Document fingerprinting is a data loss prevention feature in Microsoft 365 that transforms standard text forms into sensitive information types to help detect and block outgoing documents with sensitive content. It works by creating a unique 'fingerprint' based on the word patterns of uploaded documents, enabling DLP policies to identify matches and enforce rules accordingly. Key benefits include protecting sensitive information while allowing exceptions for authorized departments, though limitations exist such as detection constraints with password-protected files and unsupported file types.