Tokenization vs Encryption – Everything you Need To Know


Tokenization is a popular data security technology that has found its way into payment processing. It can enable merchants to keep their customer card information private, while enabling the convenience of storing the transaction on file for future reference or refund purposes. For more details on how tokenization works, see this article.

However, it is important to recognize that tokenization is not the same as encryption, and understanding how each technology works will help security professionals build more secure payment systems.

Encryption is a mathematical process through which data is scrambled plain text into ciphertext. It has been around for centuries—the Caesar Cipher showed that encryption can be used to protect secrets. However, it is only in the last few decades that we started using complex mathematical formulas and keys longer than a few characters for encrypting data.

What makes encryption strong is not its complexity but how difficult it is to break the code without having the key. If a user knows a secret decryption key, encryption is easy to break.

Tokenization vs Encryption

Tokenization and  encryption essentially works by using the same mathematical principles, but with one major difference—it does not require the decrypting key. Thus, tokenized data is more secure than encrypted data because there’s no way for a bad actor to retrieve the original information without also knowing the token generation algorithm.

When tokenization is used for storing data (i.e., the payment information), it carries over its inherent security benefits; however, when used as a method of representing sensitive data in order to facilitate transactions without exposing it to merchants, tokenization becomes merely an additional layer of obfuscation on top of the encrypted data. This means that the transaction itself has the same level of security as the encryption. If you are using HTTPS to encrypt all transactions, then your tokenization is just another layer on top of an already secure transaction.

Tokenization can be applied to any data whether it’s running through a network or stored on disk. Encryption is usually used when data needs to be stored securely. There are plenty of examples where encryption is the best choice for data security, but in some instances tokenization can be an equally viable option.

The question that remains to be answered then, is when should you use tokenization instead of encryption? The answer lies in your requirements for decrypting the information within your systems. If you need to retrieve the original data, then you should use encryption. However, if you don’t need to decrypt your data on a regular basis and simply wish to prevent unauthorized access of its critical information, tokenization may be the better option.

In essence, encryption provides confidentiality while tokenization enhances security by protecting against both disclosure and misuse.

End-to-end Encryption Secure Payments

A payment processing company can use tokenization to protect card information while at the same time retaining the ability to easily process refunds and store purchase records. An ecommerce merchant, on the other hand, requires encrypted data in order to make a refund, which will not be possible if they are using tokenized data for their transactions. Most importantly, in all cases, encryption or tokenization will not in themselves prevent fraud; the use of strong authentication and access controls is also key.

When used by merchants to store card details after a transaction has been processed, tokenization provides added security by replacing sensitive payment information (e.g., the 16-digit primary account number or “PAN”) with a unique digital identifier known as a “token”. The PAN is the equivalent of your physical card and contains all of the information needed to conduct a transaction. This number, however, can be used by attackers in much the same way as you might steal someone’s credit card and use it for fraudulent purchases.


When tokenization is used to replace card data with a surrogate value, the sensitive information is never at risk of being stolen. Tokenization addresses the security concerns associated with storing payment information on your servers by never sending the actual PAN to your system in the first place. The tokenized data provided by NIO can be easily integrated into your systems so that you can focus on growing your business and leave the security to us.

Unlike encryption, which only replaces the sensitive card data with a surrogate value (without changing its size or appearance), tokenization reduces the quantity and magnitude of sensitive information, transforming it into smaller, less complex, and less valuable data files. This simple change diminishes the number of potential entry points for hackers to target, thereby limiting the potential of a breach.

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Alex Walker
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