A security guard sleeps near an out of service ATM machine in Ahmedabad (Source: PTI)

Rising Costs, Stagnant Revenue Prompts Revolt From India’s ATM Operators

On Wednesday, an industry association of ATM operators put out a dire warning. “Nearly 50 percent of ATMs across the country may down their shutters by March 2019,” the Confederation of ATM Industry said in a press release. The association argued that recent regulatory changes have led to a surge in costs, making it unviable for these operators to run as many ATMs as they presently are.

Behind the warning lies a confluence of factors. From the regulator’s attempt to make ATMs and cash management services safer, to the unwillingness of banks to share some of the increased costs, and also weak underlying economics of the ATM business.

“There have been a couple of guidelines that have come from the RBI and Ministry of Home Affairs regarding physical security of cash operations and cyber security measures. All this costs money and operators who need to make all these changes need to be compensated,” said K Srinivas, director at the industry association CATMi in a conversation with BloombergQuint.

Srinivas added that while costs have continued to rise, the ‘interchange charges’ have remained stagnant for the last five years, making the businesses unviable. The interchange charge is the fee that banks pay each other for the use of their ATMs by other banks’ customers.

Higher Regulatory Costs

The immediate issue is that of the increased regulatory costs and the debate over who bears the burden. The industry association estimates that the cost of these could be about Rs 3,500 crore.

New rules demand that all cash vans are accompanied by armored guards. A more costly change is the requirement to work with locked cassettes and replenish ATMs using cassette swaps rather than refilling existing cassettes with fresh cash. These rules were brought in by the RBI in April 2018. The industry had been given time till April 2021 to transition to these rules in phases.

A second circular dealing with increased cyber security measures was released by the RBI in June. This circular, which came after two advisories in 2017, gave operators and banks until March 2019 to implement a list of cyber security measures.

The ATM industry does not want to bear these costs alone. Neither do the banks.

“Bankers will now have to sit across the table and engage with the industry on how cost will be shared. Banks alone are unlikely to pay for the additional cost,” said V G Kannan, chief executive of the Indian Banks Association.

Surinder Chawla, head of branch and business banking at RBL Bank added that as per existing agreements ATM operators would need to bear the cost of these regulatory changes. He, however, acknowledged that banks may need to step in as they are ultimately responsible to their customers.

The regulator and the government have given safeguards and controls for banks and cash transit agencies in light of recent frauds. Banks will have to step in at some point as they are ultimately responsible for their customers deposits or requirements. A commercially viable solution will be found when these agreements expire or are renegotiated, but cash transit agencies will have to bear the cost as per their agreements until then.
Surinder Chawla, Head - Branch and Business Banking, RBL Bank

Stagnant Revenues

While the regulatory costs may be an added burden, the underlying problem of stagnant revenues has existed for some time now.

For one, interchange charges have remained at Rs 15 per cash transaction for five years now. Navroze Dastur, managing director at banking solutions company NCR Corporation, says that of the Rs. 15, service providers earn Rs. 10 on an average. “The industry has been lobbying for a higher rate for some and the addition in cost has come as a double whammy for the industry,” Dastur told BloombergQuint.

The number of transactions per ATM, which would determine the revenue earned from interchange charges, have also not risen.

Data collated by BloombergQuint from the central bank’s database shows that in August 2018, 3,921 transactions took place at every ATM on an average. The level of transactions per ATM have remained mostly stagnant for the last few years and has declined compared to six years ago. Data prior to 2012 was not available.

To be sure, the stagnation in volumes per ATM may be partly due to surge in the number of ATMs in the early years. Some of the expectations on which this surge was based may have gone awry since a multitude of digital payment options have emerged.

In response to the weak economics, new ATM installations have dropped in recent years. RBI data shows that after a few years of rapid growth, banks are setting up fewer ATMs.

But even with the current level of ATMs, operators may need to find other streams of revenue, said Kalpesh Mehta, financial services leader at Deloitte.

At a time when utility of ATMs is expected to decline, operators and banks will need to focus on alternate sources of revenue generation by providing value added services to consumers.
Kalpesh Mehta, Financial Services Leader, Deloitte.

For now though, ATM operators will need to work with banks and regulators to find a solution to the jump in costs. That solution is important to ensure that customers in smaller towns and villages are not inconvenienced.

“If you go into smaller towns and villages, the economy depends on cash...unless you put up more ATMs, these customers will be inconvenienced,” said Srinivas.

None of us are arguing that measures announced are not required but you can’t expect operators to bear the entire cost. We’ve reached out to RBI, NPCI and we are reaching out to the Ministry of Finance to find a solution.
K Srinivas, Director, CATMi