Tokenization Vs Encryption – Which one should your business use?

No matter what type of business you are running, data security is of prime importance these days.  

Because if a data breach occurs, it would expose your organization to huge fines and affect your reputation. 

A research study from Statista states that nearly 3205 data breaches happen in the US as of 2023.  

Such data breaches create huge financial losses for businesses where the average cost of a data breach costs somewhere around 4.45 million US dollars. 

Whether the data (consumers or organizational) is transmitted over the internet or stored at some place, choosing the right security technology (tokenization or encryption) is a NECESSITY for your business. 

These are 2 data protection strategies (tokenization and encryption) that will help your business to fight hackers and keep your business data safe. But both these methods work differently and are not the same. 

Now the question here is – which is the best data security tool that can protect your business against cyber threats (tokenization or encryption)? 

In this blog, we will provide you with a detailed walkthrough of tokenization and encryption so that you can make a prudent choice while creating a data security strategy. 

What does Tokenization mean?  

Tokenization is the process in which sensitive information like your bank account details and credit card numbers are replaced with a surrogate value, and that’s what you call it as a token (a unique string of characters). 

Tokens have no value of their own. Unlike encrypted data, Tokenization does not use a fixed mathematical formula, an algorithm, or a secret key for finding original information out of tokens. 

Implementing tokenization is considered a good data security practice especially if your business is dealing in financial transactions or payment systems. 

As the sensitive information is stored somewhere else, hackers struggle to break into the environment to steal tokens. Because tokens have no intrinsic value and they do not contain anything, they will never be used for fraudulent purposes. 

Think of it in the way that you bought the monthly food subscription from an ABC company using a credit card. As you opt for monthly charges, the company needs to store your credit card information inside their internal business systems. 

So, you would ask what role does tokenization play here? 

Tokenization secures your credit card number with random strings or values that no one else can read.  

And if the company does not use tokenization, then every digit in your credit card is saved in their database.  

Suppose someone tries to hack their website and access all the data (including your credit card details), then the person is going to make future purchases in your name without your consent. 

So, now you understand that tokenization (data security technique) plays a significant role in protecting your data online and reducing friction on customers’ side when they do checkout.  

How does Data Tokenization Work?

To understand how data tokenization works, we need to consider an instance of processing payments. When a customer makes online purchases using a credit card or account number. Such information is sent to the merchant’s payment processing software. 

If such software is using tokenization, the primary account number (PAN) of the customer is converted into tokens and those tokens indicate the original sensitive information. 

When the merchant needs to do payment verification, the business will send the token to the payment processor which then de-tokenizes the TOKEN ID to complete the transaction. 

However, sensitive information is stored inside the TOKEN VAULT (cloud database) where customer data is encrypted. 

Thus, the objective behind data tokenization is to reduce data breaches. 

Why is data tokenization important for your business?

Data tokenization is important because it offers a range of benefits which are as given below-  

1. Strengthens data security 

When using tokenization, business gets an additional layer of security and need not worry about securing confidential customer information in internal databases. 

Even if hackers try to break the system, they won’t be able to access sensitive customer information as the data is stored in the form of tokens. 

Each token has no value of its own and there is no secret key by which they can reverse information to get original insights. 

2. Saves your time on regulatory compliances 

Meeting security standards such as the Payment Card Industry Data Security Standard (PCI DSS) is a legal requirement for businesses to comply with. 

Businesses that process, store, and deal in credit card transactions should be PCI DSS compliant to ensure that credit card details provided by cardholders are secured.  

With data tokenization, it has become easier for businesses to protect sensitive cardholder information such as primary account numbers and other card details.  

Here, sensitive customer data is turned into tokens and tokens are not subject to compliance requirements. 

Thus, it saves organization time, lowers compliance costs, and reduces administrative workload. 

3. Reduces data breaches  

Payment processors that use tokenization protect sensitive information against cyber-attacks. The customer data is stored in the form of tokens, and if hackers by any chance find tokens cannot steal personal data because a token is a non-sensitive substitute that has no intrinsic value. 

Businesses that are not focusing on data protection suffer a direct revenue loss and their customers will switch to competitors that offer better payment security solutions.  

4. Builds customer trust 

Customers are not likely to deal with businesses that do not follow data security practices.  ‘

A research study from Harward Business Review states that data breaches have significantly increased by 20% from 2022-2023. 

Moreover, 66% of US consumers do not intend to trust companies that became a victim of data breaches. As a result, they lose their customers.  

Using tokenization, businesses can ensure that the online transactions that customers do are safe and secure.  

And consumers are likely to deal with businesses that focus on protecting customers’ personal information. 

5. Increases subscription-based purchases 

Another big benefit of data tokenization is that it simplifies subscription-based purchases. 

These days customers’ behavior has changed a lot and they have shifted to online purchasing. They intend to save their payment details so they can make faster payments. At the same time, companies need to ensure that card details should not be vulnerable to hackers. 

Because of tokenization, online purchases, especially recurring payments have become more secure and safe because tokens are random and non-reversible. 

Hence, tokenization ensures that customers’ financial information will be saved as a non-sensitive token meaning it is difficult for hackers to access sensitive data. 

What is Encryption?  

Encryption isn’t a fancy term anymore especially when you spend your entire time on the internet doing online shopping or performing a transaction at an ATM.  

Do you wonder what protects your data from being transmitted to others?  

Your information is encrypted so that third parties cannot access it.  

Legitimate websites use encryption to protect users’ data. Those sites have a secure sockets layer (SSL) which restricts the data sent between systems and keeps the browsing safe and secure.  

Encryption involves transforming plain text into an unreadable format (cipher text) using an encryption key so that it is not consumed by anyone else other than the intended recipient.  

The input data (plain text) will be converted using the cipher key into an output known as encrypted data.  

The intended recipient will use the decryption key to convert it back to plain text. When the recipient translates the information in its original form, the whole process is called decryption. Keys make the data secure from hackers or intruders.  

Just like tokenization, Encryption acts as a data security tool for protecting confidential information (management data and financial information). If unauthorized parties access such information, it might cause a substantial loss for the organization and affect its reputation. 

So, IT teams should employ data security techniques such as encryption to protect and manage sensitive data so that it will not go into the wrong hands. Businesses can use encryption to secure confidential information such as payment card information, cardholder details, or personally identifiable information. 

However, in terms of security, encryption is not a safe method like data tokenization because if hackers gain access to your system and steal the encryption key, they can decipher the information in its original form.  

Let’s understand this concept with an example –   

Suppose you send a message to your close friend and the message is “HELLO” (plain text) and the message is encrypted as “Jgnnq” using a key. 

If your close friend has access to the key, he/she can decrypt the information and read the message as “HELLO”. 

It’s like a door and key system where you lock the door to prevent unauthorized access, but if someone finds the key for your lock, then you will suffer a financial loss.  

The only drawback in this case is that if anyone other than the intended recipient can find the decryption key can steal your information. Then, your information will not remain private.  

How Tokenization is different from Encryption?  

Basis of comparison	Data tokenization	Encryption
1. Meaning	A data security technique used for converting sensitive data into non-sensitive substitutes is known as tokens.	Encryption uses complex mathematical algorithms and keys to scramble plain text into cipher text so that no one else other than the recipient can read and understand the message, data, or file.
2. Is it breakable?	Tokenized data can’t be decrypted.   Even if attackers enter your IT environment and steal your tokens.   Hackers cannot use them for fraudulent purposes as tokens don’t contain anything.	It is a reversible process, and the data can be decrypted in its original form if anyone has access to the encryption key and steals sensitive information.
3. Method of securing data	Data tokenization uses tokens to protect your personal or payment data.  No place for key management.	Keys are used for securing sensitive information.
4. Compliance	Unlike encryption, tokenization does not have a breakable algorithm because sensitive information is replaced with unique tokens.  So, hackers have access to nothing as the real data is stored in the token vault.	Encryption does not provide a fair advantage to you as anyone having a decryption key can steal your confidential information and can destroy your business.  Infact, several government entities consider this data security technique as less secure.
5. Uniqueness of data	Tokenization adds an extra layer of security by assigning unique tokens for the same data. Thus, it adds an extra layer of security.	Encryption produces the same encrypted output when the same data is encrypted with the same key.
6. Use case	It is majorly used in the payment industry where complying with data protection standards (PCI DSS) is of utmost importance.  It’s the best fit for dealing with structured data fields. For instance – Credit card numbers and other numerical values can be transformed into unique tokens.	Encryption is suited for securing structured and unstructured datasets (such as e-mails, long textual messages, or entire documents).
7. Adaptability	Tokenization faces scalability issues when there is an extensive database.	Encryption on the other hand can deal with large data volume.

Which one is better for your business: Tokenization or Encryption 

Know your use case before deciding whether to use Tokenization or Encryption for your business. Both are considered the best methodologies for ensuring the security of sensitive data.

Consider using Encryption as a data security tool in the following cases-  

• When you are dealing with unstructured and voluminous amounts of data such as video footage or image data  
• Encryption is a cost-effective measure for you to deal with data that does not require intense protection. However, if you are in a business that requires taking care of financial information or protecting patient records, then you should go with Tokenization.  

Tokenization is a viable choice for you in these cases –  

• When you are dealing with datasets such as credit card information that require stringent compliance requirements like the PCI DSS. 
• If your data is of structured form, tokenization is much easier to apply. 

Wrapping Up  

There is no one-size-fits-all approach as to whether tokenization or encryption is good for your business. It completely depends on your business requirements. 

You can go with tokenization if you want to minimize compliance obligations. (PCI DSS). This way, you will be able to handle sensitive data. 

But, if scalability is a major concern for you, encryption is a suitable way for handling voluminous amounts of data. 

Getting confused?  

Then, 

Ask yourself a series of questions that will help you to make a wise decision between 2 data security methods. 

• Have you experienced data breaches in the past?  
• Do you need protection in securing payment data such as credit card numbers or entire databases? 
• What is your company’s size and customer base? 

At BigOhTech, we’ll help you make the right choice for your business by understanding the key risks that your organization is facing so you will have encrypted tomorrow.  

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