Electronic “tokens” avert credit card fraud

Digital is the future of everything.

And banks should have been at the front of the line. They have the most to gain. It has not worked out that way.

The simple reason is fear.

Bankers believe diving headlong into digital will lead to more identity theft. Then there is the cost, and responsibility, of maintaining all that data.

Their solution: Shift responsibility to customers, and Silicon Valley. And that is going to create a tidal wave of opportunity for investors.

For example, the proliferation of smartphones has had an unforeseen benefit. Now, almost everyone carries around a state-of-the-art biometric input device. Most have fingerprint scanners, and some have iris scanners, too.

However, the biggest advance has been software.

Together, Alphabet (GOOGL) and Apple (AAPL) control 99% of the smartphone market.  To make payments easy and safe, they embedded tokenization into their operating systems.

The technology replaces your actual credit card number with a random set of numbers generated by your bank. This “token” is then stored on the device.

The number is random, and typically cannot be accessed without a fingerprint scan. So Android Pay and Apple Pay are way more secure than any piece of plastic you may have in your wallet.

This fact is not being lost on banks. They have been struggling with mounting credit card fraud. High-profile breaches at Target and Home Depot also have not helped.

ZD Net reports that Javelin Strategy & Research found that in 2016, the number of credit card fraud victims in the U.S. surged by 17% to 15.4 million. Fraud related losses were $16 billion.

New technology can protect your credit card number with an encrypted “token”.

Even plans to move to chip-enabled credit cards may be fraught with danger. The EMV global standard gets its initials from its developers, heavy-hitters Europay, Mastercard and Visa.

But even with that pedigree, the EMV standard predates substantial e-commerce. It’s great for point-of-sale. But online, it suffers all the weaknesses of traditional cards.

In Europe, credit card fraud has already moved online. Experts fear the trend is coming here. They expect it to accelerate as fraudsters pounce ahead of the final push to implement EMV.

Tokenization solves all of their problems. And banks don’t have to pick up the cost of storing the data. Nor do they have to worry about keeping it safe.

In theory, it’s a huge win for the industry. Their share of the digital move is little more than the cost of developing a smartphone application.

Citigroup is now contemplating using tokenization, coupled with a smartphone to access its extensive automated teller machine network. Two years ago, it was toying with the idea of new ATMs with iris-scan hardware.

For bankers, that type of turnaround is unheard of. However, it is in keeping with the current progression of information technology. Everything is moving exponentially.

Scalable, modular Silicon Valley technology is the bridge to banks as they shutter thousands of branches and replace workers with identity-verifying robot ATMs.

Sociology aside, the potential positive impact to early-adopters is enormous.

This will create other winners, too. Over the intermediate and longer terms, it should create a scalable, shadow-banking cottage industry. Without the need for physical branches, anyone can get into banking.

It’s a financial technology bonanza.

And we should not overlook that banks are willingly ceding authentication to Apple and Alphabet. People already worry about privacy and the power of Silicon Valley. This move shifts power from New York’s money center to the Left Coast.

It’s not a small development. Make sure you are ready to take advantage by owning some of the major players in the transaction industry.

These players include: Mastercard (MA), Visa (V), PayPal (PYPL) and Fiserv (FISV), as well as systems integrators and consultants like Oracle (ORCL) and Accenture (ACN).

Best wishes,

Jon Markman

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Comments 4

  1. Mary Saunders July 12, 2017

    How does this article I not contextualize by discussing bits and Ethereum ? The major moated old card companies are not the only players. I lived in OR, and I am not a fan of Oracle. I would be interested in a follow-up with more bit-players as opposed to legacy players. Legacy now does not go back very far. Disclaimer: I am on my phone. Some mistakes may be mine, but some may be the intellectual property of my phone editor.


  2. H. Craig Bradley July 13, 2017


    I received my first credit card from Bank of America in 1975. I used it for 40 years with no incidents of fraud or attempted fraud ( declined transaction). Then a couple years ago someone tried to make an online purchase at a European web site selling women’s apparel. Last Nov., another attempt was made locally at a retailer in Oceanside, CA and this time, the charge went through ( This makes the case an actual crime).

    Last January, an arrest was made by the County Sheriff (rare). A 27 year old female Hispanic woman was arrested and according to the detective in-charge of the investigation: ” She had hundreds of credit card numbers in her possession and lots of stuff, as well “. Thus, we have organized credit card fraud rings going to town at B of A. Other than tokens, there is no possible way to prevent it anymore. Card holders have Zero Liability when fraud is detected.


  3. H. Craig Bradley July 13, 2017

    BILL GATES ON BANKS ( Circa 1995):

    ” Banking is necessary; banks are not “


  4. RASAQ AYOOLA July 14, 2017

    True experience is the best teacher