Connect with us

FINANCE

What is smart tokenization?

Marten Nelson, co-founder and VP of Marketing at Token Inc. 

chartBefore we get into the ‘smart’ bit, let’s recap. Tokenization is the security process that most recently unlocked the mobile payments market. All the major ‘OEM Pays’ (Apple Pay, Samsung Pay etc.,) use the technology to secure the transmission of payment data between device and terminal. The process itself however – of replacing sensitive data with unique identifiers which retain the essential information but don’t compromise security – can, in theory, be applied to any kind of transaction, from bank details, to health records, ID numbers – even to the idea of money itself.

The central idea is this: when tokenized, unlawfully intercepted payment authorization data is rendered valueless because it simply isn’t there; it is replaced by a token. This means the data can, in effect, hide in plain sight.

What is a smart token?

A smart token takes this idea a step further. It’s a regular token on steroids. It transmits the value and all the information needed to authorize the transaction together, in one go, including enhanced counterpart identity, transaction and invoicing data. It consists of three layers: an asset, a set of rules, and a state. Let’s break it down.

An asset is the source of value. Think of it as the ‘center’ of the smart token. Typically, it’s a bank account, such as your current or savings account.

Surrounding this asset are a number of rules. These rules, which can be programmed by the issuer, dictate who can access the asset, at what time, for what purpose and under what set of circumstances.

Imagine you’re buying a TV from Amazon. When you hit ‘buy’, your bank sends a smart token to Amazon which has the following rules: a €1000 payment limit and a two-week expiry date. In another transaction, the smart token issued in relation to the same asset (your bank account) could have completely different rules. If you’re buying a series of weekly Pilates classes, the token may have a six-month duration, enabling your gym to regularly draw down on that token as each class takes place.

That is the great thing about rules – they are the flexible layer that allow smart tokens to create an almost infinite number of unique and secure digital payment types at a fraction of the cost of today’s conventional payments infrastructure. Any existing payment method you can currently imagine – cash, credit card, cheques, and gift cards – can be emulated by a smart token, thanks to the rules. This is the flexibility that opens the door for banks.

Finally, a smart token has a state. This is the part of the token which tracks the value of the token according to its rules. After three months of Pilates classes, it’s the state that will record that 50% your payments have been made. The combination of asset, rules and state combine to provide banks with the power to tear up the rulebook and perform transactions faster and at a vastly reduced cost, without relying on third parties to validate the payment.

Smart tokenization is at the core of Token’s open banking proposition. Want to get smart? Contact us today.

Continue Reading
Editorial & Advertiser disclosureOur website provides you with information, news, press releases, Opinion and advertorials on various financial products and services. This is not to be considered as financial advice and should be considered only for information purposes. We cannot guarantee the accuracy or applicability of any information provided with respect to your individual or personal circumstances. Please seek Professional advice from a qualified professional before making any financial decisions. We link to various third party websites, affiliate sales networks, and may link to our advertising partners websites. Though we are tied up with various advertising and affiliate networks, this does not affect our analysis or opinion. When you view or click on certain links available on our articles, our partners may compensate us for displaying the content to you, or make a purchase or fill a form. This will not incur any additional charges to you. To make things simpler for you to identity or distinguish sponsored articles or links, you may consider all articles or links hosted on our site as a partner endorsed link.

Recent Posts