In today’s Finshots, we tell you how ATM operators make money and why they’ve been asking for higher fees.

The Story

1.31 lakh.

That’s the number of off-site ATMs (Automated Teller Machines) India had at the end of FY23. We’re talking about those standalone ATMs that aren’t inside a bank’s branch. And this figure is about 1.5% more than last year’s.

But this tiny growth isn’t driven by banks. Their off-site ATMs in fact, have actually dropped by 2% during the same period. So the credit for the increasing trend goes to the White Label ATM Operators (WLAOs). These folks are private ATM service providers like Tata Communication Payment Solutions’ Indicash and India1 Payments. And customers from any bank can use them to transact.

A decade ago though, things were different. Only public, private or foreign banks set up and operated ATMs. But that whole infrastructure ate into their profitability. They had to pay rent for ATM spaces, employ security systems and personnel and refill ATMs with cash. The capital or one-time costs of owning ATMs added up too. It was an expensive affair.

Sidebar: ATMs operated by Scheduled Commercial Banks (Public, Private, Foreign, Small Finance Banks and Payment Banks) are called brown-label ATMs.

That’s probably why banks reduced deploying more ATMs, especially in remote areas where people didn’t use debit cards much. And that meant that financial inclusion was under threat.

So the RBI (Reserve Bank of India) had an idea. It said “Hey, let’s allow the private folks to hop into the ATM business. They can do all the heavy lifting and incur most of the capital and operational costs. They can expand into rural areas too, while banks can concentrate on their core business. And that way, more and more people can have access to banking at their fingertips.”

That’s how WLAOs entered the space in 2012.

But while the number of ATMs is growing even if at a snail’s pace, the number of players in the segment has halved ever since. And the ones that are left are demanding a pay raise.

What do we mean?

You see, WLAOs make money mainly through interchange fees. Think of it as the fee that your bank pays another bank or a WLAO when you swipe your card at another bank’s ATM or a white-label ATM.

Now here’s the problem. The first 3–5 swipes are free for customers swiping their cards at any bank’s ATM. So WLAOs start making their money only after these cardholders cross this threshold. And even the fees they get then are quite low.

For context, in 2012 a WLAO made ₹15 on every financial transaction that a customer did at its ATM. And in 2021, that went up to ₹17. On the flip side, a 2019 RBI report suggested that these folks had to shell out about ₹60,000 a month to keep an ATM running. So if they wanted to run profitable businesses, they had to earn at least ₹20 per transaction (including non-financial transactions).

Sure, that’s not their only source of revenue since they can earn some extra money by displaying advertisements. But the math doesn’t really add up.

It also means that their expansion into semi-urban and rural spaces isn’t working out as expected because they aren’t making enough money to cover the costs, which have been rising over the last few years.

See, since the last interchange fee hike, the RBI has increased interest rates by 2.5% to keep inflation under control. It simply acts as a disincentive for people and businesses to borrow money. But the cash that WLAOs reload into their ATMs is actually part of their working capital or the money that they need to operate every day. So if they rely on working capital loans, it simply means that the cost of loading cash has climbed uphill. Add to that the fact that rentals and fuel costs have been on the rise, and you’ll see how things have simply gone for a toss.

Also, the push to change how ATMs are reloaded can increase the near-term costs even further.

See, at the moment, money is loaded into an ATM through a process involving personnel coming in with sacks of cash. And all this cash is out in the open. That’s why there’s so much security around this exercise.

And the RBI has been trying to make this more secure. It wants to implement a contactless cassette-swapping system. That way, the folks who reload cash into these machines simply have to swap old currency cassettes for new ones that are locked. They don’t even have to touch the money and these cassettes have embedded chips that can count how many notes they contain.

But the thing is that the cost of each cassette could be nearly ₹15,000 and procuring these in large quantities brings with it a financial cost.

So, if ATM operators have to bear it, you can see why they have been nudging the RBI to hike interchange fees. And there has been some chatter about it in the last few days.

But guess what?

There are other ways to bring down the costs for ATM operators too.

You see, nearly 70% of the 2,60,000 (on-site and off-site) ATMs including those operated by banks have machines that only dispense cash. And that makes cash replenishing an expensive proposition. But if ATM operators set up machines that can accept deposits too, it can recycle money for cash withdrawals. And this will reduce the number of trips ATM operators need to make to reload their ATMs.

If you think beyond it, you’ll see that footfalls at banks will reduce too, helping them focus on operations other than time-consuming cash withdrawals and deposits.

So while the initial costs might be higher, it could be quite a worthwhile proposition in the long term.

Also, there might be a way to get borrowing costs down for some of these ATM operators.

Look, an RBI report from 2020 pointed out that WLAOs typically access working capital loans from banks at MCLR (Marginal Cost Of Funds Based Lending Rate) linked rates. This is simply the rate below which banks can’t lend. And although they are linked to the repo rate or the rate at which the RBI lends money to commercial banks, these rates are much higher.

To put things into perspective, as of March 2024, the average MCLR is upwards of 8.5%. But the repo rate is lower at 6.5%.

So the RBI committee had suggested that letting WLAOs borrow at repo rates rather than the MCLR, can actually help them reduce operating costs.

But it doesn’t look like the suggestion has been put into practice yet.

So yeah, there seems to be some interesting stuff happening in the boring old world of ATMs and we’ll have to wait and see what happens now.

Until then…

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