Why banks prefer tokenization over encryption in digital payments
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Tokenization has played a pivotal role in enhancing the security of online transactions, contributing over $40 billion in additional revenue for businesses globally through more secure and efficient eCommerce processes¹. By replacing sensitive payment information with a unique token, tokenization reduces fraudrisks and boosts consumer confidence, driving higher transaction volumes.
As digital payment channels grow, so do the risks associated with security breaches. Tokenization and encryption are two prominent data protection methods, each with unique benefits and challenges. Banks, however, are increasingly favoring tokenization due to its efficiency, enhanced security, and compliance benefits—especially within digital payment systems.
8 key differences between tokenization and encryption
Tokenization offers banks a strategic advantage, minimizing sensitive data exposure and simplifying regulatory compliance. According to recent research by the Bank for International Settlements (BIS), tokenization can reduce spreads for asset-backed securities (ABS) by 30% or more, illustrating its potential to streamline financial operations². The below table highlights key aspects of tokenization that make it the preferred choice for banks.
| Aspect | Tokenization | Encryption |
|---|---|---|
| Data Format | Tokens are of similar length and format as the original data, making it suitable for existing databases and applications. | Encrypted data often changes in length and format, which can complicate storage and compatibility with legacy systems. |
| Security Model | Token vault stores the mapping between tokens and original data; tokens are meaningless without this mapping. | Relies on cryptographic algorithms and keys; data is only secure if the encryption keys are kept safe. |
| Compliance (PCI DSS) | Tokenization can reduce the scope of PCI DSS compliance, as only the token vault needs to meet compliance requirements. | Encrypted data still requires strict controls and PCI DSS compliance for all data storage points. |
| Risk of Exposure | Minimal exposure, as tokens cannot be reversed without access to the token vault. | If encryption keys are compromised, encrypted data can be decrypted. |
| Performance | Lightweight as no complex algorithms are applied on every transaction, enabling faster processing times. | Encryption and decryption can add computational overhead, especially for large volumes of transactions. |
| Use in Cloud and Networked Environments | Tokenization is often more suitable, as sensitive data can be stored in a separate vault, reducing the risk of exposure in cloud environments. | Encrypting data in a cloud environment requires key management solutions, adding complexity. |
| Data Breach Impact | If a breach occurs, tokens are leaked but not actual sensitive data, minimizing potential damage. | Leaked encrypted data, if the keys are compromised, exposes sensitive information. |
| Access and Permissions | Only applications needing access to original data require access to the token vault; other systems can process tokens. | Encrypted data may need access to encryption keys across multiple systems, increasing risk. |
How Sigmoid can help
Leveraging our experience in driving compliance initiatives for Fortune 500 companies, Sigmoid brings a deep understanding of regulatory requirements and data security best practices to tokenization implementations. Our expertise positions us as a trusted partner for banks aiming to strengthen data protection while meeting rigorous compliance standards. Through tailored tokenization solutions, we can help financial institutions reduce their compliance footprint, enhance operational efficiency, and safeguard sensitive information.
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