Digital banking is revolutionizing the world by transforming the way we manage and interact with our finances. With the rise of mobile apps and advanced fintech solutions, banking has become more accessible, convenient, and efficient than ever before. Customers can now perform a wide range of financial activities, from transferring money and paying bills to investing and applying for loans, all from the comfort of their smartphones. This shift is not only making banking services more user-friendly but also driving financial inclusion for people from all walks of life to participate in the global economy.

As digital banking continues to evolve, the integration of tokenization is further enhancing its impact and offering new levels of security, efficiency, and access. By leveraging tokenization, digital banking platforms can provide more seamless transactions, secure customer data, and open up new possibilities for asset management and financial innovation. 

In this blog post, we will briefly talk about what is tokenization in digital banking? Why do we need it in banking? And what is the process of it?

Tokenization in Digital Banking

We have talked about tokenization multiple times in our previous articles however, for simplicity, you can perceive tokenization as representing some valuable information by a symbolic token. It converts tangible or intangible assets into digital tokens, such as art, real estate, or stocks, with blockchain technology. It is similar to a social security number which represents a specific citizen or the plastic coins in the poker game which represents real money. 

These days financial institutions have started focusing on the crypto space to address issues like anti-money laundering, and compliance. Not just in retail banking, but tokenization is helping in investment banking as well by transforming bonds, mutual funds, insurance, real estate, or even the dollar itself into tokens. Tokenization has made all of this possible by leveraging the transparency and security offered by blockchain technology.

Also Read: Payment Tokenization 101  &  Data Tokenization 101

Financial Institutions Moving Toward Tokenization in Banking

Tokenization brings a large variety of benefits across the financial sector. It also works beyond the scope of banking to encompass investment and capital markets as well. About 85 percent of security transactions are conducted on trading platforms today utilizing tokenization. Various companies such as JPMorgan Chase, Goldman Sachs, and UPI have implemented tokenization in their financial service. 

To discuss some of the implementations, we first have a JPM Coin, a digital currency, introduced by JPMorgan to perform instantaneous transactions between institutional accounts. Goldman Sachs in 2018 has also announced plans to build a trading platform for not just security trading but other financial services as well. UPI is India’s largest payment system which as of now processes over 500 million token-based transactions monthly between vendors and end-users with high security and instant finality.

This explains how tokenization streamlines financial transactions by hiding sensitive credentials during exchange. It balances security, convenience, and fast processing for both consumers and businesses. 

What is Tokenization in Digital Banking?

In the banking sector, Tokenization seems relevant and important as it offers high-level security to protect sensitive credit card details from the open banking system. It achieves this by replacing sensitive customer information, such as credit card numbers, account details, or personal identification, with a unique digital identifier known as a token. This token is a randomly generated string of characters that holds no intrinsic value and cannot be used outside of a specific transaction or system. When a payment is made or an account is accessed, the token is used in place of the actual data, which remains securely stored in a centralized or cloud-based system.

For instance, when you use mobile wallets like Apple Pay or Google Pay, your actual card number isn’t transmitted; instead, a token is used, which ensures your information remains protected even if intercepted. This not only reduces the risk of theft but also streamlines transactions by cutting out unnecessary intermediaries. As a result, this enhances security and reduces the risk of data breaches, as even if the token is hacked, it cannot be used to access the underlying information. Web3 takes this a step further by combining the power of tokenization with an immutable ledger to achieve the safest and most transparent system where each transaction is recorded forever. 

Also Read: Credit Card Tokenization Explained: Everything You Need to Know

Why We Need Tokenization in Digital Banking

Tokenization offers a variety of benefits across industries. For various transactions, we have different types of tokens, such as NFTs, crypto, or security tokens. Additionally, tokenized payment is a digital innovation that uses crypto tokens to represent currency and simplify the complex process of cross-border transactions. Visa Token Service is a real-world tokenized payment example that replaces sensitive card details with a unique digital ID token during online transactions.

Apart from this, users of the banking system can exchange dollars for digital tokens such as USDC and DAI which they can transfer or spend online. These tokens securely hold real money in reserve, ensuring that sensitive financial information never directly touches the merchant’s systems.

Tokenization also streamlines the process of issuing and managing security transactions, reducing the time and cost associated with these transactions. Smart contracts, which are self-executing contracts with the terms of the agreement directly written into code, can automate compliance, dividends, and settlement processes, further enhancing efficiency and reducing the risk of human error. For banking, this means not only cost savings but also the ability to offer more innovative financial products to their clients. As tokenization continues to gain traction, it is set to redefine the landscape of investment banking, making it more inclusive, efficient, and adaptable to the needs of a global, digital-first economy.

 What is the Process of Tokenization in Digital Banking 

Typically these are the key steps involved in the process of tokenization in banking.

• Data collection

The bank collects and gathers all sensitive data requiring tokenization, such as usernames, passwords, transactions, balances, etc.

• Token definition

The technical definitions are specified on the basis of data format, structure, and cryptographic techniques required to tokenize different categories of attributes.

• Token generation

Then tokens are generated programmatically in the selected forms such as hashes. We render the real meaningful data behind these cryptographic hashes to hide sensitive information.

• Token Mapping

Then we use a ledger to map each real value to their corresponding hash value.

• Token utilization

In this step, while performing business or individual transactions with partners or across internal and external systems, tokens replace actual data in a seamless manner.

• Token renewal

To obscure traces of attributes and sensitive information from malicious parties, tokens may undergo periodic refreshes.

• Vault management

In vault management, we define the internal authentication which can encode, decode, or define the mappings to utilize tokens according to their assigned definitions and functions.

If we implement this technology well in the architecture of the financial system, we can unlock seamless, privacy-protecting digital services for customers.

Conclusion

The future of tokenization in digital banking holds tremendous potential to reshape the financial industry. As more institutions adopt this technology, we can expect to see a continued shift towards greater accessibility, security, and efficiency in financial transactions. Tokenization will enable broader participation in investment opportunities, allowing individuals to invest in assets that were previously out of reach. It will also enhance the speed and security of digital banking transactions, from everyday payments to complex cross-border trades. As the technology matures, the integration of smart contracts and blockchain will further streamline operations, reduce costs, and minimize risks across the banking sector. Ultimately, tokenization is set to become a cornerstone of modern finance, driving innovation and transforming how we interact with money and investments in a digital-first world.

Ready to integrate tokenization into your financial solutions? BlockApex offers expert services to help institutions leverage this technology for seamless, secure, and scalable digital transactions. Contact us today to learn more!