Tokenization and Next Generation Banking
Banking and financial services in general have evolved significantly over the past three decades. We have progressed beyond analogue banking; the days of tally numbers, when the most basic banking transactions had to be carried out in person and could take the customer anything from three to seven hours to complete.
In the unfortunate instances where a customer had a complaint, that could only be resolved in the bank branch where (s)he opened the account, a situation that compelled the account holder to travel long distances to consummate banking transactions. To access bank loans as an individual or a business was an arduous task which could take weeks or even months. Banking was both cumbersome and frustrating. As a result, people preferred to transact in cash. And many, wary of the challenges associated with running a bank account, chose not to open accounts and were happy to perform all their financial transactions in cash.
Fast forward to the present and the transformation in banking is nothing short of mind blowing. “So much has changed in the African payments landscape,” Mitchell Elegbe, Founder/Group Chief Executive Officer, Interswitch, says. Advancement in technology has totally transformed banking, financial transactions, and the user experience. Today, banking, or financial transactions are largely both seamless and fun, riding on the innovative infrastructure built for real-time online payment. “Twenty years ago, we built real-time online payment infrastructure that the industry has leveraged,” says Jonah Adams, Managing Director, Digital Infrastructure and Managed Services, Interswitch Systegra.
Indeed, with Interswitch’s position as a bellwether in payment infrastructure, and the continued innovation by the company and others, everyday banking transactions like account opening, payment for goods and services, checking of account balance, funds transfer, and accessing loans are now performed in minutes and from the comfort of the home, office, or even on the go. An individual or a business can access bank loans in millions of Naira within minutes, using only a smart phone.
Owing to the ease and convenience the digital channels offer, there has been a marked uptake of these channels. Data on electronic transactions released by the Nigeria Inter-Bank Settlement System (NIBSS) for the first seven months of 2022 showed that e-transactions rose to N210.08 trillion, an increase of about 41% over the N149.36 trillion achieved in the corresponding period of 2021. Over the past 10 years, this figure has continued to rise year-on-year.
The increasing need by bank customers for safety, convenience, and speed continues to push the envelope in banking innovation. Financial institutions are spending billions of Naira to strengthen their digital capabilities and ensure customer retention and growth. Forward thinking financial institutions have even introduced robotics to improve their operations and boost user experience.
It is clear that next generation banking or payment solutions will be heavily digital, driven by mobile wallet, account to account (A2A), cards, Buy Now Pay Later (BNPL), embedded payment, and real-time payment, among others. The 2022 Global Payments Innovation Jury report, produced by a group of industry leaders from around the world, including investors, regulators, and public policy organizations, agrees that analogue, cash-based banking or payment solutions are long dead, replaced by fully digital models.
“The market share of real time A2A and mobile money transactions is expected to increase steadily over the next five years…the card model in developed countries is going to be hard to shake,” says John Chaplin, Chairman, Global Payments Innovation Jury. The pandemic ensured that the last vestiges of cash transactions are gradually being erased. According to Harish Natarajan of the World Bank, “Worldwide account ownership has increased by 50 percent in the 10 years spanning 2011 to 2021, to reach 76 percent of the global population.” This growth, Natarajan said, is largely driven by “innovations in payment services notably mobile money.” In Nigeria, account ownership is 64%, data from the Central Bank of Nigeria showed.
Fraud, identity theft, cyberattacks, data compromise and loss, among others, are issues next generation banking will continue to contend with. Security and safety of funds and identity will drive the rate of adoption of digital banking or payment, which is why financial institutions must invest in cyber tools while regulators remain vigilant to protect retailers and bank customers.
Tokenization is one such cyber tool that is gaining prominence, becoming an increasingly popular way to protect data. For instance, the Reserve Bank of India, determined to protect customers’ sensitive information or data for debit or credit card transactions, issued tokenization guidelines for the country’s financial services industry.
Recently, Interswitch, in partnership with Providus Bank, Mastercard, and Thales, launched tokenization, “the first in West Africa and first in sub-Saharan Africa,” according to Jonah Adams, Managing Director, Digital Infrastructure and Managed Services (Interswitch Systegra). On the rationale for the introduction, Adams says, “Based on the capacity of tokenization, customers can achieve a level of core protection that is not available anywhere in the industry.” This will help build trust among customers. The benefits of tokenization are many. Among others, tokenization allows seamless, speedy, transparent, and safe financial transactions. With tokenization, online payments become stressless; the tedious card details customers had to input online become unnecessary. It enables financial institutions to cut down on cost of cards and machine production.
So, what exactly is tokenization and how does it work? Experts at Interswitch, Thales, Masterclass, and Providus Bank help provide clarity on these at the launch. Tokenization of payment cards is a process by which the sensitive 16-digit primary account number (PAN) on a customer’s credit or debit card is substituted by an algorithmically or randomly generated series of non-sensitive characters or token during payments to frustrate hackers and data thieves.
So, for instance, if a card with a 16-digit card PAN – ‘8796 5432 0165 7669, is used on a gateway that has tokenization software, a ‘fake’ random 16-digit alphanumeric ID is immediately generated with characters like ‘123D 7&F6 98Ui F45W’, to mask the original PAN. A hacker who tries to steal the payment card details will only see the fake ‘123D 7&F6 98Ui F45W’ token that is not connected to an individual or account and not the original PAN. Also, a new token is generated each time the customer uses his payment card with a compliant merchant. If a customer uses his card at compliant Merchant A, a token is generated and when he uses the same card at compliant Merchant B, another token is generated, and so on.
Babatunde Okufi, Group Head, Business Development at Interswitch, described tokenization as a tool that will help “futureproof” card payments. The global payment industry also believes this to be so. The Payment Card Industry Data Security Standard (PCI DSS) requires businesses that deal with payment card data to ensure compliance with strict cybersecurity requirements. One of PCI DSS’s allowed cybersecurity standards is tokenization.
Next generation banking will no doubt be digital. However, it would come with increasing cybersecurity challenges. The need for safe and secure banking and payment systems means the application of tokenization will find increasing relevance in the industry. It is expected, therefore, that other industry players will follow Interswitch’s lead and collaborate to protect customers and build trust and confidence in the industry.