BY ARPIT SHARMA
Recently, RBI has issued a few guidelines to push forward the concept of Tokenization in the economy. The ripple effect of which was confusion, doubts and misunderstandings.
One may question what is it all about?
When I was first introduced to this topic, my mind was absolutely filled with doubt. However, this doubt was more of a driving force and it motivated me to research and write a blog for people to understand and grasp correct concepts pertaining to the field. So let’s buckle up and start from square 1!
What is Tokenization?
Tokenization is a process which converts some valuable data into a series of characters. These characters are not related to the original data in any form, be it any algorithm, formula, etc. This concept has already been implemented in developed countries such as the USA, UK, Australia, etc. wherein it is used to keep a cardholder’s (Debit or Credit) information private and safe.
One may take this to be synonymous with the process of encryption but there’s a huge difference between the two. Tokenization converts the information into more of a random string of numbers whereas Encryption uses its pre-existing algorithms and formulas to convert the original data. This makes Tokenization a much safer option because anyone who decrypts or deciphers an encryption can track down an algorithm to get the original information but it is not possible in the case of tokenization as it will just show a random string of numbers.
Application
Tokenization is used to convert sensitive information such as the 16 digit credit/debit card number, the expiration date and even the CVV of the card into tokens. Generally, the card details get saved at various sites to ease up the process rather than filling it at every purchase. Now, the payment sites or online shopping sites might assure you that your data is safe with them. However, there is every possibility that the system of such applications may get hacked and one may risk exposing their sensitive data to the hacker. To prevent this, tokenization has come under the spotlight and it is a more secure way of carrying out such transactions.
How does it work?
This model is rather more complicated compared to encryption and other existing models which makes it safer.
Let’s understand it using an example:
One goes to a nearby grocery store and decides to pay online. There is a QR code to scan, post that necessary details have to be filled in and upon clicking on the payment option there is a set of processes that follow. Firstly, a message would be sent to the app asking for a token, the app in use would ask the bank to generate a token for this transaction by sharing.
RBI and the Indian Digital Market
India has an estimated 100 crore debit and credit cards, which are used for about 1.5 crore daily transactions worth Rs 4000 crore, according to data shared by participants at a CII seminar on the subject this week. The value of the Indian digital payments industry in 2020-21, as per RBI’s annual report, was Rs 14,14,85,173 crore.
Keeping in mind the safety of every digital currency user, RBI issued guidelines to implement the system of Tokenization and make our everyday transactions much more secure and user friendly.
So far, RBI has only mandated for merchants to keep Tokenization as an option of payment but not force them to shift to Tokenization fully.
Problems faced
Tokenization has a lot of drawbacks and shortcomings as well.
The major one being its execution. The Indian Market is so varied and widely spread that even a small change requires a lot of time and effort for execution. Apart from the execution, there is another problem with smaller businesses. These micro units are not ready as of now to undergo the process of Tokenization. They consider it to be a hassle and troublesome as various systems would have to be installed to enable the process of tokenization.
All in all, just as a coin has 2 sides, every new policy model has its pros and cons. But in the case of Tokenization the major pro is that our data is safe, efficient and most importantly a lot of time is saved.
To move towards an Advanced Digital India there’s a need to move towards a Safe Digital India as well!
ABOUT THE AUTHOR
I am a first-year B.Com hons student. I am also the Research and Editorial Head at FIC, which has shaped my learning path immensely. Aside from writing, I enjoy binge-watching TV shows and series, and The Big Bang Theory is one of my favorites.
Disclaimer: The views expressed in this article are the author’s own and do not necessarily reflect the views of the organization.
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