Banks and financial firms can't afford to suffer from data breaches. Hence, they hire cybersecurity experts who use various methods and test management tools to protect sensitive customer and business data. However, hackers often find loopholes in systems and manage to access and use sensitive data unauthorizedly. Therefore, traditional cybersecurity methods can't provide the best protection anymore. In this post, we'll discuss how tokenization can significantly improve the security, efficiency, and reliability of fintech services.

What is Tokenization?

It is a process where a sensitive piece of data or information is replaced dynamically by a randomized and unreadable value known as a token. Only the parties involved in the network know how to use the token. Hence, this transaction system has almost zero vulnerabilities. However, the sensitive data will still need to be stored securely at a centralized location for reference and should be protected using rigorous cybersecurity protocols.

Types of Tokenization

Here are the types of tokenization every fintech software development company should use to improve the efficiency, security, and convenience of their financial services:

1.      Vault Tokenization

Traditional digital banking apps use Vault tokenization to ensure secure payment processing through conventional methods. It also helps maintain secure databases. This secure database is called vault database tokenization. The role of this database is to safely store both sensitive and non-sensitive data. Network users use sensitive and non-sensitive data tables to decrypt tokenized information.

2.      Governance Tokenization

Many countries are moving towards digital voting systems to make elections fairer and more seamless. It also helps governments keep election results safe from manipulation and unauthorized access. However, these systems are prone to hacking attacks, and there have been instances when the security of traditional digital voting systems has been compromised. Therefore, companies should adopt the governance tokenization model for their voting systems. It's a blockchain-based model which can improve the system's security thanks t its decentralized protocols. Governance tokenization can also be used for consensus among stakeholders, as governance tokenization allows for better decision-making.

3.      Platform Tokenization

Platform Tokenization refers to the tokenization of blockchain networks enabling the development of dApps (decentralized apps). Moreover, due to their blockchain-based infrastructure, dApps are much more secure than regular apps. Platform tokenization also offers better transactional support and almost zero downtime.

4.      Utility Tokenization

The purpose of utility tokenization is to allow access to different services within its protocol. Because there's no direct investment token creation within the protocol of utility tokens, they provide an excellent platform for improving the system's overall economy.

5.      Vaultless Tokenization

Fintech services normally use vaultless tokenization for the processing of transactions. It functions on a secure network of cryptographic devices with certain algorithms based on conversion standards. This means that sensitive data can safely transfer into non-sensitive assets. In vaultless tokenization, the tokens don't require a tokenization database to store sensitive data.

6.      NFT Tokenization

NFT (Non-Fungible Tokens) is one of the most discussed technology trends. It is also one of the most common types of tokenization in blockchain. Unique digital assets like pictures, videos, audio, or any piece of art can be traded as NFTs. Apart from being the cornerstone of the Metaverse, NFTs can also play a crucial role in protecting artists' ownership rights and allowing them to seamlessly trade over a decentralized network. The demand for NFT development services is also increasing dramatically as it's deemed the next big thing in the world of technology. This is why companies are still investing billions of dollars in NFT tokenization.

7.      NLP Tokenization

Natural language processing is one of the most important applications of AI. However, many might not know the role of tokenization in this technology. Tokenization helps break down texts into smaller segments, making it easier for machines to learn and understand the language and user's speech/text better.

Benefits of Tokenization in Fintech

Here are some reasons why tokenization can make a difference in the world of fintech:

·         Helps companies and users avoid revenue loss and penalties

Financial firms cannot compromise on security; when security breaches occur, they suffer a lot as an institution. They lose a massive amount of revenue, and governments impose hefty fines on such firms for not implementing rigorous security measures and keeping up with the standards. In data breaches, customers also suffer from massive losses, and they won't let the financial firm responsible for this loss get away with it. Hence, they file lawsuits that often go in their favor, and the bank has to pay thousands or even millions of dollars in compensation.

·         Improves the security of the overall infrastructure

Prevention is better than cure. Therefore, you don't have to wait for security breaches to improve the security of your overall digital infrastructure, including your apps, software, and databases. With the help of tokenization, you can make transactions a lot more secure. The token is unreadable for any 3^rd party interferer. Only the payment processor can understand the token, which helps companies ensure external and internal protection against fraud and security breaches.

·         Reduces fraudulent activities

The best thing about payment tokenization is that there is no fixed token for one card. Instead, multiple tokens are created for the same card when used in various channels. For instance, if a token is used in a certain mobile app, the same token cannot be used in any other digital platform. So, even if the token is stolen, it's useless for the hacker. Payment tokenization also helps companies and individuals avoid loss reimbursement, expensive notification processes, and legal actions due to chargebacks.

·         Improves convenience

With the help of tokenization, customers won't have to enter sensitive information manually every time while logging into the app or making a transaction. Also, we don't recommend keeping your passwords and other sensitive information saved in a notebook, your Google/Apple account, or any other app that claims to keep your passwords and sensitive data safe. Tokenization is not only the safest way to store your sensitive data safe from breaches, but it can also help you seamlessly make transactions. Customers will only have to add their confidential details once. Then, instead of creating a fixed card or account number, the platform will create a randomized and dynamic token ID, making it almost impossible to compromise the security of your account.

·         Allows for recurring payments

Recurring payments are becoming quite common for businesses and individuals. We all have subscribed to different services, and the subscription amount gets deducted automatically through our card every month. However, recurring payments through traditional digital banking methods are prone to failure. Also, in case of a data breach, customers' card information is often accessed unauthorizedly. Therefore, financial firms and businesses need to integrate tokenization into their recurring payment system to make it safer and more convenient. As mentioned previously, tokenization helps fintech companies convert static card or account numbers into dynamic token IDs that are impossible to read and use for intruders.

·         Builds customer trust

Fintech companies can't function without gaining customer trust. Fintech companies should make their customers believe that their money is in the right place. They not only have to provide users with great features and convenience, but they also have to ensure all online transactions happen frictionlessly and securely without downtime, failures, or hiccups. We recommend using payment tokenization to improve customer experience and trust. Token-based transactions are free from security vulnerabilities. Hence, there's no chance of a breach, and the money and assets of your customers will remain secure. Also, tokenization allows for more efficient transactions. 

·         Helps fintech companies with PCI-DSS compliance

Every bank and financial firm that stores, processes, and transmits customer credit/debit card data have to comply with the regulations and protocols set out in the PCI-DSS (Payment Card Industry Data Security Standard). Considering how advanced black-hat hacking has become, it's difficult to comply with these rigorous data security standards through traditional digital banking and security protocols. Hence, tokenization provides fintech services with a simplistic and low-cost way to meet these regulatory protocols and practices. Payment tokenization satisfies four compliance clauses from PCI, which helps financial firms save a lot on operational costs.

We hope you had a great time learning about tokenization and its incredible applications in the world of fintech. Companies are always looking for individuals with excellent fintech app development skills. If you're new to this niche and want to learn more about fintech and related technologies, you don't have to spend thousands of dollars on courses. You can simply sign up at 10Pearls University's website and learn exciting courses based on various in-demand tech skills. We help people upskill themselves for free and become job-ready within a few months.