fast process that takes place in real-time, enabling faster checkouts and a more pleasant customer experience.

How is an authentication token generated?

How is an authentication token generated?

Payment tokens are generated when a customer initiates a transaction with a merchant. The merchant must have previously signed up for payment tokenization. Once the process begins, the customer’s sensitive payment data is changed through a strong cryptographic algorithm.

This replaces the current numbers on the PAN with randomly generated characters and symbols. Next, a unique token is generated that represents the encrypted information as non-sensitive data. This token, together with the original data, is stored securely in the creator’s PCI-compliant token vault.

What is more, the token creator does not return the PAN to the merchant. Instead, they use it to authorise a transaction. As such, a merchant can keep sensitive data, such as card details, out of their systems, preventing malicious access. The token creator can be an entity that includes an acquirer, issuer, network or payment processor.

How do I create and use a token generator?

While it is possible to create your own token generator that your business can use, the process is highly complex and expensive. This is why most merchants rely on current service providers to help them with automatically updated tokens and systems.

Does your business need tokenization?

Payment tokenization, such as credit card tokenization, is necessary in a number of business cases.

Below, we outline a few of these to determine if your business needs tokenisation.

  • eCommerce sites: If you run an ecommerce site and you accept ecommerce transactions, tokenisation is an excellent way to ensure that you use a secure identifier through issuing a token to ensure that the customer’s card information is securely stored.

    So, whether you have once-off or returning customers who pay via recurring transactions, you can offer a faster checkout and a smoother payment experience, as well as reduce your cart abandonment rates. You can also demonstrate your business’ commitment to safeguarding sensitive information and enhancing customer trust and confidence.
  • Subscription businesses: These businesses operate a subscription model, which, in theory, requires customers to input their card details for every payment cycle. This can create issues related to time efficiency and inconvenience. This is why such merchants must ensure that customers’ payment information is saved and secured and also stored in a way that is in line with PCI DSS compliance.

    In these cases, tokens are automatically refreshed, which can reduce the chance of payment declines due to card expiry, for example. It minimises the need for customers to manually update their payment information after a card replacement.
  • Brick-and-mortar stores: When a merchant accepts in-store transactions, tokenisation can also be important for stores that use point-of-sale (POS) systems or mobile payment solutions, offering an extra layer of security.

    In such cases, tokenisation works by not storing the actual cardholder data when the customer presents their physical card for payment. Apart from card data, it’s also possible to tokenise mobile wallets for secure smartphone transactions.
  • Platform businesses: Platforms and marketplace businesses create an environment for a multitude of third-party sellers and customers to transact. In these cases, the multiple parties involved and the potentially higher transaction volume necessitate security and trust. Tokenisation offers this in a streamlined way by ensuring PCI compliance when transferring sensitive information.

Overall, offering tokenisation, irrespective of your business model, is essential to build trust and provide data security when processing customers’ payment information.

What are the benefits of payment tokenization?

What are the benefits of payment tokenization?

Payment tokenisation comes with ample benefits.

Among these include the following:

  • Safer cross-border transactions, enabling merchants to accept global payments as tokens, can be used irrespective of geographical location.
  • It creates cross-channel consistency, meaning that merchants offering online, in-store, or mobile sales channels can benefit from each while creating a more consistent shopping experience.
  • Tokenisation supports multiple payment methods, including credit and debit cards and mobile wallets.
  • It facilitates stronger fraud monitoring and analysis by analysing purchasing patterns and identifying unusual behaviour without exposing cardholder data.
  • It can lead to significant cost savings as a result of the minimised number of data breaches and potential reputational damage costs.
  • It offers data storage in the event of payment disputes, such as chargebacks.
  • Tokenisation improves security by offering secure transactions that protect sensitive information.

While these are just a few benefits of tokenized data in payments, many others exist. The advantages listed all show that by generating tokens as part of your online or in-person payment process, you can better cater to customers’ needs and offer them a higher level of security.


Ensuring that your business is PCI-compliant involves offering your customers tokenisation for their current and future transactions, regardless of whether you operate an online store or a brick-and-mortar location.

The advantages of tokenisation for greater confidence, security and peace of mind are undeniable, and if you want to ensure trust in your business, using tokenisation in your checkout process is essential.

Frequently Asked Questions

While both technologies protect sensitive cardholder information, encryption changes sensitive data into ciphertext. It uses an algorithm and a secret encryption key. If these keys are compromised, it is possible for the data to be decrypted and, therefore be susceptible to fraud. Tokenisation uses strings of indecipherable and irreversible payment tokens, which makes it stronger and more protected against fraudulent attacks.

Network tokens are a more advanced version of payment tokenisation. In such cases, it is card networks, such as Mastercard and Visa, that store the PAN and generate the tokens. This is useful as network tokens are always up-to-date even if the card details expire.

The three primary types of tokenisation are network, PCI and digital wallet. The main difference lies in which party is responsible for issuing and storing the token and reading the original card details. A network token is issued by a card scheme. A merchant or a payment gateway manages a PCI token. Tokenisation for digital wallets is a type that is used exclusively for digital wallets.

Payment tokens, by their nature, are not reversible. The sequence of random characters created cannot be converted back to reveal the customer’s PAN.

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