Tokenisation: Banks warn RBI of ‘chaos’ as small merchants are not ready for the shift

With the deadline to shift to the new tokenisation rules approaching, the Reserve Bank of India (RBI) has asked banks to check the level of preparedness at the entity level. The central bank has reached out to banks in recent weeks to ensure the transition is smooth, according to people familiar with the development.

“The RBI wants banks to ensure the banking system is prepared for the new rules. The regulator is in touch with most banks on this subject,” said a senior official at a private sector bank, on condition of anonymity.

An RBI official, who did not want to be named, confirmed that consultations are on with various stakeholders.

But, while banks are confident of meeting the new norms along with payment networks, merchants are not ready. During consultations with the RBI, banks warned the regulator of potential chaos as small merchants need more time for the big shift.

What is tokenisation?
Tokenisation refers to the replacement of credit and debit card details with an alternate code called a “token”. A token is unique for each card, token requestor and device. The token requestor is the entity that accepts a request from a customer for tokenisation of a card and passes the request on to the card network for the issue of a corresponding token.

A tokenised card transaction is considered safer as the card details are not shared with the merchant during transaction processing. The card-holder can get the card tokenised by initiating a request on the app provided by the token requestor.

The token requestor will forward the request to the card network, which, with the consent of the card issuer, will issue a token corresponding with the combination of the card, the token requestor, and the device.

Banks cautious
While all this will make transacting safer, immediately, banks have told the regulator that chaos could ensue if the entire system is pushed into tokenisation in one go. The lenders are worried that there will be huge disruptions across online payments platforms during the new year, unless the RBI considers their request to extend the deadline.

Moneycontrol reported on December 21 citing sources that banks, in their individual capacity, as well as industry lobby Indian Banks Association (IBA), have made representations to the RBI for an extension of the tokenisation deadline.

“Every bank has been writing individually to the RBI. IBA has written to them, too. If the whole ecosystem has to implement tokenisation at the same time, it will be chaos. It has to be a gradual, step-by-step process,” said another banker, requesting anonymity.

The senior private sector bank official cited earlier echoed that view.

 Will there be another deadline extension?
Some bankers expect that the RBI may give an extension to stakeholder, considering the difficulties in complying with the new rules in one go.

“I would say that if the RBI gives an extension, it will be better,” said the private sector bank official. “Both banks and networks are almost prepared but merchants are not,” he added.

The problem with implementation on a large scale is the lack of awareness among small merchants about the change in the process, other bankers indicated.

There is no certainty on whether the central bank will extend the deadline to tokenise debit and credit cards. However, it is weighing feedback from the industry and will take an appropriate decision, said the RBI official cited earlier.