Tokenization, programmable payments, inclusion: Unpacking near-term trends in the payments ecosystem

Very little appears to be staying the same for the payments industry in 2023 compared to where it’s headed in the next five to seven years.

Inflation and high-interest rates are impacting consumer preferences when it comes to payments. This is resulting in near-term trends like tokenization beyond cards, borderless rails, credit for the underbanked, and the proliferation of payment acceptance options, according to a new Mastercard report.

Will tokenization take over?

Tokenization is making headway in protecting sensitive payment card information against cyber attacks. But it can extend beyond cybersecurity and involve the conversion of a tangible or intangible object that has economic value, into a digital equivalent (token) through a blockchain, enabling improved tradability and liquidity. 

The global tokenization market could reach $24 trillion in financial assets alone by 2027, according to the report. In the coming years, it’s anticipated that tokenization will expand across various financial verticals including real estate, asset management, and into contracts and agreements. 

Consumers will have the opportunity to tokenize things they already own, liquid or illiquid, without undergoing a lengthier exchange process. 

Today, 89% of the securitized asset-backed tokenization market is in real estate. Tokenization of real estate assets involves converting ownership rights into digital tokens on a blockchain network. This allows for property to be divided into small shares, enabling fractional ownership and quicker transfer of ownership. 

For instance, if a homeowner owns a house, the only way to tap that value would be to sell the house or take a mortgage or home equity line of credit, which can be a lengthy process. A mortgage comes with fees and durations that may not be favorable. 

The entire property could be tokenized in the future. The consumer will have a token in their digital wallet and can borrow against it, sell a fractional piece to an investor, or transfer some of it to family. 

The digitization of assets – trading assets, such as fiat currency, stock, or commodities, and even art and collectibles – can be represented by tokens, opening new possibilities for consumers to manage things of value.

What will be required is the ability to unify tokenized goods — they will need to be exchangeable and have standardized elements of technology, data, and security. 

“Companies like Mastercard are well-suited to bring these capabilities to market and help our customers step into this future. We anticipate that the banks, merchants, and digital players that recognize these opportunities early will be able to deliver differentiated products and services. The ones that don’t could be left behind or even disrupted,” said Ken Moore, chief innovation officer at Mastercard.

Programmable payments to the rescue

Programmable payments enabled by DLT technology are expected to bring automation and clarity into challenging payments processes, such as complex multi-party settlements, cross-border supply-chain transactions, or variable royalty payments to creators in marketplaces.

Programmable payments are automatically executed when a set of predetermined conditions are met. Artificial intelligence, machine learning, APIs, and smart contracts are expected to play a significant part in automated payment processing.

One significant pain point for companies is managing their liquidity – specifically, optimizing the payments they make relative to the payments they receive. Programmability can bring automatic optimization to this process by applying automated rules for various terms between participants and improve the timing of payments, with consideration to time-outs or lengthier cross-border settlement periods. 

JP Morgan and Siemens have tested programmable payments since late 2021 using Onyx, JP Morgan’s blockchain-based platform for payments transactions. Following pre-programmed rules, commercial payments are made automatically, removing the need for human intervention and optimizing the use of liquidity buffers during staff downtime, such as weekends, bank holidays, and overnight.

Governments are also exploring how to build programmability into money itself via central bank digital currencies (CBDCs) of 114 central banks, representing 95% of global GDP.

Tokenized commercial bank money and central bank digital currency are thought to bring benefits in terms of settling programmable payments. Both options can emerge as suitable settlement solutions for programmable payments due to the expected credibility of their issuers and their use within a comprehensive legal framework.

The rise of always-on ubiquitous digital wallets

A growing number of consumers are using digital wallets on a phone, a browser-based wallet, a bank app, a fintech app, or a crypto wallet – while feeling confident enough to leave their physical wallets at home. 

Digital wallets are now the leading POS payment method, at 32% as of 2022. Analysts expect 4.4 billion unique digital wallet users by 2025 – more than half of the world's population, according to the report. Following closely is the global biometric payments market, which is projected to grow at a rate of 62% CAGR from 2022 - 2030.

Omnichannel-style interoperability is likely to integrate wallets across environments, unified by a digital ID. Always-on ubiquitous digital wallets stand a chance to evolve into single control points, helping consumers deploy payment cards and bank accounts, tokenized assets, identity documents such as driver's licenses and passports, and house keys and office access cards. 

There may also be advances in the ways used to authenticate these credentials. 

“We expect the wallet of the future to manage data, provide customized financial insights, and even act as a remote control of sorts that enables personalization for online and in-store experiences,” said Moore.

As tech companies move into consumer finance, big banks come across the difficult choice of contending against them or partnering with them. While Big Tech is leading in global digital wallet share, banks are catching up to them to claim their market share in part – thanks to the fringe benefit of consumers trusting them. 

The race to produce the “one wallet” is also driving a shift within the financial industry leading to collaborations between banks and fintechs. EWS, owned by seven of the largest US banks including Bank of America, Chase, and Wells Fargo, plans on introducing a digital wallet to compete with the likes of Apple Pay and Google Pay but it is likely to be a long haul. Paze is set to go live with merchants and member banks in June prior to a general availability in the fall.

“I anticipate more bank and tech partnerships in the future. However, given the level of competition and regulatory oversight, no one wallet provider is likely to dominate,” added Moore.

Are borderless rails a silver bullet?

In the words of a payments expert, “The idea of global macro-harmonization is still utopian.”

While many leaders are giving a shot in the arm for the growing use cases of open banking, an absolute harmonization to create a single common regulatory and market supervisory agenda for cross-border transactions is unlikely to take shape in the immediate future. 

However, as regulators and industry work through these challenges – to get some minimum standards around security, messaging, and greater interoperability – some level of calibration between the affiliation of the willing with a number of countries collaborating to implement greater interoperability and enable borderless payments rails could happen. 

“The demand for fewer borders is a reality that will drive innovation by decade’s end. The challenges ahead include lack of standards, a fragmented regulatory environment, and varying data localization rules,” noted Moore.

The future financing solutions and the underserved communities

The underserved are a wide cohort that includes the base of the pyramid, including migrant workers and even young consumers that don’t have a traditional history of credit. Additionally, 70% of women-owned enterprises with credit needs are unserved or underserved, shows the report.

One of the key challenges of financial inclusion for these segments is with data. These consumers or small businesses may lack the data to prove who they are, or they may have a very thin credit profile due to a lack of financial history. 

In the coming years, Moore said he foresees identity tokenization and financial data, such as previous spending habits, collectively filling the gaps in today’s credit decisioning processes.

Identity tokenization requires creating identity tokens that represent the contact information and personal details of customers. It mitigates issues stemming from data fragmentation and enables a single point of reference to recognize and authenticate customer identities across multiple parts of a customer journey.

In the course of time, the credit invisible demographic may also be able to leverage tokenization to use illiquid assets as collateral along with open banking solutions that can connect that data to provide them more opportunities to access funding.