Credit Card Encryption vs. Tokenization: Which Is Better?

As I explored ways to make payments more secure, I came across encryption and tokenization. But which should I use?

I’ll compare both and help you decide which is the better option.

Let’s start by outlining the key differences.

Key Takeaways

• Some forms of encryption (e.g., EMV) are only applicable to card-present purchases.
• Hackers can reverse encryption, but not tokenization.
• Both methods are proven to prevent credit card fraud.
• Businesses can use encryption and tokenization for processing payments.

That said, neither can stop chargebacks caused by merchant error or friendly fraud. But chargeback alerts can.

Learn more about what these are.

Credit Card Encryption vs. Tokenization

Encryption changes your credit card data into a coded format using algorithms. Only the correct decryption key unlocks it. If hackers steal the data and the key, they access your card details.

Tokenization replaces your card details with a random token. The system generates this token, which has no value outside that system.

Hackers who intercept the token can’t access your real card number. Systems also set tokens to expire or cancel them for specific vendors.

Let’s break down these methods further. Keep reading.

1. Use Cases

Encryption has different forms designed for specific stages of payment processing.

For in-person payments, that’s EMV. When a customer inserts an EMV chip card, the chip creates a unique cryptogram. This cryptogram encrypts the payment data. From there, that data’s protected during transmission to the payment processor.

EMV encryption doesn’t work for online purchases or some contactless payments. For example, NFC technology doesn’t encrypt the chip’s data. This makes the data vulnerable to eavesdropping.

For online purchases, payment processors use encryption to protect the data instead.

Online transactions depend on SSL/TLS protocols. These protocols encrypt cardholder data as soon as customers enter it on a website. This stops most hackers from intercepting sensitive information between the user’s device and the merchant’s server.

This encryption is vital for e-commerce platforms and online payment systems. While it’s not the focus of this post, I felt it was important to mention.

Tokenization excels at securing stored payment information. It replaces sensitive data with unique tokens, so merchants don’t store real card details.

For instance, when customers save their card for future use, the system creates a token linked to that card. Merchants then use the token for recurring payments, refunds, or saved checkout options. Keeping the actual card data safe.

Glossary:

• SSL (Secure Sockets Layer): A protocol that encrypts data during online transmission.
• TLS (Transport Layer Security): An upgraded version of SSL.
• EMV (Europay, Mastercard, Visa): A global standard for chip card transactions.
• NFC (Near Field Communication): A short-range wireless technology.

2. Compliance

Encryption helps businesses meet various security standards, including PCI DSS. This helps with PCI DSS because it helps ensure that credit card information is securely transferred.

It’s more-so relevant with EMV liability shift compliance. Since October 2015, merchants who don’t use EMV chip technology are responsible for certain types of fraud. For instance, counterfeit card fraud. This change caused a rise in chargebacks for non-compliant merchants.

For example, from January to May 2021, chargebacks linked to the EMV liability shift jumped from 2% – 14% to 56% – 67% [1].

We have a separate guide that does a better job of explaining EMV liability shift. Check it out.

Tokenization helps companies comply with PCI DSS by reducing the systems that handle card data. Replacing card details with tokens means merchants store less sensitive data in their systems.

This makes compliance easier because fewer systems fall under PCI DSS requirements.

However:

The PCI Security Standards Council states that tokenization doesn’t remove the need for compliance. Instead, it simplifies the process by reducing the systems involved.

Glossary:

• PCI DSS (Payment Card Industry Data Security Standard): A set of rules for businesses that handle credit card information.
• EMV Liability Shift: A change in fraud liability to merchants not using EMV chip technology.

3. Security

The use of EMV chip technology has reduced counterfeit card fraud. For example, Visa reported a 70% drop in counterfeit card fraud by December 2017 among US merchants using EMV [2].

Tokenization boosts security in card-not-present (CNP) transactions, like online purchases. By replacing sensitive card details with unique tokens, it lowers the risk of data breaches and fraud.

Visa’s data shows that token-based purchases reduce online fraud by 30%. This is compared to transactions that use traditional card numbers [3].

Glossary:

• Card-Present Transactions: Payments made with a card at the point of sale.
• Card-Not-Present (CNP) Transactions: Payments without the physical card.

4. Data Format

Encryption keeps the original structure of sensitive data. It may turn 4111 1111 1111 1111 into 93hf 28x9 a0gk 6qzl.

While unreadable without a decryption key, the output still resembles a card number. This makes encryption handy for systems that need the data’s original format. For instance, those processing transactions.

Tokenization completely changes the data’s format. Instead of a recognizable credit card number, the system creates a random token, such as f71j3b9x-840g-7c2q.

This token has no link to the original data. It’s useless outside the system where it was created.

For this reason, tokenization is better for securing stored data. It’s also better for protecting sensitive information during a breach.

These format differences affect how each method fits into payment systems. Encryption ensures compatibility, while tokenization adds extra security by making intercepted data worthless.

5. Reversibility

Encryption is reversible. It uses algorithms to scramble data, but the correct decryption key restores the original information.

This reversibility is essential for processing payments or accessing cardholder details. Though, it comes with risks.

If hackers get the encrypted data and the decryption key, they can unlock an encrypted card number.

Tokenization is irreversible without access to the token vault. When a system creates a token, it links the token to the original data inside a secure database managed by the token provider.

The token itself holds no information about the original data. Thus, it’s impossible to reverse-engineer. Even if hackers steal the token, they cannot retrieve the card details without access to the token vault.

6. How It Works

1. Encryption (via EMV) secures data during in-person transactions by using the card’s chip.

Here’s how it works:

1. Card dip: The shopper inserts their EMV chip card into the terminal.
2. Cryptogram generation: The chip creates a one-time-use cryptogram using dynamic data, like an iCVV.
3. Encryption: The terminal encrypts the cryptogram and transaction data.
4. Decryption and validation: The processor decrypts the data . From there, it validates the cryptogram, and approves/denies the transaction.

2. Tokenization replaces sensitive data with random tokens for storage and reuse.

Here’s how it works:

1. Data entry: The customer enters their card details.
2. Tokenization request: The merchant’s system sends the card details to a tokenization provider.
3. Token generation: The provider generates a unique token and links it to the card data.
4. Secure storage: The merchant stores the token instead of the actual card details.
5. Token usage: Merchants use the token for recurring payments, refunds, or saved checkouts.

7. Vulnerability

Encryption relies on the security of the decryption key. If hackers access this key, they can unlock the encrypted data and expose sensitive information.

And again, EMV bypass cloning presents a risk. Fraudsters use this method to extract chip data and create counterfeit magnetic stripe cards. Thus, its success depends on secure (and updated) payment terminals.

Tokenization removes sensitive data from a merchant’s system, but the token vault remains a key vulnerability. If hackers breach the vault, they can access the original cardholder data.

Mitigation strategies:

• For encryption: Use strong key management practices and regularly update payment terminals. Ensure EMV technology is fully implemented to prevent bypass cloning.
• For tokenization: Choose a reliable tokenization provider with advanced encryption and strict access controls.

8. Management

Encryption requires ongoing key management. Businesses or payment processors must generate, store, and rotate encryption keys securely to prevent unauthorized access. If keys are mishandled or stolen, encrypted data becomes vulnerable.

For EMV encryption, payment processors usually manage the keys. However. Merchants must ensure their payment terminals are compliant, properly configured, and regularly updated.

Tokenization doesn’t require merchants to manage keys. The tokenization provider handles the data and stores it in the token vault. This shifts the responsibility for protecting card details to the provider.

For merchants, this makes compliance and operations easier. They only deal with tokens, which hold no value if stolen.

Still unsure what tokenization is? Let’s break it down.

What is Tokenization?

Tokenization is a payment security method that replaces sensitive data with a token. This token has no value outside the system where it was created.

Here’s how it works:

When a customer enters their card details, the system generates a token to replace the real data. The actual card information is securely stored in an encrypted token vault managed by the token provider.

The token is then used for payment processing, recurring billing, or saved payment options.

Tokenization is common in e-commerce, subscription services, and digital wallets. If you’ve used Google Pay or Apple Pay, your payments have been tokenized.

We’ve covered the key points here, but for a deeper dive, check out the detailed guide I wrote on tokenization.

Let’s check out the pros and cons.

Glossary:

• Token: A randomly generated identifier that replaces sensitive payment data.
• Token Vault: A database that stores the original payment data.
• Token Provider: The entity responsible for creating tokens and maintaining the token vault.

Summary: Replaces sensitive payment data with secure, randomly generated tokens

Tokenization Pros & Cons

Pros:

• Enhanced security: Tokens are useless outside their original system.
• Simplified compliance: Reduces the scope of PCI DSS requirements.
• Supports modern payments: Works with digital wallets and recurring billing systems.
• Minimal impact of breaches: Hackers can't reverse stolen tokens.
• Less friction: Allows faster checkouts without needing customers to re-enter details.

Cons:

• Reliance on providers: Merchants depend on third-party providers to manage token vaults.
• Single point of failure: A token vault breach could expose all linked sensitive data.
• Inconsistent standards: Different tokenization methods may cause compatibility issues across systems.

Next, let’s dive into encryption.

What’s Credit Card Encryption

Credit card encryption protects payment data by converting it into unreadable code. It uses mathematical algorithms to secure information like card numbers and expiration dates. Only authorized parties with the decryption key can unlock the original data.

One of the ways it does this is via EMV chips. These are the chips you’ll find inside of most payment cards.

These chip cards dynamically encrypt transaction data and create unique cryptograms. The cryptograms add extra security. Ensuring intercepted data remains useless without the matching key.

This guide didn’t dive that deep into encryption. That’s because I wrote a separate guide just for it. Check it out for more details.

For now, let’s move onto the pros and cons.

Glossary:

• Cryptogram: A dynamic, transaction-specific code generated by EMV chips to secure payment data.

Encryption Pros & Cons

Pros:

• Strong data protection: Encrypts payment data, making it unreadable without the decryption key.
• Prevents counterfeit fraud: Reduces card-present fraud.
• Supports compliance: Meets some PCI DSS requirements for securing data during transmission.
• Widely adopted: Compatible with most modern payment systems.
• Flexible: Secures data in in-person and online transactions.

Cons:

• Key management challenges: Requires secure storage, rotation, and management of keys.
• Vulnerable to key theft: If hackers steal the decryption key, encrypted data becomes exposed.
• Limited to transmission security: Protects data in transit but not while it’s stored.
• EMV bypass risks: Fraudsters can exploit implementation flaws to misuse or clone data.

So, which should you use?

Should Your Business Use Tokenization or Encryption?

You should use encryption and tokenization for maximum payment security.

Encryption:

Start by accepting EMV payments through up-to-date terminals. Work with payment processors that provide secure, encrypted transactions — most modern providers do.

Tokenization:

Choose a payment processor that offers tokenization or use payment methods like Google Pay. It tokenizes transactions by default.

Combining both:

Encryption secures data in transit, such as when EMV cards or mobile wallets send payment details. Tokenization protects stored data and enhances transaction security with tokenized payment methods.

Most modern payment processors combine technologies. Making it easier for merchants to adopt them.

Now you should have a clear understanding of the differences between tokenization and encryption. 

Thanks for reading.

Wrapping Up

Encryption and tokenization are great for preventing fraudulent chargebacks. But those only account for 1% of all disputes. What about disputes caused by merchant error or friendly fraud?

That’s where chargeback alerts come in. These notifications let you know when a customer is about to file a dispute. This gives you the chance to issue a refund and prevent it from turning into a chargeback.

Ready to take control? Book a demo and give them a try.

Sources

• [1] EMV Liability Shift Trends. CMSPI. 7/25/2021
• [2] EMV Cards Cut Down Counterfeit Card Fraud. Bleeping Computer. 2/26/2018.
• [3] Deep Dive on Tokens. Visa.