Before 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.