RBI Notifications

What is Tokenization of Debit and Credit Cards?

Note4Students

From UPSC perspective, the following things are important :

Prelims level: Tokenization

Mains level: Read the attached story

The Reserve Bank of India (RBI) has decided to defer the implementation of tokenization of debit and credit cards for online transactions by a further six months following representations from stakeholders.

RBI decision

  • RBI has also extended tokenization of Card-on-File (CoF) transactions where card details are saved by merchants — and directed the merchants not to store card details in their systems from January 1, 2022.
  • A CoF transaction is one in which a cardholder has authorized a merchant to store his or her Mastercard or Visa payment details, and to bill the stored account.
  • E-commerce companies and airlines and supermarket chains often store card details.

What is Tokenisation?

  • Tokenisation refers to the replacement of credit and debit card details with an alternative code called a ‘token’.
  • This token is unique for a combination of card, token requestor (the entity that accepts a request from the customer for tokenisation of a card and passes it on to the card network to issue a token) and the device.

Benefits of Tokenization

  • Transaction safety: Tokenization reduces the chances of fraud arising from sharing card details.
  • Easy payments: The token is used to perform contactless card transactions at point-of-sale (PoS) terminals and QR code payments.
  • Data storage: Only card networks and card-issuing banks will have access to and can store any card data.

How are the transactions currently processed?

  • There are many players involved in processing one card transaction today:
  1. Merchant
  2. Payment aggregator
  3. Issuing bank
  4. Card network
  • When a transaction happens on a merchant platform, the data is sent to the payment aggregator (PA).
  • The PA next sends the details to either the issuing bank or the card network.
  • Then issuing bank sends an OTP and the transaction flows back.

Which companies dominate card transactions in India?

Is the industry ready to implement this?

  • Not fully, that is why the RBI had to extend the deadline.
  • The industry currently can convert CoF into a tokenized number. However, the readiness to process the token is negligible.
  • About 90% of banks are ready with provisioning of token on Visa. Only 25-30% banks are ready on Mastercard.

Impact on businesses

If the industry isn’t ready, several business models would be impacted.

  • E-mandates (recurring payments) will stand ineffective from 1 July.
  • Card EMIs account for 25% of online e-commerce sales. That option will no longer be available.
  • Cashbacks/discount offers by banks will be impacted, too.
  • A user may not be able to use Mastercard saved cards on a merchant platform to make a transaction and will have to enter the card details every time a transaction is made.
  • This could be the same for some Visa cards.

Way forward

  • The new system is a much bigger disruption to the way digital payments will henceforth be processed.
  • Integration of systems and the ability to process is one part.
  • The industry also needs to test the performance and success rate of the tokenization solution.

 

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

JOIN THE COMMUNITY

Join us across Social Media platforms.

💥Mentorship December Batch Launch
💥💥Mentorship December Batch Launch