Why the ATM industry in India continues to struggle

The economic recession, Covid-19 pandemic, and the increased digitisation in cities have dealt another blow to the ATM (automated teller machine) industry that's already stuck in unviable operations. With the Reserve Bank of India (RBI) yet to decide on the proposals for an increased fee structure, ATMs in the country are gasping for breath.

Most of the scheduled banks and independent ATM operators—called white-label ATM operators or WLAOs—have reduced the number of ATMs operated by them. This has already impacted people from rural and semi-urban centres who essentially form the bottom of the socio-economic pyramid.

The total number of ATMs in India stands at 234,244 by end of September 2020, marginally down from 2,34,357 in March 2020, according to RBI data. A senior banker said the industry has seen stunted growth since 2017, following strong annual growth of 14% between 2012 and 2017.

The stunted growth in ATMs is putting a serious strain on bank customers across the country. Since the demonetisation of high-value currencies in November 2016, several million people have come to the banking channels by opening new accounts. The government’s move to go for direct transfers of welfare benefits to people’s accounts has also given a push to new bank accounts.

The banker, who declined to be identified, says there is a perceptible change in consumer behaviour following the pandemic. “A vast majority of people reduced their activities at ATMs for the fear of the Coronavirus. There was also a fear of the virus staying alive on the currency notes. It crippled the cash economy even after the first three months of the lockdown,” he says.

“ATM operators are facing tough times. We are still nowhere near the March 2020 levels. Even during Diwali, the activities were 20% less than that of March, and 30% less than the previous Diwali,” says Sanjeev Patel, chief executive officer of Tata Communications Payment Solutions Ltd (TCPSL), a wholly-owned subsidiary of Tata Communications Ltd. TCPSL is the largest WLAO in India, currently operating 7,615 ATMs. It has been steadily shutting down ATMs since September 2019, when it had 8,352 ATMs.

Despite holding a licence to set up 15,000 ATMs, TCPSL has decided against deploying new machines unless there is an upward revision in the interchange fee (payment from the cardholder’s bank to the ATM owner). “Initially, during the lockdown, ATMs were not accessible primarily because of customers’ inability to go out. Later, the entire ecosystem that supported the ATM industry had collapsed. There was an acute shortage of manpower and cash replenishment agencies (CRAs) struggled to fill ATMs. A lot of employees and drivers had left for their villages during the lockdown. It was hard to maintain the required cash levels in ATMs, especially in rural areas,” says Patel.

Soon after the lockdown was lifted in June, rural and semi-urban ATMs were back in action, while ATMs in metro cities continued to face rejection. ATMs deployed in colleges and other educational institutes, bus stands, railway stations, and commercial establishments, especially IT companies, are all mostly non-functional.

K. Srinivas, managing director of BTI Payments Private Ltd, the second largest WLAO in the country, says companies are losing money since the interchange fee is inadequate.

At present, the total number of white-label ATMs stands at 24,195.

Among WLAOs, two players—Muthoot Finance Ltd and SREI Infrastructure Finance Ltd—have already exited the business as it was “financially unviable”. Muthoot had 217 ATMs in March 2020, and none by September 2020.

“More than a year after the RBI committee submitted its proposals to increase interchange [fee] in December 2019, the central bank is sitting on it,” says Srinivas.

In June 2019, the RBI had set up a committee headed by V.G. Kannan, the then chief executive of Indian Banks' Association (IBA), to review the interchange fee structure. The idea was to give a fillip to ATM deployment in the country, especially in the unbanked areas. The committee unanimously decided to increase the charge to ₹18 for cash transactions (from the earlier ₹15) and ₹8 for non-cash transactions (from the earlier ₹5) in rural areas where the population is less than 1 million. In urban areas, the fee was fixed at ₹17 and ₹7, respectively. The committee also decided to charge all cash transactions above ₹5,000 while it was agreed to expand the scope of three free transactions available in cities to 50-odd towns with a population of more than 1 million.

The committee had also deliberated on issues around the cost impact of regulatory guidelines for enhancing ATM security and control measures. “Enhanced security measures at the ATMs and the vehicles carrying cash had also impacted the overall economics of ATM deployment,” says the banker quoted above.

As the RBI decision to hike the interchange fee hangs in balance, WLAOs are counting their losses. According to a back-of-the-envelope calculation, white-label operators have spent over ₹1,000 crore to set up 25,000 ATMs in India, at an average cost of ₹5 lakh per ATM. Depending on location, each ATM may incur a running cost of ₹30,000 to ₹50,000 per month, according to Patel. This means that you need 90-100 transactions a day to make its operations viable.

The RBI committee estimated the average monthly cost of operating an ATM to be in the range of ₹75,000-₹80,000 per ATM, excluding cassette swap. “The blended estimated cost (cash and non-cash transactions in the ratio of 75:25) per transaction at the rate of 120 average financial transactions per ATM per day comes in the range of ₹15.60 to ₹16.70 and at the rate of 130 average transactions it comes in the range of ₹14.50 to ₹15.40. This is against the existing blended interchange rate of ₹12.50. The cost per transaction for WLAOs are higher as their hits per day per ATM are low compared to bank ATMs. The cost of operating ATMs per month may further rise by about 15%, if cassette swap is implemented,” said the committee.

According to Srinivas, the cost per transaction is around ₹15.50, taking a weighted average of cash (75% of all transactions) and non-cash (25%) transactions. “As against this, the realisation is only ₹12.50 per transaction today.

Some WLAOs have continued to deploy ATMs in the hope that the RBI would one day increase the interchange fee. For instance, BTI Payments has increased its numbers and is now in striking distance of the No.1 player. “By December-end, our total number was 7,400 ATMs. We are hopeful that the RBI will soon hike the fee structure. As a conscious decision, we had deployed a majority of our ATMs in rural and semi-urban centres. After the government’s move to promote direct benefits transfer (DBT), people from rural and semi-urban areas have come back to ATMs in a big way. The move by companies to allow people to work from home has also helped improve ATM usage,” says Srinivas.

He adds that his company has seen a 20% increase in transactions at their ATMs in the rural and semi-urban areas as compared to the pre-Covid-19 days. “However, usage in our ATMs in urban centres continues to be a problem.”

Low penetration of ATMs in India

The fact remains that India continues to be among the countries with the lowest penetration of ATMs. While India has 650,000 villages, there is one ATM for 10 villages. “This is a big hurdle for financial inclusion. We need to provide 24x7 ATM access to the public. Otherwise people will start keeping more cash than one requires in their homes,” says Patel.

Srinivas agrees. “The ATM penetration needs to be enhanced. A higher interchange [fee] will draw more companies to set up ATMs.”

The RBI committee noted that ATM access in India lags most of the emerging markets and large economies like Russia, Brazil, China, South Africa, the U.S., the U.K., etc. with only 22 ATMs being available per 100,000 adults in the year 2017. While the overall ATM access in India is low, the ATMs are also unevenly deployed between rural and urban areas. About 69% of the population, living in rural areas as per the 2011 census, have access to only 47% of the ATMs deployed in semi-urban and rural centres, the rest being in metro and urban centres. “There is a huge requirement for ATM deployment in India to make it accessible to masses and make it even more available in semi-urban and rural centres where it is highly underserved,” noted the committee.

Interestingly, the currency in circulation (CIC) has seen a sharp increase and is hovering around ₹27 lakh crore. After a temporary blip during demonetisation, the cash economy has continued to thrive in the country.

“While digital transactions have shown a sudden increase, ATM transactions are also growing at 13%-14% annually in line with a similar growth in CIC. There are 850 million debit cards in the country and growing. All these will increase the reliance on ATMs,” says Srinivas.

India also has one of the lowest ratios of ATM cash withdrawals relative to cash in circulation, according to an RBI report, `Benchmarking India's Payment Systems’ released in June 2019. “It is also an indicator of low efficiency in recycling cash, that is, the cycle of withdrawing cash, making payments with it and in turn making deposits through the banking system,” said the report.

The data for the last three-four years shows that banks have gone slow in setting up ATMs. “There have been several PSU bank mergers following which their managements have decided to cut down on ATMs if the merged banks were running independent cash machines in the same locality. Also, since the cost of deploying an ATM is higher, one can’t blame banks if they have decided against putting up more ATMs and depend on the existing machines by paying a lower fee for every transaction by their customers,” says an industry official.

The RBI committee had said that most of the WLAOs concentrate on the semi-urban and rural areas. “They would be encouraged to operate in this space thereby achieving the purpose of increasing ATM penetration there,” it said.