ATMs may be old, but not obsolete

When Niti Aayog CEO Amitabh Kant said sometime last year that debit cards, credit cards and ATMs would be redundant in next three-four years as Gen Y in India, comprising a whopping 72%, use their mobile phones for financial transactions, he hocked many in the banking industry. RIP, ATMs. Does it mean then that the two lakh-plus bank ATMs, first introduced in India in 1987 by HSBC, are going to be history soon?

Going by RBI data on ATMs for FY 17-18, the number of ATMs have declined for the first time, after having grown exponentially in the last two decades, and probably may decline further in the coming years. The question is, will they decline so rapidly in the next few years and become redundant, as Amitabh Kant seems to suggest that they will disappear completely from the banking ecosystem. Not in the next few years. Not likely as long as people use cash for economic transactions and, in India, people trust and use cash more and ATMs will continue to exist for a while at least.

As per RBI data, there were 2,07,052 ATMs — both on site and off site — as on March 31, 2018, in India, as compared to 2,083,54 the previous year. A decline of 1,302 ATMs over the 12-month period, a surprising development in a country where ATM penetration was supposed to go up every year. More ATMs were closed during the year than were opened.

Are we becoming a less cash economy? Yes, perhaps, as a cursory look at RBI data suggests, there were 31,37,204 point of sale (PoS) machines as on March 31, 2018, compared to 25,26,342 on 31 March 2017 — an increase of 6,10,882 PoS machines, or an increase of 24%. As more and more POS machines are being installed across the country, people are using their debit/credit cards for transactions and are keeping less cash in their wallets. The decrease in ATMs and the increase in PoS may suggest that we are moving towards a less cash economy.

As banks started encouraging customers to migrate from brick-and-mortar banking to ATMs, it helped them cut costs considerably. The transaction cost per customer fell by a third. The current phase is marked by migration of customers from ATMs to internet and mobile banking. The transaction costs are falling further and so it makes sense for banks to reduce the number of ATMs.

With dwindling number of transactions per day and stringent RBI guidelines on cash replenishment, use of lockable cassettes, recalibration of ATMs post-demonetisation and deployment of security guards pushing up costs, ATMs are becoming less and less viable.

The RBI recently advised the banks to consider using lockable cassettes in their ATMs, which shall be swapped at the time of cash replenishment, to mitigate risks involved in open cash replenishment/top-up. The RBI, however, has said that the above measure may be implemented in a phased manner, covering at least one third of ATMs operated by the banks every year, such that all ATMs achieve cassette swap by March 31, 2021.

Increasing costs

As per reports, the RBI has stopped giving subsidies to banks towards installation of ATMs and cash-recyclers in the wake of the directions it had given to the banks in August 2016 through its master circular.

Not many of us know that RBI has been reimbursing expenses to banks for installation of ATMs in urban centres to the extent of 50% of the actual cost of the machines or Rs 2 lakh, whichever was lower, and 60% or Rs 2.5 lakh per ATM installation in semi-urban and rural areas. Perhaps, the move to withdraw the subsidy is aimed at encouraging digital transactions in the economy.

These regulatory guidelines are increasing the costs of maintaining ATMs. Banks are caught in a pincer movement between reduction in ATM transactions (revenues) on the one hand and increase in operational costs on the other, making ATMs unviable. To break even, a bank ATM has to clock at least 100 to 125 transactions per day.

The revenues for the banks come from the fees that they charge for cash and non-cash transactions. Currently, banks charge a fee of Rs 15 for each cash and Rs 5 for all non-cash transactions from each other for use of their ATMs by other banks’ customers. The fees are recovered from users beyond the five free transactions.

The Confederation of ATM Industry (CATMi) has demanded that these fees be increased by at least Rs 3-5 per transaction to enable the (ATM) operators to recover the costs. Whether the fee will be increased, time will tell.

“I may be old but not obsolete,” says the Cyborg character played by Arnold Schwarzenegger in the Terminator Sequel, Terminator Genisys. ATMs may be old, going by the frenetic pace at which banks are embracing technology, but they are unlikely to become obsolete in the near future.

(The writer is a banker)