ATMs a costly affair for banks

Bank ATMs are on the cusp of a blistering pace of growth. Going by one estimate, these are set to double over the next three years.

There’s also more technological innovation coming in to make them more feasible. But amid all this, there’s a bit of a worry: the machines are anything but profitable for banks themselves.

According to a report from AM Mindpower Solutions, a market research firm, ATM terminals in India are expected to grow to 2.3 lakh in 2015 from 93,800 in 2011 at a compounded average growth rate (CAGR) of 25.11%.

“We are hovering at about 75-80 per million people. In China, there are 200 plus ATMs per million people. So, that shows there is more room for growth. The banks themselves are opening a large number of new branches. Due to this, there will also be more ATMs, going forward,” said Navroze Dastur, senior general manager (South Asia channel partners and strategic alliance), NCR Corporation.

A sharper focus on financial inclusion means ATMs can have a wider reach in rural India and urbanites, on their part, get to avail of more value-based features.

“Very soon, we will see a lot of rural ATMs and this will be by companies engaged in low-cost ATM manufacturing. We are into bunch note acceptors or cash deposit machines. These cash depositors will serve the purpose of ATMs and will allow real-time cash deposit solutions. The next step will then be other advanced ATM machines,” said Shantanu, branch manager, Hitachi India.

However, an increased number of ATMs doesn’t necessarily bring big bucks for banks.

“Currently, if you calculate the electricity, property, maintenance and security costs, an ATM would cost about Rs50,000 per month for a bank,” a senior official from a private bank said.

To cover these costs, it would require a bank to record at least 5,000 transactions every month, or about 170 transactions a day. “The national average for daily transactions per ATM stands at about 125-130 day. Then, how is this business profitable?” the official wondered.

According to Ram Sangapure, general manager, Central Bank of India, banks earmark about 20-25% of the ATM expenditure towards branding and visibility costs. This internal transfer pricing makes the business look more cost effective. While bankers agree that ATMs are an important branding tool, they are not really profit centres.

To ensure the distribution of ATMs is more even and systematic, the finance ministry has recently decided to outsource 63,000 new ATMs of public sector banks to third party service providers under the brown label system.

In this system, third party providers run and maintain an ATM while using a bank brand. In exchange, a bank pays the service provider with a per transaction fee, called the interchange. Currently, the card issuing bank is charged `18 for every cash transaction and `8 per non-cash transaction. “So, if a player can bid for charges below `18, banks would entrust them to deploy new ATMs,” said Sangapure. According to sources, Reserve Bank of India has been pushing for a reduction in these charges, with an intention to bring them to Rs15 and Rs5, respectively.

“However, a reduction in interchange does not mean profitability for third party providers will go down. The introduction of the white label scheme by the RBI will ensure there are more machines in the market, ensuring profitability,” says Loney Antony, managing director, Prizm Payments, a financial services provider.

Moreover, with the white label scheme, where ATMs are entirely managed and maintained by third party providers without any bank branding, the onus is on third party providers to grow their network considerably. The central bank only last month announced final guidelines for white label ATMs. As per the new norms, third party service providers will have to open a bulk of their ATM network in semi-urban and rural areas.

“This will facilitate financial inclusion, as banks will be forced to issue debit cards and open more accounts with the rural population,” says Stanley Johnson, president, managed services, AGS Transact Technologies, a player in the ATM market.

Antony believes that even if the total number of ATMs were to cross 2 lakh, the growth in debit cards issued will ensure India would still remain under-penetrated. “We usually take a ratio of one ATM for every 2,000 cards. That way, even with around 500 million cards, we would need over 2.5 lakh ATMs in the market,” he reasoned.

The total ATM cards issued in India are estimated to grow at a 4-year CAGR of 22.7% to reach 672.9 million in 2015, according to the AM Mindpower Solutions report.