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By Kristian T. Sørensen – Norfico
While the ability to pay using a phone or another smart device rather than a payment card is a convenient use case on its own and one that has drawn much media and consumer attention over the past decade, most industry white papers and analysis have concluded that, for mobile payments really to take off, focus needs to shift to use cases for mobile wallets beyond payments. The Canada-based mobile financial services pioneer, Carta Worldwide, has introduced to the market the concept of smart tokens and smart tokenization to release the potential of Value Added Services. We met Carta Worldwide’s VP of Strategic Alliances, Giles Sutherland, to hear more.
The introduction of Host Card Emulation (HCE) effectively solved the conundrum of bank and mobile network operators having to collaborate to deliver mobile payments. With HCE also came a more standardized approach to the known discipline of tokenization – the act of substituting sensitive data with a non-sensitive equivalent. “With tokenization, the mobile payments industry took a great leap forward,” says Giles Sutherland.
He continues, “One thing was the reduction in commercial complexity’ introduced by HCE, and subsequently the digital wallet players, but tokenization brought with it a much-needed decoupling of the payment transaction and the underlying processing. This principle of abstracting interfaces from the engine has been part of the ‘tech gospel’ for years, but has finally found its way to payments.”
From tokenization to smart token
While basic tokenization is used to substitute the 16-digit payment card PAN with a token of no intrinsic value. Carta Worldwide’s second generation tokenization, the smart token, uses logic and code to add intelligence to the transaction and take it beyond transaction security.
The smart token enables programmable payments, meaning that it becomes possible to define a set of parameters specifying, for instance where, when, for what and by whom a transaction should be authorized. These new programmable payment opportunities enable value added services (VAS) at scale – for the benefit of consumers, merchants, and issuers. Giles Sutherland explains, “While much time, effort and money have gone into solving the ‘how’ of mobile payments, in recent years there hasn’t been enough time spent asking ‘why’ – why do consumers want to use mobile instead of plastic? Why do merchants want to accept payment via mobile instead of the current payment instruments? Smart tokens are enabling a new wave of innovation that will make possible more contextual, personal, and local use cases driving compelling value that will finally see mobile payments reach critical mass.”
One of the example use cases for smart tokens that Giles Sutherland shares is the support of improved payment solutions for children in place of cash. The smart token could either be prepaid or have the parent’s payment instrument – be that a payment card or a bank account – as the funding source and be deployed to the child’s wearable, mobile wallet or other smart device allowing the child to pay in the school canteen.
Upon purchase, the processing of the smart token would ensure that the child could only spend a certain amount, since the transaction would only be approved during school time and at one particular merchant – in this case, the school itself. As well as restrictions on merchant category, time and amount, the smart token could, with proper integration, even be programmed to reject purchases if the child were about to buy certain types of product. This could, for example, be used to protect children with certain allergies from buying something they cannot tolerate.
New loyalty solutions
Another instance where smart tokens could play a role is in relation to the distribution and redemption of loyalty solutions like points, discounts and offers.
So far, most loyalty solutions have been at best closed loop and very local. This is mainly due to the fragmentation that proprietary solutions have caused in the value added services market. One of the main barriers has been redemption, where the solutions have faced challenges of complex integration and continuous upgrading of POS terminals and systems.
The processing of the smart token would solve redemption issues by being able to ‘intercept’ a transaction and route it through to a given merchant’s loyalty system in the same way that a traditional transaction can be routed as a bilateral transaction or routed through to a card network. In this way, smart token technology cuts through complexity by making it possible to deliver value added services and to deploy them at scale without having to upgrade the point of sale systems.
“What is elegant about the smart token solution is that you don’t have to worry about how you deploy it. Instead, you can leverage the existing market infrastructure, thereby actually reducing the complexity of the ecosystem rather than adding to it as most solutions have done so far. It becomes simple to deploy, and it doesn’t require heavy input and buy-in from the different stakeholders in the ecosystem. This allows the stakeholders, through different partnership constellations, to focus their resources on the actual services rather than the infrastructure needed to support them,” says Giles Sutherland.
He adds, “The smart token is designed in a way that can deliver more advanced functionality, more intelligence, and more value to the user experience. Smart tokens can provide advanced functionalities and ubiquitous services while still being interoperable with the existing ecosystem – including the acceptance infrastructure. The key is the rule based authentication which occurs on the backend so that from an acceptance infrastructure perspective this solution is agnostic.”
Token of Anything
The inherent qualities of smart tokens open a range of potential use cases; first within the EMV payment paradigm, then by the tokenization of account based payments in a PSD2 setting and beyond. But smart tokenization does not end with traditional transactions or loyalty redemption. Eventually, it will also be possible to use smart tokens on a much broader scale as a possible candidate for a future ”Token of Anything” – part of the much-talked-about Internet of Value.
“This way, the introduction of smart tokens brings us closer to the idea of ‘smart money’ currently discussed by thought leaders like David Birch who advocates a future of local currencies rather than global ones. With smart tokens we can – at least in theory – support a digital marketplace where anything of value can be tokenized and exchanged. This could pave the way for a future return to an optimized version of the barter economy, in a digital and, therefore, a global setting,” concludes Giles Sutherland