The term tokenization refers to the action of creating and using an alias or "token" in place of real information while linking the alias to the information it represents.

This term is often used in reference to information transacted by mobile payment solutions. In this case, the mobile payment service generates a token credit card, prepaid card, or debit card which is shared with merchants and other third parties instead of your real card information. Only your financial service provider has your real card information. When a payment is charged to the token payment card, your bank or other financial service provider matches the token card information to your actual card information, and charges your real payment card. 

Tokenization is most widely used in relation to online shopping because online transactions bear the highest risk of data theft. Online tokenization systems are offered by many payment networks and by some card issuers.

The majority of mobile wallets which can be used to authorize point of sale (POS) transactions using near field communication (NFC) use tokenization to prevent transferred credit card or bank account information from being used fraudulently in the event that data is stolen from POS.

A number of credit cards and debit cards which have integrated tokenization capabilities have been developed. Some of these use electronic displays in the place of a printed or embossed card number, with a token card number being generated and shown on the display upon demand.

Example of tokenization:

A credit card has a credit card account number which can be used to make card-not-present purchases such as orders placed over the telephone or the Internet. This means that third parties which intercept this information can use it to make fraudulent transactions.

To prevent this from happening, some credit card companies use tokenization. When you use your credit card to make a purchase from a merchant, your financial services provider shares a token card number with the merchant instead of your actual card information. The actual credit card number is known only to you and your financial services provider.

If a merchant's database is breached by an unauthorized third party, the third party only obtains the token, and not your actual card information.

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Credit card comparison
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Editor Daniel Dreier
Daniel Dreier is editor and personal finance expert at