Tokenization – paving the way for the future of payments

Source: This article was first published on https://cio.economictimes.indiatimes.com/news/next-gen-technologies/tokenization-paving-the-way-for-the-future-of-payments/83421635

Tokenization will not only redefine the current payment ecosystem by enabling a safe and secure experience for the consumer but will aid our country significantly in migrating faster towards a less-cash society.

Over recent years India has emerged as an epicentre of digital payment innovations. Consumer behaviour, government, regulatory initiatives and investor appetite are all synchronized towards driving, adopting and using digital solutions. And while smartphones, mobile technology and eCommerce complemented this growth, the usage of digital payments really got a leg-up during the COVID-19 pandemic last year.

Mirroring these changes, the country’s digital payments industry is also consistently evolving and moving towards an ecosystem that supports the already existing card-based models, along with fostering the growth of new and innovative cardless solutions!

Safety concerns and movement restrictions resulted in online transactions growing 80 percent in 2020 over 2019. There is an increasing preference for contactless payments – with contactless cards and mobile devices providing “less touch” experiences – now accounting for 41% of face-to-face Visa transactions in the Asia-Pacific region. And as service providers strive to create a simplified, seamless payment experience, the need to balance security emerges. Given the increase in internet penetration and mobility, security threats are increasingly rearing their ugly head. Cybersecurity experts are vocal in their fears about the increasing number of payment vulnerabilities as customers expose vital financial information during transactions.

As India reaches a point of digital inflection, its success or failure will depend on the capability of the ecosystem to collaborate to prevent fraud and protect the consumer’s information, more so in an economy that is digitally enabled. The guidelines released by the Reserve Bank of India on Tokenization for debit/credit/prepaid card transactions through mobile and tablets enabled stakeholders to explore tokenization for contactless transactions at Point Of Sale (POS) terminals, Quick Response (QR) code based payments and in-app payments.

With an increased spending in ecommerce – a growth of 73% in Tier I cities and around 400% in Tier II & III cities – coupled with a preference shift towards subscription-based services after the pandemic, it is the apt time to extend tokenisation guidelines towards online commerce too. With the regulator prohibiting Payment Aggregator & Payment Gateway (PA/PG) providers from storing card related details for security purposes, allowing tokenisation for online commerce would enable e-merchants to enhance the checkout experience. That said, with a steady increase in the digital payments across the country, tokenisation for offline and online transactions is a significant step towards a secured digitally enabled country.

Securing digital payments through tokenisation

Frauds amounting to INR 1 lakh or more have increased between 2017 & 2020 at a CAGR of 34%. Visa Token Services, deployed in India since 2017, are designed to offer secure payments with a broad range of connected devices, across multiple digital wallet providers and with future payment innovations globally. It helps protect transactions by replacing sensitive payment information with a unique digital identifier or “token”. This encrypted token keeps actual card details private and has no value if compromised.

Simply put, tokenization is an added layer of safety in digitised payments creating a water-tight security environment. Tokens are issued to the device of the customer through what is called token issuance. The main objective of this token is to anonymize and protect the 16-digit number on a payment card, by replacing and devaluing the real card number with a randomly generated number that looks like a PAN. With zero frauds reported on tokenized transactions till date in the country, the use of tokens not only translates into convenience but above all, a reassurance of security.

Enhancing consumer payment experience

The pandemic has altered the way consumers use and pay for services. With work-from-home changing content consumption and collaboration for work, subscription services witnessed a significant uptick1 and tokenization can help increase stickiness. It also eliminates the need for consumers to update their card credentials on expiry thereby catering to a growing set of users shifting towards subscription-based services.

At a time when the limit for contactless payments without the need of entering PIN has been increased to Rs 5,000, this also enables a merchant to utilize their payment device/mobile phone to conduct contactless transactions, even if the corresponding tokenized transaction is not from a contactless card.

Enabling a digitally connected future

With a digital near-revolution currently underway in India, merchants are adopting omnichannel strategies to capitalize on consumers who shop across channels. While this enables them to further enhance the consumer experience, there is an additional responsibility to protect consumer’s sensitive information. Acceptance of tokenization helps them achieve a twin objective – becoming more customer-centric as well as cost-effective, as tokenization does not require merchants to make substantial changes to their payment acceptance systems. The consumer experience can be taken to a completely different level if issuers move from additional factors of authentication and instead deploy resources for risk-based authorisation.

Globally, tokenization has led to reduction in fraud impact on online merchants by an average 26%. Thus, it helps prevent fraud by offering financial institutions, merchants, and third-party payment providers such as digital wallet providers, a secure way to enable mobile and online payments without sharing sensitive account information. For consumers there is no change in the way payment is made, either in-store or online, hence removing some of the complexity in digital transactions from their perspective.

While it is still a long road before our market matures, we are on the path towards a new universe – beyond laptops and handheld devices to car dashboards and wearable technology for day-to-day transactions. So, it will become quite natural that consumers carry out a financial transaction, anytime and anywhere using their devices, expecting greater convenience, connected through cloud technology. To this end, tokenization, will not only redefine the current payment ecosystem by enabling a safe and secure experience for the consumer but will aid our country significantly in migrating faster towards a less-cash society.