Tokenization in modern payment systems

Digital payments and their workflow are a critical part in any modern economy. In this blog post, I will explore the concept of tokenization and its role in digital payment systems .

As an example I will use easy to understand e-store checkout flow.

After selecting the items customer is redirected to the checkout page to enter payment details. The checkout page is a part of payment service provider’s (PSP) software development kit (SDK). SDK’s role is to integrate PSP processing features into merchants app or website without having to write everything from scratch. At the frontend of an e-shop PSP’s JS library takes over the sensitive input fields. These input fields are actually hosted iframes served from the PSP’s domain and not merchant’s server. After the customer enters payment data (like card number, expiry date, CVV) and clicks “Pay”, the payment library sends the card data directly to the PSP Secure Vault via TLS, which encrypts the data in transit. Merchant’s system never sees or stores the raw card data

The actual card number is stored in a payment service provider’s PCI-compliant “card vault”. PCI stands for PCI DSS - Payment Card Industry Data Security Standard. The PSP generates a unique, random identifier - token that represents the stored card details.

• The token is just a database pointer.

• The merchant never sees the card number, only this token.

• Tokens are useless outside the PSP’s system, they have no mathematical relationship to the original number, they are just a reference to the original data stored in the secure vault.

• Tokens replaces sensitive data with non-sensitive reference.

Once the card details are tokenized merchant receives unique token and can send it in an API request to the PSP for charging the card, storing transaction related data for future transactions (subscriptions, etc.) While PSP handles the real payment and replaces the token with the actual card number internally and communicates with card brands (Visa, Mastercard, Amex, etc.) via the acquiring bank, and returns the result.

Summary

• Tokenization is a secure reference to stored card details.

• Merchants can’t reverse the token and never sees or stores raw card data.

• Tokenization allows merchants to stay PCI-compliant as they don’t need to directly store card data.

• Payment service providers absorb most of the PCI-compliance burden by managing secure storage of card data.

Tokenization is a secure, audited process managed entirely by the PSP’s SDK and hosted endpoints. It ensures the safe, seamless handling of sensitive transaction data, making it a key pillar of modern digital payment systems.

(Recommended reading: Wikipedia- Payment tokenization)