The digital economy and specially its virtualization, has been on the rise since the beginning of the internet´s development. The so-called tokenization of the economy is affecting all sector of activity and especially the finance field, as well as the customers fidelization systems.
What is a token?
A token is just a piece of data that represents another piece of more valuable information. Tokens have virtually no value on their own; they are only useful because they represent something larger.
A good analogy is a poker token: instead of filling a table with legal tender bills and coins (which can be easily lost or stolen), players use tokens to determine their position in the game. Token chips cannot be used as money; however, they must be exchanged after the game for sound money.
Tokenization works by removing valuable data from your environment and replacing it with those tokens. Most companies keep at least some sensitive data within their systems, whether it is credit card data, medical information, Social Security numbers, or anything else that requires security and protection. By using tokens, this data is extracted from your environment entirely and then replaced with tokens that are unique to each piece of information.
The token itself inherently carries the information or value. The purpose of token conversion is to exchange sensitive data – typically payment card or bank account numbers – with a random number in the same format but with no intrinsic value of its own. This differs from encryption, in which a number is changed mathematically, but its original pattern is still stored in the new code, known as format-preserving encryption.
Tokenization is the process of removing sensitive data from enterprise systems by replacing it with an indecipherable token and storing the original data in a secure data vault in the cloud. Encrypted numbers can be decrypted with the appropriate key. Tokens, however, cannot be re-invested, because there is no mathematical relationship between the token and its original number.
Tokenization, a booming phenomenon and great growth prospects throughout the world economy
Several institutions such as the World Economic Forum (WEF), Deloitte or McKinsey project that up to 10% of the world’s Gross Domestic Product (GDP) will be stored and processed with the help of blockchain technology by 2025-27. According to Finoa, it is estimated that by the year 2027, the tokenization of capital markets for example could exceed 24 trillion dollars.
This phenomenon is managing to cross not only borders and any sector of activity but also companies of any size. The solution and tokenization services have been deployed across verticals, including government; banking, financial services and insurance; IT and telecommunications; healthcare; retail; energy and utilities; automotive; and education.
According to Markets and Markets, SMEs are expected to be the biggest beneficiaries of the tokenization market. SMEs are small in size but serve a large number of customers worldwide.
The tokenization of the customer-supplier relationship, a great opportunity to transform customer loyalty systems
Companies can relate through tokenization with their customers and modernize their traditional loyalty systems such as the cards we use daily in shops and services to accumulate points, discounts … as Iberia Plus, Travel Club, Carrefour …
Loyalty systems have stood the test of time even though technology has been transforming the way consumers interact with brands, forever changing the way products and services are delivered. For the same reason, many methods of encouraging customer loyalty have come and gone over the years, yet the concept of rewarding customers will never go out of fashion. Brands have recognized the need to cultivate customer loyalty in an environment where business competition is increasing and customer loyalty is decreasing.
But let us not forget that loyalty systems are first and foremost a means for companies to know their customers and to adapt to their needs, tastes and preferences.
With the entry of Blockchain technology a world of opportunity has opened up for brand building through tokenization. By leveraging these technologies, loyalty programs can improve the customer experience while addressing the challenges associated with traditional reward models.
The current state of loyalty programs is that there are too many of them, which are not interconnected. Most programs operate as isolated silos. As a result, the user experience is inconsistent and it seems impossible for customers to achieve a minimum number of points to redeem against relevant rewards. Who has not stopped accumulating points for the unattractive rewards – 10,000 points for a game of frying pans?
With the introduction of a token-based loyalty system, the parameters for companies can change. Imagine an open system where reward points from different issuers can easily be exchanged through a network of SMEs, shops and start-ups.
Everyone will be able to offer a variety of different rewards to suit the tastes and preferences of their customers. Reward points are built on tokenization and are essentially “currencies” used in the daily exchange of products and services in a large trading community.
The decentralized and open source format of the blockchain, together with high security encryption, will allow companies to connect directly with customers in an open way. It will facilitate seamless interaction between stakeholders, from customers to shops in a secure and fraud-proof environment. There is still a big question: how will the collection of consumer data, the main objective for companies with their loyalty programs, be solved? At Fellow Funders, we have no doubt that ingenuity and creativity will soon solve this.