Picture this:

You are excited to buy a new smartphone. You could use a single swipe/tap/insert or a digital wallet to pay, but your card information is in transit. What if fraudsters steal it in mid-air?  

Here comes tokenization - a powerful technique that helps protect sensitive payment information. But what exactly is it, and how does it work?  

This blog will explain why tokenization matters for secure transactions by breaking down the different eras and explaining the basics of tokenization in simple terms.

a) Pre-Tokenization Era:  

Back then, when you swiped or inserted your card in the POS machine – The following steps happened:  

1. Card Swipe/Insert -> POS terminal reads your actual card number, expiry date, and CVV from the magnetic stripe or EMV Chips.  

2. Data sent to Bank -> The merchant’s system transmitted your full card details to the payment network (Visa/MasterCard) to the issuing bank

3. Authorization request -> The issuing bank approved or declined the transaction  

4. Payment Completed -> If approved, the merchant stored your card details (often unencrypted) for refunds or future purchases.

Challenges:

Man-in-middle: Merchant stored raw card information, making it easy for hackers to intercept data during transmission.  

Weak encryption exposed millions of card numbers, and this led to data leaks [e.g., Target breach 2013, Home Depot 2014]  

In 2014, EMVCo defined the technical specifications for payment tokenization. Visa, Mastercard, and others align their token services (VTS, MDES, etc.) with these specs to ensure interoperability.

How did tokenization fix these flaws?  

Tokenization solved these flaws by:  

- Replacing card numbers with tokens became useless to hackers - as the PAN is converted to random alphanumeric characters.

- Eliminating storage of raw card data with merchants.  

- Making each token unique to a single transaction.

b) Early-Tokenization Era:

2005 - Began to emerge as a PCI DSC initiated a secured approach to process sensitive data

2013-14

• “Visa Token Service” (VTS) was launched (Replaces sensitive card details with secure digital tokens, reducing fraud by ensuring actual card numbers are not being exposed during transactions.)

• VTS initiate was adopted by Apple Pay

• Mastercard Digital Enablement Service” (MDES) was introduced

• EMVCo (global card standards) published the first tokenization framework

Before Visa formulated tokenization, other companies & industries experimented with this with similar ideas.

Why is this Era Mattered?

-      Target breach [2013] exposed 40M+ credit cards, forcing the industry to adopt better security

-      Tokenization shifted from “nice to have” to “necessity for merchants & banks.”

Visa’s Role:

Visa re-invented the existing tokenization by providing network-level-tokenization system, where the network issued tokens & not the merchants.

This came into picture due to the rise of e-commerce frauds like [Target Breach 2013]. They borrowed concepts from RSA’s tokenization patent and early fintech implementations and came up with the framework.

How does tokenization work in the payment sector?

Step 1:

You initiate a payment  

Step 2:

System requests tokens.  

Instead of sending your card number, the payment processor requests a token from the Token Service Provider [TSP].  

Step 3:

Unique token generation

A random alphanumeric code (like "TKN_7X9P2Q4R") is created. This token is linked to your card but can't be reverse-engineered. The mapping is handled only by the TSP.

‍Step 4:

The unique token is used for a transaction. Only the token travels through the payment network.

Step 5:

When it reaches the bank, it queries the vault, like "Who owns this Token?" The vault replies that it is mapped to a card with PAN—[1234-5678-….].  

Step 6:

If the data matches, the issuing bank approves the transaction; otherwise, it declines it.

c) Late Tokenization Era – Present:

Global Adoption:  

2015:

Google Pay & Samsung Pay adopted tokenization 

2017:

Visa & Mastercard expanded tokenization to e-commerce[not just mobile wallets]  

2020s:

Tokenization became mandatory for recurring payments[Netflix, Uber & other subscriptions]

Recent Adoptions:

• Dynamic tokens: Single-use tokens for each transaction - makes it more secure  

• Cross-border tokenization: Lets token work globally without exposing the card detail  

• Beyond card: Now used in bank accounts [ACH], IDs & even crypto wallets.  Though the core concepts of network-level tokenization remain the same, they slightly vary for contact/NFC/UPIs and digital wallet payments. In the upcoming blogs, we will see in detail how they differ.