Banks Need to Get on the Token Train
The idea of banks becoming Token Service Providers (TSPs) is an increasingly relevant move.
Tokenization is not new, it has existed for some time now as a way to secure card payments, though formerly within a single party domain. Now, EMVCo has taken the lead to foster and encourage global interoperability.
Fundamentally, new standards allow tokens generated by one entity to be processed by another, giving rise to a host of TSPs offering token lifecycle management - banks today pay third-party TSPs for this service. If banks were to adopt tokenization and become full-service TSPs, a new revenue stream will be created that did not previously exist; also payments to the aforementioned third-party providers can become a thing of the past. There are reasons beyond revenue that support a bank’s TSP transition.
Because it is unlikely that banks will control pricing, token costs could go up over time, resulting in reduced card transaction margins. Banks will need to comply with the processes of TSP providers. The inflexibility will become a significant pain point as tokenization is unlikely to remain restricted to card payments. In time, it will be also be essential for wearable payments, smart contract IDs for block chains, etc. across payment schemes.
In a world where Internet of Things (IoT) is emerging and M2M/A2A commerce expanding, tokenization can become a simple way of securing identity, assuring payment safety and minimizing fraud.
Clearly, there are sound business reasons for banks to investigate tokens as an offering. Larger banks that have investments in technology are bound to find it an attractive addition to their portfolio.
A typical TSP ensures that merchants, digital commerce sites and operators of mobile wallets don’t need to store card data that is vulnerable to security breaches. Instead, the card data is stored by the TSP in a virtual and secure token vault. The TSP issues tokens for transactions with no entity in the payment chain processing the actual PAN.
It is possible to develop TSP capabilities from open source components. Many vendors have taken that approach and built such products. For an issuer, it may be better to buy than build TSP capabilities. For those interested in customizing TSP functionality in-house, partnering with vendors offering collaborative design services will become necessary.
The choice between developing the technology from scratch and implementing an available solution is driven by multiple factors
Like other banking and finance systems, tokenization will quickly become standardized. Full service TSPs will, as a consequence, become commoditized.
Cost management and flexibility will likely remain the core reasoning behind a given bank’s transition into TSP. It would also benefit them to consider differentiation from an early stage. Going forward, key differentiators in a tokenization solution would involve API management, innovative notifications, fraud detection and licensing options. To achieve, banks would be well advised to partner technology providers with domain expertise in order to create reliable long-term TSP roadmaps.
Hari Subramanianis a Consulting Partner, Chetan Ghadge is the Banking Solution Group Head, and Vinodh Ravishankar is a Managing Consultant at Wipro Limited.