The global tokenization market is expected to rise to an estimated value of USD 4495.79 million by 2026, with a CAGR of 22.45% in the forecast period of 2019-2026, with key players like Symantec, Fiserv, WEX, and Mastercard all playing a key role [1].

What is Tokenization?

Tokenization is the process of swapping out sensitive information, frequently debit/credit cards or bank account details, for randomly-generated data (called tokens). This randomly-generated data has essentially no reference, which makes it different from encryption. Encryption is characterized by a mathematical code which makes the data unreadable; the code is then decrypted using a key. With that said, anyone who has the encryption can unlock (or decrypt) the data. Conversely, with tokenization, a token has essentially no relationship to the sensitive data and is therefore considered more secure. The only way to retrieve the original data is by using the original system which created the token.

In August 2019, NovoPayment announced that it has scaled the deployment of Visa Inc. (NYSE: V)’s Visa Direct to enable instant payments, P2P and P2M payments, account-to-account payments, fast funds and mass payouts, as well as the use of Visa Token Services. Visa, Inc. is a holding in the ETFMG Prime Mobile Payments ETF.

Source: Visa, Inc.

Similarly, Mastercard (NYSE: MA) announced in 2018 that it would be making its digital payments platform “token ready”, enabling tokenization services on all cards by 2020. [2]

Can tokenization eliminate security theft?

The use of tokens does not actually remove the threat to data security, but rather, it removes the data itself. In other words, if a system stores its customers’ data using tokens, and it is hacked at any point in future, the only data the hackers will get is the token. This is critical, because by itself the token is useless, as it contains no secure information. The original data is stored in a data vault which is a secure, centralized server storing the sensitive information and all corresponding tokens.

Why would a payment system use tokenization instead of encryption?

The bottom line is that for many firms, tokenization is a more cost-effective method of securing sensitive client information relative to encryption. Because the integrity of any encryption platform is based on the strength of its algorithms, encryption as a solution requires a large and expensive compliance department to provide oversight. With that said, tokenization is a less resource-intensive solution, as it removes all sensitive information from critical systems and replaces it with tokens, which are useless for any foreign entity that might wish to invade.

From the website of EVO Payments, Inc. (Nasdaq: EVO), one of the holdings in the ETFMG Prime Mobile Payments ETF:

“The layering of tokenization and encryption along with POS and EMV-compatible systems make it possible for merchants to reduce security weaknesses while also addressing relevant authorization vulnerabilities. Keep in mind that there are two areas in the transaction process in which data could be vulnerable to a data breach: the preauthorization and post-authorization points. Tokenization and encryption help protect cardholder data once consumer and payment data are validated. Additionally, tokenized and encrypted data are of absolutely no value to a hacker, as they are simply meaningless strings of characters that cannot be used.” [3]

Source: Securosis.com

The EFTMG Prime Mobile Payments ETF

The ETF Managers Group’s Prime Mobile Payments ETF (NYSE: IPAY), is a globally-diversified, liquid, exchange-traded fund that is designed for investors who are looking to take advantage of the growth of the mobile payments theme. IPAY is the first-to-market and the largest ETF to provide investment exposure to global companies transforming commerce and empowering businesses and consumers to transact securely and efficiently. Tokenization represents one improvement that is being implemented across the companies that make up IPAY’s holdings, including Mastercard (NYSE: MA), VISA (NYSE: V), EVO (Nasdaq: EVO), Wirecard AG (WDIG DE), and Fidelity National Information Services (NYSE: FIS).

 

Sources

  1. 1. https://www.marketwatch.com/press-release/tokenization-market-to-see-stunning-growth-thales-esecurity-wex-verifone-mastercard-merchant-link-2019-09-20
  2. 2. https://www.pymnts.com/mastercard/2018/digital-commerce-security-card-tokenization/
  3. 3. https://www.evopayments.us/ten-steps-to-save-your-merchants-from-data-breaches/

 

Author Portrait
With more than 30 years’ experience in investment management, James brings a wealth of experience in global markets to ETFMG’s platform. Prior to joining ETFMG, James held Senior Portfolio Management roles at Deutsche Bank, Geode Capital Management, and SSgA, where he was a member of the team that in 1994 launched the first-ever ETF. James holds a Bachelor of Science degree in Applied Mathematics from the University of Massachusetts, Amherst.