What is Card Tokenization and its Benefits

Recently, the Reserve Bank of India (RBI) indicated that it would not extend the deadline for tokenizing card-based payments and introducing card-on-file. Tokenization as an alternative to card storage. This rule applies to all stakeholders except card issuers and card networks. This is a crucial topic from an exam perspective, hence students need to read it carefully and try to connect the dots.

Tokenization: An Introduction

• Tokenization is the process of replacing your card details with a unique code or token, allowing you to make online purchases without revealing sensitive card details.
  
• Tokenization services generate unique alternate codes to facilitate card transactions.
  
• The 16-digit customer card number is replaced with a non-sensitive value called a token. This means that a customer’s card information is no longer available to the merchant, payment gateway, or third-party provider who assists in processing digital transactions today. With card tokenization, consumers no longer need to be afraid to store their card details.
  
• Cardholders must provide explicit consent to be collected for tokenization.

Who can be the providers of Tokenization services?

• Tokenization can only be performed by approved card networks, and restoration of the original primary account number (PAN) must be possible only for approved card networks.  
  
• Appropriate security precautions must be taken to prevent anyone other than the card network from discovering the PAN from the token and vice versa. RBI emphasizes that the integrity of the token generation process must always be guaranteed.

Size of the Industry:

RBI 2021-22 and 2021-22 Annual Reports show payment transactions made with credit cards to grow 27% in volume to Rs 22.399 billion and 54.3% in value to Rs 9.72 crore reached.  

Why does RBI want to tokenize cards?

• Customers’ card details are stored by merchants and poor security measures put all customers at risk. There have been several instances in the past of merchants’ websites being hacked and debit and credit card details leaked. RBI wants to eliminate it.
  
• By requiring card tokenization, the burden of security falls on payment processors and banks, not on merchants. Tokenized card transactions are therefore considered more secure as the actual card details are not shared with merchants during transaction processing.
  
• Tokenization ensures the standardization of card-stored transactions through an irreversible higher security standard compared to existing reversible encryption standards. 

How does tokenization work for the card?

• When checking out on an online shopping portal, you will be required to enter your card details and select tokenization. Merchants forward them to their respective banks or card networks (VISA, Rupay, Mastercard, etc.). A token is generated and sent back to the merchant, who keeps it for the customer.
  
• The next time the customer comes back to shop, they should select this saved token when paying. You will see the same masked card details and the last 4 digits of the customer’s card number. The customer must enter the CVV to complete the transaction.
  
• Customers do not need to remember the token. The end customer experience remains the same during payments.
  
• Tokenization requests are implemented by the cardholder using an Additional Authentication Factor (AFA). Tokens generated by this algorithm allow payments to be made without revealing banking details, thus protecting confidential information and preventing card fraud.

Major Advantages:

Tokenization was developed primarily to combat online fraud and curb digital payment breaches. This has many advantages. Some of them are:

• Improved safety and security: The generated token is unique to one card at a particular merchant, which ensures overall security when conducting card-based transactions. Eliminate the risk of storing card data online and ensure the uncompromising convenience of storing customer token data on the merchant side.
  
• Faster checkout: Using a tokenized Mastercard allows for a faster payment process as you don’t have to enter your card number for every purchase.
  
• No more “false rejections”: Legitimate online payments with valid cards are often rejected because the transaction appears fraudulent. Tokenization makes this a thing of the past as using tokens for payments ensures the highest level of security.
  
• Simple card management: Tokenization can also be used to keep track of all cards and tokenized merchants.
  
• No physical card is required: Tokenization allows you to store a virtual version of your card on your smartphone in case you forget to carry your wallet.
  
• Additional benefits: Tokenization also offers cashback benefits when secured by platforms such as Amazon, Paytm, Swiggy, Flipkart, and Phonepay.