The concept behind tokenization is simple.
Tokenization is a tech-enabled way to safeguard sensitive information by replacing it with non-sensitive, scrambled strings of information.
The practice of tokenization within the financial services realm might be most readily apparent with the tens of billions of tokens issued by payments networks, where progress is charted in announcements, as well as management commentary on quarterly earnings calls.
Visa crossed the 10 billion token mark in June. The company noted that replacing sensitive consumer-level data with a cryptographic key, or token, saved $650 million in fraud in the prior year while driving over $40 billion in incremental eCommerce revenue for businesses globally.
In terms of being a business driver, “in Acceptance Solutions, third-quarter growth was driven by increasing utilization across both token and eCommerce-related services,” Visa CEO Ryan McInerney noted on an earnings call.
Mastercard, for its part, notched its own milestones. During an earnings call, CEO Michael Miebach told listeners that replacing payment credentials with a digitally secure token has had a positive impact on commerce.
“When deployed, fraud rates decrease, and approval rates improve,” he said. “So, launching a decade ago, the technology has been broadly adopted around the world. In fact, we surpassed 22 billion tokenized transactions in the first half of 2024, up 49% versus a year ago.”
Tokenization, Miebach said, also “makes checkout more secure… We are working with our merchants and bank partners to drive adoption. Click-to-Pay transactions more than doubled year over year in the first half of 2024.”
The advent of tokenization, he said, gives Mastercard “an opportunity to build a whole set of services on top of the basic token that we can price for, and that we feel we should price for, because they drive a better outcome in terms of better approval rates, lower fraud and so forth for our customers.”
Thredd CEO Jim McCarthy told PYMNTS last month that tokens, once device-specific or wallet-specific (as had been the case with Apple Pay) have evolved “into not just the digital credential, but the programmable one.” The token can now take on different “characteristics,” depending on where and how it’s being used — as a credit, debit, or buy now, pay later (BNPL) option.
The programmable nature of tokens, underpinned by blockchain and smart technologies, means that data, assets and even payments can be executed with improved security and sets of rules governing what’s changing hands and when across verticals as diverse as real estate, gaming and commodities markets.
Last summer, Mastercard launched its Mastercard Multi-Token Network to help foster the creation of these tokens (and conduct screening and transaction monitoring) to support new business models across various sectors using tokenized bank deposits.
Tokenization platform OpenEden announced in a Thursday (Aug. 1) press release that it will bring tokenized U.S. Treasury bills to the XRP Ledger. Ripple is investing $10 million into OpenEden’s TBILL tokens as part of a larger fund that will allocate the Treasury bills provided by OpenEden and other issuers.
The ledger offers automated market maker functions, which improve the liquidity of the trading itself, and simplify, in general, the exchange of assets, which in turn can open new revenue streams for financial services firms.
Earlier this year, the Bank for International Settlements announced its joint efforts with seven central banks — including the Federal Reserve Bank of New York — to test tokenization to improve cross-border payments.
J.P. Morgan Chase is one of the largest financial institutions making forays into the tokenized space. It said last year that its tokenized collateral network facilitated its first collateral settlement for a live client over-the-counter (OTC) derivative transaction. The company said in a paper issued jointly with Oliver Wyman that “deposit tokens could further support economic activity in the digital space, including in a ‘Web3 economy’ where significant economic activity happens on shared ledgers, with tokenized asset transfers settled via deposit tokens. This digital economy would be facilitated by direct, instant and atomic exchanges between peers.”
For payments networks in particular, tokenized deposits represent an opportunity. Visa said the tokens in this case are “the digital representation of bank deposits where money deposited with a bank is minted on that institution’s own blockchain ledger with the backing of that financial institution’s balance sheet.”
In tandem with HSBC and Hang Seng Bank, Visa embarked on a tokenized deposit trial to settle a high-value real estate transaction and merchant/acquirer fund flows.
