FinTech companies and merchants that handle cardholder data – especially when storing customers’ card numbers for future use – face a critical security challenge. They must protect sensitive Primary Account Number (PAN) data while complying with strict industry standards like PCI DSS (Payment Card Industry Data Security Standard). Historically, many organizations defaulted to encryption as the go-to method to safeguard stored PANs. Encryption uses algorithms and secret keys to scramble card data, rendering it unreadable to unauthorized users. However, encrypting card data is not a silver bullet; the encrypted PAN can still be decrypted and thus carries residual risk and compliance burden. In recent years, tokenization has emerged as a superior approach for protecting stored card data. Tokenization replaces the actual PAN with a surrogate “token,” so that the real card number isn’t present in the merchant’s systems at all. This approach can dramatically reduce the impact of data breaches and simplify PCI compliance. 

In this post, we’ll compare encryption and tokenization for handling and storing cardholder data. We’ll define how each method works for protecting PANs and examine their security implications, compliance impact, and integration complexity. A side-by-side comparison table will highlight key differences. We’ll also look at a real-world use case of a travel platform that migrated from an encryption-based solution to tokenization to meet PCI compliance and reduce operational burden. Finally, we conclude with why tokenization is generally the better choice for merchants and FinTechs that need to store card data for future transactions.

Encryption for Cardholder Data (PAN)

Encryption is the process of transforming sensitive data into an unreadable format using a cryptographic key. For example, a 16-digit credit card number can be encrypted (using a standard like AES) into a ciphertext string, which looks like random gibberish. Only those with the correct decryption key can revert the ciphertext back to the original PAN. In the context of payments, encryption is widely used to protect data in transit – the lock icon in your browser during checkout indicates the PAN is encrypted as it travels over the network. Merchants also often encrypt card numbers at rest in their databases to prevent easy exposure of cardholder data. This adds a layer of security: if someone without the key accesses the database, they see only encrypted PANs, not the real card numbers. 

While encryption is a fundamental tool for data confidentiality, it has important limitations when used for stored card data:

• Reversible (Decryptable) by Design: Encryption scrambles data in a reversible way – if an attacker or insider obtains the encryption key, they can decrypt all the protected PANs and reveal the original card numbers . In other words, the encrypted data “still exists in original form somewhere” and is only as secure as the keys and algorithms used. This means the protection is not absolute; it hinges on safeguarding the decryption keys. A breach of the key management system can compromise the entire encrypted data set in one blow.
• PCI Scope Remains High: From a PCI DSS compliance perspective, storing encrypted PANs does not remove your environment from scope. Because encrypted card data can be reverted to real PANs, the PCI Security Standards Council considers it still in the category of cardholder data that needs full protection. As a result, a merchant database containing encrypted PANs is still part of the Cardholder Data Environment (CDE) and subject to onerous PCI controls and audits. In practical terms, using only encryption “does nothing to reduce the scope of compliance.”  Organizations must implement all 12 PCI DSS requirement areas (hundreds of security controls) around systems that store or handle encrypted PANs, which increases complexity and cost.
• Key Management Challenges: Encryption introduces the burden of managing cryptographic keys. Keys must be stored securely (often in hardware security modules or specialized key management systems), rotated regularly, and access to them tightly controlled. Poor key management practices – for instance, hard-coding encryption keys in application code or failing to rotate keys – can undermine encryption completely. Unfortunately, in some legacy systems, encryption keys may be hard-coded or infrequently rotated, creating hidden vulnerabilities. Proper key management is so critical that even PCI DSS dedicates requirements specifically to protecting keys. The “single point of failure” nature of encryption keys is a risk: if the master key is compromised, everything encrypted with it becomes accessible .
• Operational Complexity: Building and maintaining an encrypted card data solution in-house can slow down development and operations. Every system that needs to use the card data must have access to decryption routines and keys (or interface with a key management service), which adds integration effort. Testing and analytics can be hampered because the raw data isn’t readily available without decryption. Moreover, treating an environment as PCI in-scope (due to storing encrypted PANs) means extensive network segmentation, monitoring, and audit processes that can drag on deployment timelines. In short, using encryption for stored cards often leads to “expensive audits” and slower product iterations as the organization navigates compliance obligations .

In summary, encryption ensures that card data is protected in transit and at rest under lock and key, but it doesn’t eliminate the presence of sensitive data. Encrypted PANs still carry risk because they can be decrypted. If attackers breach a system and also obtain the encryption keys (or exploit weaknesses in key management), they can retrieve the original card numbers . This persistent risk and the heavy compliance load of an in-scope environment make encryption a less-than-ideal standalone solution for merchants who need to store cardholder data long-term for recurring billing, subscriptions, or “save card” features.

Tokenization for Cardholder Data

Tokenization takes a fundamentally different approach: instead of encrypting the real PAN and storing it, the merchant stores a random surrogate value – a “token” – and does not keep the actual PAN at all in their systems. The true card number is safely stored in a separate, highly secure token vault (often operated by a specialized provider or payment processor), and the merchant only holds the token reference. The token acts as a placeholder that can be used to perform authorized transactions in place of the PAN, but on its own the token reveals nothing about the original card number. 

What exactly is a token? It can be a string of digits or characters that looks superficially like a credit card number or a random GUID, but it has no exploitable meaning outside the tokenization system . For example, the PAN 4111111111111111 might be stored in a vault and the merchant gets back a token like TKN-9f84c1e7.... If someone intercepts or steals that token, it’s useless to them – they can’t algorithmically “decrypt” it to get the PAN, because it’s not generated by an encryption formula but rather by an assignment in a secure database. Tokenization “replaces [the data] entirely” rather than transforming it, eliminating the need for any cryptographic key on the merchant side. Only the token vault can map the token back to the real PAN (typically via a secure lookup), and only authorized requests from the merchant (or their payment processor) can trigger that de-tokenization when needed for a transaction. 

A typical tokenization workflow for payments is as follows: the customer’s card number is captured (usually via a secure iframe or API) and sent directly to the tokenization service (for example, a vault provided by a PCI-compliant vendor or payment gateway). That service stores the PAN securely in its vault and returns a token back to the merchant’s application. The merchant then uses the token to represent the card in all future operations (store it in their database, use it to initiate charges, etc.). If the merchant needs to charge the card, they send the token to the vault or payment API, which swaps it for the real PAN behind the scenes (or charges on the merchant’s behalf) – the merchant’s systems never see the raw card number again. In this model, the PAN is essentially kept off-site in a secure vault, and the merchant’s environment contains no actual card numbers – only tokens.

The benefits of tokenization for handling PAN data are significant:

• No Stored PANs in Your Systems: Perhaps the biggest advantage is that your databases no longer hold actual card numbers – only the tokens. If hackers breach the merchant’s database, they find only token values, not usable card data. The real PANs are in a separate vault database that the attackers have not breached (assuming the vault is properly secured). Because no sensitive card data resides in the merchant environment, there’s nothing of value to steal. This removes the primary prize that attackers are after. As one security provider put it, in a tokenized environment, even if intruders get in, “no sensitive data is being stored, [so] none is available to be stolen” . In effect, tokenization can “virtually eliminate” the risk of mass cardholder data theft from a merchant’s systems .
• Tokens Are Unreadable & Useless to Thieves: A token is typically a random or pseudo-random value with no mathematical relationship to the original PAN. This is unlike encrypted data, which does have a mathematical relationship to the plaintext (albeit a cryptographically protected one). Because of this, tokens cannot be decoded by any brute-force calculation – the only way to get the PAN back is to present the token to the tokenization system with proper authentication. Thus, even if a token is intercepted or leaked, an attacker cannot derive the original card number from it . The token on its own is garbage data outside of the vault context. (Note: The token vault of course does encrypt the PAN data internally, but all that complexity is confined to the vault’s side. The merchant never handles or sees those encryption keys or the PAN.) In payment scenarios, tokens can even be formatted to look like actual card numbers (format-preserving tokenization) to fit legacy systems, but they are dummy values. Visa and other networks have taken this concept further with “network tokens” for cards on file – Visa alone reported issuing 10 billion payment tokens as of 2024 as part of its tokenization initiatives , underscoring how widespread this approach has become.
• Dramatically Reduced PCI DSS Scope: Since no real cardholder data (PAN, expiration, CVV) resides in the merchant’s environment after tokenization, most of the systems are taken out of PCI DSS scope. The vault and tokenization provider still have to be PCI compliant, but that responsibility is offloaded to them. From the merchant’s perspective, the card data environment shrinks to almost nothing. Compliance effort drops significantly – many merchants using tokenization can even change their required PCI validation to a simpler form (for example, from a complex SAQ D or Level 1 audit to a lighter SAQ A or A-EP, if implemented properly). As guidance from the PCI Council notes, because encrypted card data is reversible it must be treated as cardholder data, but replacing PANs with tokens does reduce the scope, cost, and risk of compliance . In fact, by removing PANs entirely, companies can “greatly [reduce] the scope and costs of compliance”, with most systems falling under the lowest level of PCI obligations. This means fewer controls to implement and validate, less audit time, and lower risk exposure in the eyes of regulators and partners.
• No Cryptographic Key Management for Merchants: Tokenization shifts the security burden to the vault provider. The merchant doesn’t need to manage encryption keys for stored PAN data – there are no decryption keys to manage on the merchant side because the merchant never stores sensitive data in the first place . The token vault of course uses strong encryption and controls internally, but from the merchant’s perspective, they simply make API calls to create or use tokens. This eliminates a major source of complexity and potential error. As an AWS security blog notes, a tokenization solution typically boils down to two API calls (create token and retrieve token), and “managing access controls can be simpler” than dealing with enterprise key management policies . Also, if a token vault were somehow compromised, it would expose only the data associated with those tokens, whereas an encryption key compromise could expose all data encrypted with that key. Thus, tokenization localizes and limits the damage of any single breach.
• Simpler Architecture & Integration: Integrating tokenization into your systems can be straightforward, especially with modern providers. Many payment gateways, FinTech APIs, or data security platforms (like VGS, Spreedly, Adyen, etc.) offer tokenization-as-a-service that can be invoked via HTTPS API or SDK. Instead of building custom encryption modules and secure databases, developers simply send card data to a secure vault endpoint and receive back a token. The overall system architecture is simplified: your application no longer needs to store or heavily guard card numbers – it only stores tokens, which are not sensitive. This often translates to faster development and product launches, since much of the heavy lifting (security, compliance) is handled by the tokenization service. As noted, you avoid the need to design key management or worry about encrypt/decrypt in each service. Additionally, using tokens can improve other operations: for instance, you can freely use tokens in logs, analytics, or testing environments because they’re not real PANs, which would be unthinkable with actual card numbers or even encrypted card numbers. Tokenization thus allows developers to focus on core features rather than on managing sensitive data, aligning security with agility. Modern tokenization solutions also ensure simple integration with digital channels and existing workflows.

It’s worth noting that encryption and tokenization are not mutually exclusive – they are often used in tandem. For example, in a card-present scenario, a merchant might use point-to-point encryption (P2PE) to encrypt card data from a card reader to the payment server, then tokenize the PAN at the server side for storage. Even tokenization systems themselves use encryption to protect data within the vault. However, from the perspective of a merchant deciding how to store cardholder data for future use, tokenization provides a far cleaner security model. By avoiding the storage of any true PAN, tokenization minimizes the “attack surface” and compliance responsibilities for the merchant. This is why tokenization has become an industry best practice for payment data security – indeed, when comparing side by side, tokenization is viewed as the superior security technology for protecting stored sensitive data.

Encryption vs. Tokenization: Key Differences

The following table summarizes a side-by-side comparison of encryption and tokenization across several key criteria:

Criteria	Encryption (Stored PAN)	Tokenization (Stored PAN)
Security & Breach Risk	Protects data by cipher; but reversible if keys are compromised, meaning a breach can expose all card data. Encrypted PANs still reside in your environment, so attackers who obtain the keys or find vulnerabilities can retrieve card numbers.	Protects data by removal; PAN is replaced with a random token, so even if your system is breached, attackers get no actual card data. Tokens have no value outside the vault – a stolen token does not reveal the PAN. Overall breach risk is greatly reduced.
PCI DSS Compliance Scope	In-Scope: Encrypted PANs are still considered cardholder data by PCI DSS (since they can be decrypted). Your systems must meet full PCI requirements, with extensive controls, audits, and higher costs. No reduction in compliance scope – you maintain a large Cardholder Data Environment.	Scope Reduction: Tokenized data is not cardholder data (PAN never touches your systems). Only the token provider’s vault is in scope. Replacing PANs with tokens “reduces scope, cost, and risk.” Most of your IT environment can be taken out of PCI scope, simplifying compliance (e.g., lighter audits, possibly eligibility for SAQ A).
Key Management	Requires robust key management lifecycle. You must securely store encryption keys (often using HSMs or KMS), control access, rotate keys, and handle key retirement. A single key’s compromise can expose all encrypted data. Key management mistakes (hard-coded keys, infrequent rotation) pose serious security risks.	No encryption keys to manage for stored PAN data on the merchant side. Tokenization eliminates merchant key management since no secret is needed to “unlock” data – the mapping is handled by the token vault. The vault provider manages all cryptographic protection of PANs. This vastly reduces operational overhead and removes the risk of key exposure at the merchant.
Integration & Architecture	Typically implemented via encryption libraries or middleware in your application stack. Must integrate decryption wherever the PAN is needed (for charging the card, etc.), which can be complex. All systems handling encrypted data must be tightly secured. The architecture must account for secure key storage and audit logging for all encryption/decryption events.	Implemented via API calls to a tokenization service or payment gateway. You send card data to the service and get back a token. Your app uses tokens going forward. This “one API call” model is simpler to integrate and requires fewer code changes in downstream systems (they handle tokens like surrogate card IDs). Overall architecture is cleaner: sensitive data is centralized in the vault, not scattered across your systems.

(PAN = Primary Account Number, the 15-16 digit card number. PCI DSS = Payment Card Industry Data Security Standard.) 

As the table shows, encryption and tokenization take fundamentally different approaches to securing card data. Encryption relies on secrecy of keys and allows the merchant to retain the actual data (in disguised form), whereas tokenization avoids the merchant retaining the data at all. In terms of security, tokenization minimizes the consequences of a breach – there’s no decryptable data sitting in your systems to be stolen. In terms of compliance, tokenization materially reduces the number of system components that fall under strict regulation. And operationally, tokenization outsources the hardest part of data protection (key management and secure storage) to expert systems, letting developers interact with convenient tokens instead of handling raw PANs.

Case Study: Travel Platform’s Migration from Encryption to Tokenization

To illustrate the impact of these approaches, consider a scenario drawn from real life. TravelCo, a hypothetical online travel booking startup, wants to let customers save their credit card details for one-click bookings on future trips. Being a young company, TravelCo initially implements a basic solution: they collect the customer’s PAN on their site and encrypt the card numbers before storing them in their database. This way, they can decrypt and charge the card when a customer books a flight or hotel later, without asking for the card again. This approach worked for functionality, but as TravelCo started growing, they encountered the downsides of handling encrypted card data internally. 

When TravelCo underwent a PCI DSS audit, they discovered that by storing encrypted PANs on their servers, they were considered a Level 1 merchant in scope for PCI compliance, facing over 300 security requirements. They had to maintain stringent network security, access controls, logging, intrusion detection – the full gamut – because their systems held sensitive cardholder data. Despite encryption, their environment was viewed as high risk and required an expensive, time-consuming audit. The company also realized that managing the encryption keys was becoming a headache; they hadn’t yet invested in a Hardware Security Module and were using application-layer encryption with keys stored in configuration files – a practice their QSA (Qualified Security Assessor) flagged as non-compliant. In short, TravelCo failed their initial PCI audit due to the complexity of securing an in-house card storage system. 

Determined to fix this, TravelCo’s engineering and security team decided to remove cardholder data from their systems altogether. They opted to integrate a third-party tokenization vault solution (such as a service provided by a PCI-compliant payments provider). Over a planned migration, they purged all encrypted PANs from their database. Instead of directly handling card numbers, their website now sends card data straight to the tokenization provider, which returns a secure token. TravelCo stores only the token in their database. When a customer makes a new booking with a saved card, TravelCo sends the token to the provider to be charged (the provider transparently swaps it for the real PAN and processes the payment). 

This transition led to several immediate improvements for TravelCo:

• No Cardholder Data on Premises: TravelCo’s databases now contain tokens like tok_87abcd... instead of actual card numbers. Saved cards are represented by tokens, not PANs in any internal logs or systems. The PAN and CVV are safely vaulted off-site by the provider. This means any future breach of TravelCo’s systems would expose no customer card numbers at all.
• Vault-Managed Card Operations: The token vault (run by the provider) handles all de-tokenization and payment processing. TravelCo’s app never needs to decrypt a PAN – it simply sends the token when it needs to charge a card, and the provider takes care of retrieving the PAN securely in the background. This removed the need for TravelCo to ever hold decryption keys or touch raw card data during transactions.
• Drastically Reduced PCI Scope: Since card data no longer touches TravelCo’s environment, their PCI scope plummeted. Their web front-end that collects card info is now a tokenization iframe hosted by the provider, and their servers only see tokens, which are not regulated as cardholder data. The result: most of TravelCo’s infrastructure was now out of PCI scope, cutting down their compliance requirements to a fraction. They moved from a burdensome yearly Level 1 on-site assessment to a simple self-assessment questionnaire. This lowered audit costs and freed up internal resources that were previously tied up in maintaining compliance measures.
• Lower Liability and Greater Trust: With no sensitive card data on hand, TravelCo’s risk of a catastrophic breach is much lower. This improved their security posture in the eyes of partners and customers. Executives found that removing liability for storing card data also reassured potential investors and payment partners; it’s one less “big risk” area on the books. In the event of any breach, TravelCo would not have to report stolen card numbers (since they have none) – avoiding fines and brand damage that come with such incidents. Overall, the switch to tokenization improved stakeholder confidence that TravelCo can securely handle customer payments.

After the migration, TravelCo passed their PCI compliance validation with flying colors. The CTO quipped that it was a huge relief to “get out of the business of storing card numbers.” The engineering team no longer had to divert time to encryption key ceremonies or database encryption performance issues. Instead, they rely on a robust vault service to do that heavy lifting. The end result is a faster, safer, and more compliant way to handle sensitive payment data, achieved by offloading encryption and embracing tokenization. TravelCo’s story mirrors that of many modern merchants: by shedding the liability of holding PANs, they could innovate more freely in their core business (travel bookings) without compromising security. It highlights how tokenization drastically lowers risk and compliance burden for companies that need to store card data for future use.

Conclusion: Why Tokenization Is the Better Choice

Encryption and tokenization both play important roles in protecting payment information – and in fact, they often work together in a layered security strategy. Encryption is excellent for securing data in transit (e.g., SSL/TLS, point-to-point encryption from card readers) and in scenarios where you must control your own data storage. However, when it comes to merchants or FinTechs storing cardholder data for future transactions, tokenization has proven to be a more effective and efficient solution. By replacing sensitive PANs with benign tokens, tokenization eliminates the root cause of so many risks – the presence of card data in the environment – rather than trying to fortress it with encryption. This results in significantly lower breach risk, simpler operations, and lighter compliance demands. 

In the PCI DSS 4.0 era, where requirements are stricter and data environments are more complex, offloading card data via tokenization offers a way to “protect sensitive data altogether by not storing it in the first place.” The consensus among security experts is that if you don’t absolutely need direct access to the raw card numbers, you shouldn’t hold them. Only by removing PANs completely and using tokens can merchants truly shrink their security scope and liability. Encryption, on the other hand, still means you’re “holding the grenade” – just with a pin in it. Tokenization hands that grenade off to a specialist vault built like a bunker. 

From a business perspective, tokenization also aligns well with agility. It allows companies to adopt new payment experiences (mobile wallets, one-click checkouts, subscription models) without being bogged down by storing and securing millions of card numbers. Compliance that might have cost millions in infrastructure and audits can be streamlined, saving money. For example, studies have noted that tokenization makes PCI compliance easier and more affordable for merchants. This is a competitive advantage in industries handling large volumes of payments. 

In summary, for merchants and FinTech firms that need to keep card data on file, tokenization is the smarter long-term strategy. It provides strong security by design (no valuable data to steal), and it significantly reduces the regulatory overhead on your systems. Real-world success stories – like our travel platform example – demonstrate that moving from encryption to tokenization can lead to faster deployment, safer data handling, and simpler compliance. As McKinsey & Company observes, payment tokenization is fundamentally about cybersecurity and fraud prevention, ensuring that even if attackers intercept data, “the identity of the payment itself” remains obfuscated and protected. By leveraging tokenization, merchants can focus on delivering great products and experiences, confident that their customers’ card information is secure. 

In the end, both encryption and tokenization have their place, but when storing cardholder data for future use, tokenization provides a level of safety and simplicity that encryption alone cannot match. It’s a proactive removal of risk, rather than a reactive protection – an approach that is increasingly considered best practice in the payments industry. Adopting tokenization is a key step toward a zero-liability architecture, where even if the bad guys get in, there’s nothing of value for them to find. For any business that values security and customer trust, that peace of mind is priceless. 

Sources: McKinsey & Company; Very Good Security (VGS); AWS Security Blog; Spreedly; IXOPAY; Nira.