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Tokenization Explained: What It Is, How it Works & Types of Integration

Updated: Nov 6, 2022


In today’s digital landscape, users have high expectations of their experiences with businesses. They expect to be able to interact with businesses when and where they want. They expect businesses to have the ability to personalize their interactions with them based on their needs, interests and goals. And they also expect all of this to happen while maintaining the highest level of security possible. That’s a lot to ask from a business entity that essentially has limited ways of interacting with its customers. Businesses don’t have apps or AI virtual assistants; they are mostly limited to websites, phone systems and other in-person interactions that require trust on both sides about the information being shared. To meet these new expectations, businesses everywhere are implementing tokenization as a way to remove intermediaries from transactions and streamline how consumers can buy from them online or in person. Let’s take a look at what tokenization means for businesses, how it works and some common types of integration you might see it implemented in.


What Is Tokenization?


Tokenization is a method for creating a digital representation of a physical asset or a digital currency. The token can be a substitute for the original asset to facilitate some form of exchange, or it can be a way of representing the ownership of the original asset. Tokens are often used to make digital money transfers more secure. For example, when you transfer money to another person using a bank account, the bank transfers the money from your account to the other person’s account. If the other person is fraudulent, they can easily transfer the money back out of their account and into their own account. In contrast, when you transfer money using a credit card, the credit card company does not transfer money between your account and the other person’s account. Rather, it issues a one-time token in the amount of the original transaction. If the other person is fraudulent, they cannot transfer the money back to themselves. Rather, they must transfer the token to another person.


How Does Tokenization Work?


The easiest way to understand tokenization is to think of it as replacing the specific financial information related to a transaction with a unique identifier, or token. The token may be a number, a letter or a combination of numbers and letters. It is only important that the token be unique so that if it were to be breached, it wouldn’t be able to be used in other transactions. Tokens are used in the digital world to represent any type of asset that has value, including credit cards, debit cards, financial information, health records, personal information and more.


Types of Integration for Tokenization


Businesses are looking to tokenization to help them achieve greater security, speed and efficiency in their systems. Tokenization can be implemented via software-as-a-service (SaaS), cloud-based platforms, gateway or on-premise solutions. Each option has its own benefits and drawbacks. - SaaS solution - SaaS solutions can be embedded into your existing online or offline systems, which can make the integration process easier for businesses. The vendor managing the SaaS solution may be able to help businesses set up the solution, or it may have an API for businesses to plug into their systems. - Cloud-based platforms - Cloud-based platforms may be easier for businesses to integrate with existing systems since they don’t have to install any new software. The vendor managing the cloud-based platform may be able to help businesses set up the solution, or it may have an API for businesses to plug into their systems. - Gateway - A gateway is a dedicated piece of hardware that the business plugs into its systems. The hardware routes the transactions through the business’s systems, but the information is stored on the hardware. Gateway providers may be able to help businesses set up their systems, or they may have an API for businesses to plug into their systems. - On-premise solution - An on-premise solution is software that businesses install and manage on their own systems. It may be easier for businesses to integrate with existing systems since they don’t have to change their existing systems. However, businesses may have to hire an outside company to help with the integration process. - Hybrid solution - A hybrid solution is a combination of on-premise and SaaS solutions.


Security with Tokenization


Tokenization is an effective security measure, but businesses should implement additional measures to fortify their systems against breaches. Businesses should also regularly monitor their systems for signs of attempted breaches. To ensure the tokens in your system are secure, you should follow these best practices: - Limit who has access to the tokenization system. - Install the latest patches and updates to guard against new threats. - Have a disaster recovery plan in the event of a breach. - Regularly monitor your systems for signs of attempted breaches.


Conclusions


Tokenization is a great way to secure data and make it easier to transfer between different systems. Businesses can use it to securely store customer data, such as credit card numbers, or to make it easier to transfer money between banks. It’s also important to note that tokenization isn’t encryption, which is a method of securing the information so that it can’t be read or used. Tokenization is a method of replacing specific information with a unique identifier.

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