Encryption in payments: How it works and why it matters in 2025

Cybercrime targeting financial transactions is on the rise, with payment fraud losses expected to reach $40.62 billion globally by 2027, nearly doubling from 2020 levels. As digital payments become the norm, businesses must prioritize encryption to safeguard sensitive financial data.

Encryption plays a critical role in securing payment transactions, ensuring that payment details, customer information, and transaction data remain protected from cyber threats. But how exactly does encryption work in payments? What types of encryption are used? And how can businesses leverage encryption to enhance security, ensure compliance, and build customer trust?

This article explores the fundamentals of encryption in payments, including key encryption methods, real-world applications, and how businesses can implement secure payment solutions to stay ahead of evolving cyber risks.

What is transaction encryption?

How transaction encryption protects payment data

Transaction encryption is the process of converting sensitive payment data into an unreadable format to prevent unauthorized access during transmission. When a customer initiates a transaction—whether online or at a physical point-of-sale (POS)—their payment details are instantly encrypted, ensuring that even if the data is intercepted, it cannot be read or misused.

This encryption process is a critical layer of security in modern payment systems, helping businesses:

• Protect cardholder information from cyber threats and fraud attempts
• Comply with regulatory requirements like PCI DSS and GDPR
• Prevent data breaches that could lead to financial and reputational damage

Encryption works by transforming payment data into ciphertext, which can only be decrypted using a specific key. This ensures that even if hackers intercept the data, they cannot decipher it without access to the correct decryption key.

The steps involved in encrypting a transaction

1. Data entry and encryption initiation
   • When a customer enters their card details at checkout or taps their card on a payment terminal, the data is immediately encrypted at the point of entry.
   • Secure encryption algorithms scramble the payment details, converting them into unreadable ciphertext.
2. Transmission through the payment network
   • The encrypted transaction data is sent through a secure channel to the payment processor or acquiring bank.
   • Security protocols like TLS (Transport Layer Security) ensure that data remains protected during transmission.
3. Verification and authorization
   • The payment processor decrypts the transaction using a secure key, verifying the payment details.
   • The processor then communicates with the issuing bank to authorize or decline the transaction based on available funds and fraud detection measures.
4. Completion and settlement
   • Once approved, the transaction is completed, and funds are set for settlement.
   • The transaction details remain encrypted at every stage to ensure security from initiation to final processing.

By integrating encryption into every step of the transaction lifecycle, businesses minimize the risk of payment fraud and data breaches, providing a safer payment experience for their customers.

The concept of encrypting money

Meaning and misconceptions

The phrase “encrypting money” can be misleading, as money itself isn’t encrypted—instead, the payment data associated with transactions is encrypted to prevent unauthorized access. When a customer makes a payment, their card details, banking credentials, and transaction information are converted into an unreadable format, ensuring that sensitive financial data remains secure.

It’s important to differentiate between:

• Encryption of transaction data – This refers to securing card details, personal information, and payment instructions to prevent fraud and breaches.
• Tokenization of payment details – This process replaces sensitive card data with a unique, non-sensitive token that can be stored safely and used for future transactions without exposing the original data.

Encryption and tokenization often work together to enhance payment security. While encryption scrambles data so it can only be decrypted with a key, tokenization eliminates the need to store raw cardholder data altogether.

Practical applications of encrypted transactions

Encryption is used across various industries and payment channels to secure transactions and protect customer data. Some real-world applications include:

• E-commerce payments – When customers enter their card details online, the data is encrypted before being transmitted to the payment processor.
• Mobile wallets and NFC payments – Apple Pay, Google Pay, and contactless payments use encryption and tokenization to secure transactions.
• Recurring payments and subscriptions – Encrypted payment data ensures that stored card details remain protected when businesses process recurring transactions.
• Bank transfers and wire payments – Encrypted end-to-end communication safeguards banking credentials and financial transfers from cyber threats.

By encrypting transaction data at every stage, businesses ensure that customer information remains secure, reducing the risk of fraud and unauthorized access.

Types of encryption in payments

Encryption in payments can be classified into three main types, each serving a unique function in securing transaction data.

Symmetric encryption

Symmetric encryption uses a single key for both encryption and decryption. This means that the same key is used to scramble and unscramble data, making the process fast and efficient.

How it works:

1. The payment data is encrypted using a shared key.
2. The receiving system uses the same key to decrypt the data and process the transaction.

Advantages:

• Faster encryption and decryption
• Requires less computational power, making it ideal for high-speed transactions

Limitations:

• Key management challenges – If the encryption key is compromised, attackers can decrypt the data.
• Not ideal for large-scale payment networks that require multiple layers of security.

Businesses using secure vaulting solutions benefit from additional layers of encryption that minimize the risks associated with symmetric key management. Learn more about secure vaulting and PSP independence.

Asymmetric encryption

Asymmetric encryption uses two separate keys—a public key for encryption and a private key for decryption. This method is widely used in online payments and secure communications.

How it works:

1. A merchant’s system encrypts payment data using a public key.
2. The receiving payment processor decrypts the data using a private key that only they control.

Advantages:

• Enhanced security – Even if the public key is exposed, transactions remain protected because the private key is required for decryption.
• Ideal for online payments where secure communication is critical.

Limitations:

• Slower processing speed due to the complexity of encryption and decryption.
• Higher computational requirements compared to symmetric encryption.

Asymmetric encryption is widely used in:

✔ SSL/TLS protocols to secure online payments
✔ Cryptographic signatures for digital authentication
✔ Tokenization gateways to protect payment credentials

Hash functions

Hash functions are used in payment security to ensure data integrity and prevent tampering. Unlike symmetric and asymmetric encryption, hash functions do not allow decryption—instead, they generate a unique, irreversible fingerprint of the original data.

How it works:

1. Payment data is passed through a hashing algorithm, which produces a unique hash value.
2. If the data is altered in any way, the hash value changes, alerting the system to possible fraud.

Advantages:

• Prevents data tampering by ensuring transaction records remain unchanged.
• Used in password storage and blockchain transactions for added security.

Common payment security applications include:

✔ Verifying digital signatures in online transactions
✔ Detecting unauthorized changes to transaction data
✔ Ensuring stored payment credentials remain unchanged

Why encryption is essential in payments

Encryption is a fundamental layer of security in modern payment processing, ensuring that transaction data remains confidential, tamper-proof, and protected from cyber threats. By implementing symmetric encryption for speed, asymmetric encryption for security, and hash functions for integrity, businesses can fortify their payment infrastructure against fraud and unauthorized access.

Encryption in payments: meaning and examples

The significance of encryption in the payment industry

Encryption is the backbone of secure digital transactions, ensuring that sensitive payment data remains protected from cybercriminals. In an era where data breaches and fraud are increasing, encryption helps businesses:

• Prevent unauthorized access to customer payment details
• Ensure compliance with industry regulations like PCI DSS and GDPR
• Protect brand reputation by mitigating data breach risks

Without encryption, cardholder data, banking credentials, and personal information would be transmitted in plain text, making them highly vulnerable to interception. By encrypting transaction data, businesses can reduce fraud risks, increase customer trust, and maintain seamless payment experiences.

Real-world examples of encryption safeguarding payment data

Example 1: Online banking security
Major banks use encryption to secure customer logins, transactions, and fund transfers. Through TLS encryption, all communication between the customer and the bank remains protected from cyber threats.

Example 2: E-commerce checkout encryption
When a customer enters their credit card details on an e-commerce website, their information is encrypted before being sent to the payment gateway. This prevents hackers from intercepting and stealing sensitive cardholder data.

Example 3: Contactless and mobile payments
Services like Apple Pay and Google Pay utilize encryption and tokenization to protect card details during tap-to-pay transactions. Each payment generates a unique encrypted token, ensuring that even if a hacker intercepts the data, it cannot be reused.

Ensuring secure and encrypted transactions

Security protocols: establishing safe payment channels

Payment security relies on strong encryption protocols that create secure communication channels between merchants, customers, and payment processors.

SSL/TLS encryption – Secure Sockets Layer (SSL) and its modern version, Transport Layer Security (TLS), encrypt the connection between a web browser and a payment server. This ensures that sensitive payment data remains unreadable to third parties.

P2PE (Point-to-Point Encryption) – Used in POS systems, P2PE encrypts card data immediately when a payment is made, ensuring that even if a terminal is compromised, the data remains protected.

HSM (Hardware Security Module) encryption – A specialized security device used by banks and payment processors to securely store encryption keys and perform cryptographic functions.

EMV encryption – Chip-based cards use encryption to generate a unique transaction code for every payment, making counterfeit fraud nearly impossible.

End-to-end encryption (E2EE): protecting data from entry to completion

End-to-end encryption (E2EE) ensures that payment data remains encrypted from the moment it is entered until it reaches its final destination.

How E2EE works in payments:

1. Customer enters card details at checkout (online or in-store).
2. Payment information is encrypted immediately at the point of entry.
3. Data remains encrypted as it moves through the payment network.
4. Only the receiving entity (payment processor or bank) can decrypt the data using a secure key.

The role of tokenization in payment security

What is tokenization, and how does it protect payments?

Tokenization replaces sensitive payment data with unique, randomly generated tokens, ensuring that actual card details are never stored or transmitted in their original form. Unlike encryption, tokens are not mathematically reversible, meaning they cannot be decrypted by hackers.

How tokenization works:

1. A customer enters their credit card details at checkout.
2. The payment gateway replaces the card number with a randomly generated token.
3. The token is stored securely, while the actual card details remain protected in a secure vault.
4. The token is used for future transactions without exposing the original card number.

Tokenization is widely used in:

Subscription payments and recurring billing
Mobile wallets and contactless transactions
Stored card details for one-click checkouts

How tokenization complements encryption in payments

While encryption scrambles payment data, tokenization removes the need to store raw cardholder data altogether. By combining encryption and tokenization, businesses achieve the highest level of security for payment transactions.

Encryption vs. tokenization in payment security:

Feature	Encryption	Tokenization
Method	Converts data into ciphertext	Replaces sensitive data with a unique token
Reversibility	Can be decrypted with a key	Cannot be reversed (no mathematical relationship to the original data)
Use cases	Protects data during transmission	Stores cardholder data securely without exposure
Best for	Securing payments in transit	Reducing risk in stored payment credentials

Businesses looking for stronger payment security should explore Gr4vy’s vaulting and tokenization solutions, which provide PSP independence and secure card data storage.

Why businesses must implement encryption and tokenization

With cyber threats and payment fraud increasing, businesses must prioritize strong encryption and tokenization strategies. By integrating these technologies, companies:

Ensure compliance with PCI DSS, GDPR, and global data protection laws.
Reduce fraud risks by preventing unauthorized access to payment details.
Enhance customer trust by providing secure, seamless payment experiences.

Compliance and regulatory considerations

PCI DSS requirements: securing payments through encryption

The Payment Card Industry Data Security Standard (PCI DSS) is a global security framework designed to protect cardholder data and prevent payment fraud. Businesses that store, process, or transmit payment information must comply with PCI DSS to avoid financial penalties, data breaches, and reputational damage.

Encryption requirements under PCI DSS:

• Strong encryption protocols (TLS 1.2 or higher) must be used to secure payment data during transmission.
• Cardholder data must not be stored in plaintext; sensitive data must be either encrypted or tokenized.
• Decryption keys must be securely managed, ensuring restricted access only to authorized personnel.
• End-to-end encryption (E2EE) and point-to-point encryption (P2PE) are recommended to protect payment transactions.

PCI DSS compliance is not optional—businesses that fail to encrypt payment data risk severe fines and potential suspension of payment processing privileges.

For a deeper dive into PCI DSS best practices, check out Gr4vy’s PCI compliance guide.

Global data protection regulations: encryption for compliance

Beyond PCI DSS, businesses must comply with regional data protection laws that mandate strong encryption standards for securing financial transactions.

• GDPR (General Data Protection Regulation – EU): Requires businesses to use encryption when storing or transmitting personal financial data. Non-compliance can result in fines up to €20 million or 4% of annual global revenue.
• CCPA (California Consumer Privacy Act – US): Demands encryption for protecting consumer financial data and requires businesses to notify customers in case of a breach.
• PSD2 (Revised Payment Services Directive – EU): Implements Strong Customer Authentication (SCA) and mandates secure encryption for online payments.
• RBI regulations (India), PCI Brazil, and other regional frameworks also impose strict encryption mandates on payment service providers and merchants.

By implementing robust encryption and tokenization, businesses stay compliant and avoid legal risks while ensuring customer data remains protected.

Learn more about the role of payment security in regulatory compliance with Gr4vy’s vaulting and tokenization insights.

Future trends in payment encryption

Quantum-resistant encryption: preparing for next-gen cyber threats

As quantum computing advances, traditional encryption methods may become vulnerable to brute-force decryption attacks. Researchers are developing quantum-resistant encryption algorithms that will ensure long-term security for payment transactions.

Post-quantum cryptography (PQC) is emerging as the future of encryption, with new algorithms designed to withstand quantum computing attacks.

The National Institute of Standards and Technology (NIST) is actively working on standardizing quantum-safe encryption models to future-proof payment security.

Businesses must stay ahead of these technological changes by adopting flexible, upgradeable encryption solutions that can transition to quantum-resistant standards when necessary.

Emerging technologies in payment encryption

Encryption continues to evolve with innovative security technologies designed to enhance fraud protection and streamline payment experiences.

Tokenization 2.0: Advanced tokenization systems now support multi-PSP token portability, eliminating vendor lock-in and improving payment flexibility.

AI-driven encryption key management: Artificial intelligence is being integrated into encryption key lifecycle management, ensuring smarter security policies and automated risk detection.

Biometric encryption: Combining encryption with biometric authentication (face recognition, fingerprint ID) enhances fraud prevention while keeping payment experiences seamless.

Businesses that adopt these new encryption technologies will be better equipped to handle emerging cyber threats and compliance challenges.

Explore how AI, automation, and security advancements are shaping the future of payments in Gr4vy’s insights on payment technology.

Encryption is the foundation of secure payments

As cyber threats become more sophisticated, payment encryption is no longer a luxury—it’s a necessity. By implementing strong encryption and tokenization solutions, businesses can:

✔ Protect customer data from fraud and cyberattacks
✔ Ensure compliance with PCI DSS, GDPR, and global security regulations
✔ Enhance trust with customers by offering secure and seamless transactions

Adopt advanced encryption and tokenization with Gr4vy

To stay competitive, businesses must go beyond basic encryption and embrace comprehensive payment security solutions.

Gr4vy’s payment orchestration platform provides built-in encryption, tokenized transactions, and secure vaulting, ensuring businesses meet compliance requirements while reducing payment fraud risks.

Ready to enhance your payment security? Contact Gr4vy to explore advanced encryption and tokenization solutions for your business.