Government Should Monitor Tokenization Success and Take Proactive Measures

The year 2019 opened a pandora’s box giving the world numerous problems to deal with, be it the pandemic covid-19, subsequent on and off lockdowns 2020 onwards, or even resultant business shutdowns. While businesses suffered a lot in lockdowns, it also paved the way to digital mode of payments and it was in 2019 that India's central bank, RBI, started an attempt to secure the Digital Payments.

With the increase in usage of digital payments, Reserve Bank of India (RBI) allowed card networks to tokenize debit and credit card in order to continue improving the security and safety of card transactions.

What is Tokenization

Tokenization refers to a process by which a piece of sensitive data, such as 16-digit credit/debit card number, is replaced by a surrogate value referred as a 'Token', that has no intrinsic or exploitable meaning or value.

As per RBI guidelines, payment aggregators, wallets and online merchants (entities in card transaction/payment chain other than card issuers/card networks) cannot store any sensitive card-related customer information including full card details from October 1.

As per RBI, "Actual card data, token and other relevant details are stored in a secure mode by the authorised card networks. Token requestor cannot store Primary Account Number (PAN), i.e., card number, or any other card detail. Card networks are also mandated to get the token requestor certified for safety and security that conform to international best practices / globally accepted standards."

It is to be noted that tokenization is not mandatory for customers. A customer can choose whether or not to let his / her card tokenized. However, RBI encourages cardholders to tokenise their cards for their own safety. 

Besides being more secure, Tokenisation also speed up online payment processing as the customers do not have to enter every time they use it. In addition, in the absence of a card, the token helps the customer complete their transaction, making the process even simpler than before.

Has Tokenization been a success?

While tokenization brings breather for customers it also brought certain issues for merchants/online companies that runs on subscription-based business models such as Netflix, Microsoft, Spotify and Disney, which requires recurring deposits.

In mid of last month, the Merchant Payments Alliance of India (MPAI), an association that represents merchants, requested the RBI to plug issues around recurring payments through tokens before giving effect to the no-card storage rule.

As per media reports, MPAI said that success rates with tokens in testing mode for regular transactions have increased to 70–75 percent as opposed to the previous 65–70 percent. However, this is still lower than the 85-90 percent success rates of transactions executed with card details.

With this introduction of tokenization, while big merchants are not in much distress, smaller merchants are concerned as this would result losses in their revenue they were earning earlier.

The entire industry needs to be prepared

Though the RBI's intent is to ensure consumers' cards data security, there are lack of clarity on operational issues specifically for smaller merchants, since the very beginning when it was made mandatory. The deadline of mandate was extended thrice in last 18 months that created anxiety among smaller merchants and lack of preparedness due to the very fact that all the time durations between the deadlines were short for a massive country like India.

For an era of tokenization to occur a complete overhaul of existing system is what needed it is because all stakeholders in the transaction chain (issuers, acquirer banks, etc.) need to introduce technological infrastructure for meeting the requirements of proposed tokenisation.

Hastiness by RBI and small merchants' unreadiness for implementing tokenisation related infrastructures are two key deadlocks that resulted into chaos and now it's time for government to step in ensure smooth transition of digital payments into TOKENIZED Avataar.

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