In 2020, the money in a typical bank account is more connected than ever with a plethora of digital platforms, utilities and other third-party services. This makes controlling and keeping track of that money much more complex.
As it stands now, account holders are given a single bank account number and routing number used to make all payments to third parties (like credit card companies or gyms) or receive funds (through payroll or Venmo). This presents an unnecessary security risk – not only can somebody obtain these numbers to set up fraudulent transactions, but any of the third parties connected to the account can compromise these numbers or even leak them to malicious actors.
It’s also inconvenient. Changing that account number in case of a compromise requires contacting all the third parties with that account number on file. Additionally, with one account number, all charges and payments are displayed as transactions. Some banking apps do a better job than others of letting customers manage transactions, but it’s an annoying process to sift through all transactions to find a certain third-party charge, set limits on charges or shut off connections.
Tokenized bank accounts present a degree of security and customer satisfaction that would serve as a big step in the right direction for the industry. With unique (tokenized) identifiers generated for each third party connected to an account, tracking and controlling payments should become much easier. And if any connection is compromised, the entire account is not at risk.
Limits could be set for each token, and the tokens can be turned on or off as the account holder wishes. The access and data collected by third-parties is limited to one identifier, so they receive payments when the account holder wants them to.
This makes sense for security and convenience, so why doesn’t it exist already?
Bank accounts still work the way they did 80 years ago: As a ledger system that identifies each customer by their account number. In the late 1960s, when computers were introduced to the banking industry, new electronic systems were built on the existing model of the ledger and the filing cabinet. That’s still the system that exists today.
Change will be hard, but worth it
Any significant change is unlikely to come from the innovation layer provided by fintechs, since virtually all of them work on top of the existing banking system and are therefore bound by the same limitations when it comes to bank account number structures.
The change must come from the core. However, evolving the core data model for any system that has developed over the last 40 years around the single account number paradigm will require heavy restructuring and more or less updating every subsystem and process. That’s risky, and will involve a lot of work for any bank or core provider to undertake.
Tokenization is not a new concept, and it’s already being used as a way to safeguard sensitive data in the finance industry. It sits at the heart of Satochi’s blockchain concept, and has been effectively employed in traditional finance, most notably to secure card payments. Innovators in the finance industry have been dreaming about virtual accounts and account numbers for a while, and players such as Apple Pay, Samsung Pay, Visa Token Service and others have already institutionalized tokenized payments in the card space.
The tokenization we’re advocating for is the creation of functional, independent account numbers at the bank level that all connect to a single account, with the ACH network as a primary-use case. Along with giving the end user an experience with improved control and convenience when it comes to organizing payments, tokenization can benefit banks and fintechs as a powerful product that attracts users, as well as a cleaner and safer way to manage customer accounts.
We believe this is the kind of bottom-up evolution needed to improve the experience and overall security of the industry.
In our view, banking institutions that can find a way to offer such a solution for its users stand to reap the rewards in terms of customer satisfaction and security, while reducing fraud and operating costs for all involved. Ultimately, such a step toward modernization will also lead to cleaner interfaces, getting us all closer to more real-time and customized payment capabilities.
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