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Tokenisation will help bring huge value to the digital payments space, and is likely to gain momentum in the coming months, said Ravi Varma Datla, Mastercard‘s vice president – digital products, South Asia.

Last month, the Reserve Bank of India issued guidelines, allowing card-on-file tokenisation. Tokenisation helps consumers to enter and save a 16-digit token on e-commerce or merchant platforms, instead of storing their card details.

“Card-on-File tokenisation enhances the safety and security of the entire transaction value chain in e-commerce payments. It builds trust and can significantly increase convenience for consumers and create efficiencies for merchants. It means there is no need for a consumer to enter his card number every time he transacts, or to login to an online shopping account to update their details due to redundant card credentials,” Datla said.

Last week, National Payments Corporation of India (NPCI) announced the tokenisation system for RuPay cards. The NPCI Tokenisation system will support tokenisation of cards as an alternative to storing card details with merchants.

“We are confident that the NPCI Tokenisation System (NTS) for the tokenisation of RuPay cards will instill further trust in the millions of RuPay cardholders to carry out their day-to-day transactions securely,” said Kunal Kalawatia, chief of products at NPCI.

Also read: What is tokenisation, and how can it ensure safe transactions?

When buying a product or service online, consumers are usually forced to store their credit or debit card details. This is where tokenisation plays a significant role in ensuring consumers’ safety.

“What makes this type of token unique is that it can be used just like your normal card for online payments but only by the merchant that requested it. This means that if a bad-guy or hacker gets their hands on a token – it simply cannot be used. For the sake of identification and reconciliation, RBI has permitted merchants to display the last 4 digits of the original card number to the consumers,” Datla said.

Datla added that as of today, customers have no single view of all the merchants where they have saved their card number. With tokenisation, customers can reach out to their respective banks and view the list of all the tokens saved at merchants and also request to delete or update them.

Recently, Visa launched its card-on-file tokenisation service in India. The company has enabled its tokenisation services across 130 countries. As a large number of shoppers make the shift to online payments, Sujai Raina, Visa’s India business development head, believes it will ensure a frictionless checkout experience for consumers, and drive higher payment success rates for merchants and issuers.

“We believe the RBI’s directive to roll out card-on-file tokenisation in addition to the earlier device-based tokenisation protocols, will help build a safe, secure and seamless environment for digital payments, thus enhancing consumer trust across digital platforms,” he said.

When asked Mastercard about its plan to launch its tokenisation services in India, Datla said the company is working with its partner banks, merchants, payment aggregators, and other stakeholders towards a smooth rollout.

So far, Mastercard has rolled out tokenisation for consumers in over 2,500 banks across the globe. The company has found that the tokenisation has enabled a safer payment ecosystem, and has also increased transaction volume across the digital channel to return greater revenue for merchants, Datla said.

Datla also believes that tokenisation will help make digital payments seamless. “By replacing sensitive payment data with digital tokens, a superior ecommerce experience is created which provides increased security, approval rates and a frictionless consumer experience,” Datla said.

After a lot of deliberation, India finally bit the bullet of consolidating public sector banks (PSBs). The expected advantages in terms of reduced cost through improved efficiency and better quality of service, risk diversification, and larger balance sheet enabling ability to write larger cheques and unconstrained by single borrower and single group exposure limits are obvious.

In line with the growing requirements of the Indian economy and its aspirations, there is requirement of banks whose balance sheets are capable of underwriting large projects. As of now, State Bank of India (SBI) is the only bank which is among the top 100. To put this in to context, SBI’s balance sheet size was around $600 billion (in FY21), compared to $5 trillion for Industrial and Commercial Bank of China.

In-house expertise

A large bank is likely to have strong in-house expertise and experience to assess and price risk. During the last growth phase, most small PSBs were followers that underwrote exposure in the quest of expanding their balance sheets, without necessarily having a clear understanding of risk. In this respect, the Finance Minister’s comments for India needing 4-5 banks of the size of SBI are apt.

It has been around two-and-a-half years since the first amalgamation of three large banks was carried out (Bank of Baroda, Vijaya Bank and Dena Bank) and a year-and-a-half to the subsequent ones. While it may be too short a period to analyse the outcome, given that almost an entire year-and-a-half has been under the shadow of the pandemic, our assessment shows initial signs are encouraging.

The amalgamation process has been smoother than expected. While there were protests from the employees’ unions, the right messaging from government and bank management helped in limiting their intensity. The amalgamation schemes were well thought out and the system compatibility was kept in mind while selecting candidates. This enabled a smoother transition of customers and services of the merged bank to the anchor bank. The merger of banks has resulted in significantly larger franchise, which should aid in risk diversification. The five merged banks, along with SBI, now account for 53 per cent of systems advances (FY21) vis-a- vis 44 per cent in FY19.

The merged banks are also likely to reflect better risk diversification as they deploy discretion and risk adjusted pricing in taking exposure, which should reflect in lower concentration of advances. They would also have strengthened negotiating power with the borrowers and better ability to price the risk. As one would reckon, a large part of the asset quality issues in the corporate segment emerged on account of weak bargaining power, as many a times the banks would merely participate in the lending consortium on the terms finalised by the larger banks, thereby losing out on both pricing and collateral security.

Consolidation is also likely to strengthen funding as banks can demand that the borrowers direct transactional flows through them, thereby improving their current account deposits.

Operational efficiency

The merger has also helped in improving operational efficiency, as overlapping branches were shut down, resulting in cost savings. SBI had closed about 3,000 branches post the amalgamation of its subsidiary banks with itself within one year. Canara Bank rationalised about 600 branches within one year. Similar steps were taken by other merged banks.

The elimination of overlapping responsibilities in consolidated entity has strengthened senior management pool for the merged entity. One area where consolidated banks are expected to focus on is the upgradation and adoption of technology and digitisation, a process which becomes efficient with scale. As customers are increasingly becoming more demanding and their needs and requirements undergoing a change, this area is likely to become a differentiator.

Reducing govt presence

The second leg of banking sector reform is the government’s focus on reducing its presence in businesses and acting more as a facilitator. Some of the PSBs have had a consistent track record of weak operating performance (asset quality and profitability), poor efficiency and inadequate financial management and governance. These banks have been constantly needing government infusion, directed from taxpayer money, to support operations. There is an argument that private control on these banks would stimulate a wholesome, efficient banking system, which would be better prepared to support banking needs of high-aspirational economy, limiting demands on government resources.

The government has already announced that there would be no more consolidation and its intention to privatise two (yet-to-be-identified) PSBs. While the idea has its merit, there are certain challenges that need to be addressed. The PSUs are governed by Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, which caps the voting rights at 10 per cent for a non-government shareholder, irrespective of shareholding of private shareholders. The laws would require amendments and need to be passed by Parliament.

One could believe that some large domestic private banks or some foreign banks could be potential suitors. However, private banks have generally been lukewarm to the idea of acquiring PSBs, owing to the challenges in system integration, HR culture and policies. Additionally, selling banks’ stake to foreign banks may be politically inconvenient.

This sets the stage for the other debated topic of allowing corporates to own banks. Many of the corporate houses operate insurance companies and NBFCs of significant scale and, hence, have experience in running a financial services segment.

However, concerns have been raised on the ability of regulators in extending their supervision to non-financial entities, and the risk of challenges in non-financial entities seeping in to financial services segment. But the foremost argument has been the prevention of connected lending and corporate-owned bank being a neutral intermediary. Ostensibly the reason for the bank nationalisation was to prevent the misuse of the banking system by owner business groups.

Some of these issues could take time to resolve and, hence, the process of privatisation could be somewhat a long-drawn affair. Having said that, there is little argument that these steps, if implemented, will have huge potential and can significantly aid in supporting India’s economic aspirations.

(The writer is Director and Head, Financial Institutions,

India Ratings and Research)