Payment tokenisation explained: principles and benefits

In addition to improving payment acceptance rates and creating a smoother shopping experience, payment tokenisation directly addresses the growing need for security in online transactions. This technology is now a cornerstone of modern e-commerce security.

Payment tokenisation is also required by international card networks like Visa and Mastercard: all card-on-file transactions - such as subscriptions and one-click payments - must now be tokenised. Non-compliance can result in financial penalties for the transaction acquirer, making tokenisation not just a security enhancement but a regulatory necessity.

So, what exactly is payment tokenisation? How does it work in practice? Which business scenarios benefit most from its implementation? And most importantly, what measurable advantages can it bring to your operations? This comprehensive guide unpacks everything you need to know about this essential payment security technology.

What is payment tokenisation? 

The technical principle of tokenisation

Despite its technical-sounding name, the fundamental principle of tokenisation is straightforward: it involves replacing sensitive data with secure, non-sensitive data called tokens.

In the payment industry, this process addresses a critical vulnerability. When customers make online purchases, they transmit their card details - including the Primary Account Number (PAN) and security code (CVV). These numbers, if compromised, can be used for fraudulent transactions across multiple merchants. Payment tokenisation solves this problem by replacing the card's sensitive data with a unique digital identifier that links a specific card to a specific merchant, used throughout the payment process. Unlike the actual card data, this token has no inherent value outside of this specific relationship, rendering it useless to potential fraudsters.

A shield against online fraud

Tokenisation plays a crucial role in reducing online fraud. By replacing card data with merchant-specific tokens, it eliminates the risk of card information being stolen during online transactions.

Even if a system is compromised, the intercepted tokens are useless for unauthorised transactions on other merchant sites, as each token is unique to the relationship between a specific merchant and a specific card.

What are the use cases for payment tokenisation?

Securing card-on-file payments

Required by major card networks for Card on File (COF) transactions, tokenisation offers customers a seamless shopping experience while maximising payment security.

Card On File refers to situations where customers save their card details for future use. There are two main types of COF transactions:

• One-click payments: allowing customers to make purchases without re-entering their banking information
• Subscriptions or recurring payments: enabling automatic charges at regular intervals

In both cases, merchants need to store the cardholder's Primary Account Number (PAN). This is possible but requires authorisation under the demanding PCI DSS security standard - a complex and costly process.

Beyond regulatory compliance, tokenisation primarily allows merchants to offload PCI DSS responsibility by delegating the storage of sensitive data to the card networks. This enables merchants to enjoy the benefits of Card on File payments without the regulatory and financial constraints typically associated with storing card data.

Electronic wallets and mobile payments

Tokenisation is at the heart of mobile wallet functionality, which has seen growing popularity among consumers. Solutions like Apple Pay all leverage tokenisation technology.

These alternative payment methods securely store cardholders' data using tokenisation, allowing them to make both online and in-store purchases safely without ever exposing their actual banking details.

How does payment tokenisation work?

To understand how payment tokenisation works for credit and debit card data, let's examine the steps involved in creating a token as part of a Card on File transaction:

1. Data transmission: The customer completes a purchase by entering their card information—PAN, expiry date, and CVV—on the website's payment page.
2. Tokenisation request: The card data is sent to the payment service provider, who then requests tokenisation from the card network (e.g., Visa or Mastercard).
3. Token creation: The card network instantly generates a unique token linking the cardholder to the merchant, automatically replacing the card's sensitive data. This token can be used across the entire payment ecosystem.
4. Token storage: The card network stores the token so it can be reused for future transactions. The network is also responsible for updating the token over time.

What is the difference between tokenisation and encryption?

It's important to distinguish between tokenisation and encryption, two security technologies that are often confused:

• Tokenisation replaces sensitive data with random identifiers that have no mathematical link to the original data. These tokens cannot be converted back to the original data without access to a secure mapping table.
• Encryption transforms data using a mathematical algorithm, allowing it to be decrypted with the appropriate key. Encrypted data can be restored to its original form.

Both technologies are often used together in the payment ecosystem to deliver multi-layered protection for sensitive data.

What are the benefits of payment tokenisation?

Enhanced security for sensitive data

A token is a unique digital identifier based on two factors: the cardholder's card and the merchant's identification. There isn't just one token per PAN, but as many tokens as there are use cases, which guarantees its security.

28% less fraud on average for transactions processed through tokenisation on the Visa network¹.

Maximised payment acceptance rate

Due to their high security level, tokenised payments are more frequently authorised by issuing banks. This leads to a notable increase in merchants’ acceptance rates.

+4.6% average acceptance rate for payments made with a token rather than with a PAN¹.

Improved user experience

Because tokens are persistent data elements, they ensure transaction continuity even when a cardholder's physical card changes, for example, upon expiration. For recurring or one-click payments, merchants no longer need to ask customers to update their card information in their accounts. This significantly reduces:

• Involuntary subscription cancellations
• Service interruptions
• Cart abandonment
• Friction in the customer journey

How to integrate tokenisation into your payment strategy?

To fully unlock the benefits of tokenisation, follow these practical recommendations:

1. Choose a compatible payment provider: Ensure your payment solution supports tokenisation and complies with card network standards.
2. Communicate about security: Inform your customers that their payment data is protected by tokenisation, reinforcing their trust.
3. Optimise the purchasing experience: Highlight one-click payment options and subscriptions that are made easier and safer by tokenisation.
4. Measure the impact: Track changes in your acceptance rates and conversion after implementing tokenisation to quantify its benefits.

With Payplug, you benefit from a solution that natively integrates tokenisation to secure your transactions and optimise your conversion rate, without added technical complexity.

Conclusion

Beyond regulatory requirements, the widespread adoption of tokenisation in the payment market is explained by the significant advantages it brings to merchants:

• Enhanced protection of sensitive data
• Optimised payment acceptance rates
• A smoother customer experience

As digital payments continue to accelerate, tokenisation is no longer optional but a strategic must-have for any e-commerce business seeking to offer both a seamless and secure purchasing experience.

Would you like to learn more about tokenisation and optimise your payment strategy?

Source: 1. Visa 2. Payplug 2025