Encryption vs. Tokenization: What Every Fintech and Merchant Needs to Know

As digital commerce scales, businesses face a crucial decision: How should cardholderCardholder cardholder The person or business to whom a payment card is issued. data be stored and protected?

While encryptionEncryption encryption The process of encoding data to protect it from unauthorized access during transmission. Essential for payment security. has been the go-to, it comes with hidden liabilities. In contrast, tokenization is emerging as the modern solution that reduces risk, cost, and compliance burden—especially under PCI-DSS 4.0.

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Comparing Encryption vs. Tokenization

Feature	Encryption	Tokenization
Core Concept	Transforms data using cryptographic keys	Replaces data with non-sensitive tokens
Data Storage	Encrypted data still stores the original PAN	No PAN stored—only reference token retained
SecuritySecurity security Measures used to protect transaction data from fraud and cyber threats. Risk	Reversible with key access; potential for breach	Tokens are useless if stolen; vault access required
PCI Compliance Scope	In-scope; sensitive data exists in the environment	Often out-of-scope; PAN never touches merchantMerchant merchant An individual or business that accepts payments in exchange for goods or services. infrastructure
Implementation Complexity	Requires key management, rotation, secure key storage	No key management for merchants; handled by the vault
Use Case Fit	Data in transit (e.g. POS to gatewayGateway gateway A service that authorizes and processes card payments for online merchants. Examples include Stripe, Adyen, and PayPal. encryption)	Saved cards, subscriptions, re-use scenarios
Examples of Providers	Native encryption libraries, legacy acquirers	Spreedly

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Why Encryption Isn’t Enough

Encrypting PANs protects data in transit or at rest, but it retains the original information, meaning:

• It’s decryptable: Anyone with access to the keys can retrieve the PAN.
• It increases PCI audit scope: More controls, testing, and documentation required.
• It creates legacy risk: Poor key rotation, hardcoded keys, and incomplete data deletion are common.

Storing encrypted cardholder data “just in case” is a security time bomb—especially under PCI-DSS 4.0.

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Tokenization: A Secure, Scalable Alternative

Tokenization replaces PANs with non-sensitive tokens and stores the actual PAN in a secure offsite vault.

Benefits of Tokenization

• No sensitive data on your servers
• Simpler PCI compliance: Often considered out of scope
• Less breach risk: Tokens are worthless without vault access
• No cryptographic keys needed for merchants

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Real-World Use Case: A Travel Booking Platform Migrates to Tokenization

Before Tokenization

• Encrypted PANs stored on-prem
• PCI audit failed
• Engineering teams slowed down by data protection controls
• High liability in case of breach

After Tokenization

Change	Result
Encrypted PANs replaced with tokens	No sensitive data stored internally
Vault handles de-tokenization	Sensitive data only revealed during checkout
PCI scope minimized	Audit costs dropped significantly
Improved security posture	Better investor and partner confidence

Result: Better security, faster time-to-market, and lower cost of compliance.

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Why This Matters in 2025 and Beyond

Under PCI-DSS 4.0, storing any sensitive card data—even encrypted—brings:

• Expanded audit responsibilities
• Stricter controls on encryption keys
• Delays in product and infrastructure releases

Tokenization helps modern payment systems achieve compliance by design.

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Conclusion: When to Use What?

Scenario	Best Choice
Protecting data in transit (POS to PSP)	Encryption
Saving cards for future use	Tokenization
Reducing PCI scope	Tokenization
Minimizing breach exposure	Tokenization
Handling legacy infrastructure	Encryption (short-term)

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Final Takeaway

Encryption and tokenization both serve important roles—but if you’re storing cardholder data, tokenization offers the safest, simplest path forward.

Don’t just secure the data. Eliminate the risk by not storing it at all.