Mumbai: Banks should outsource most of their automated teller machine (ATM) management functions to third parties to reduce transaction costs, the finance minister told top bankers at a recent meeting.
Finance minister Pranab Mukherjee recently met bank chief executive officers in New Delhi to take stock of their performance for the financial year 2012 where he stressed on the opex, or operational expense, model for an automated teller machine (ATM) expansion in the country rather than the usual capex, or capital expenditure, model, said two bankers present at the meeting.
Under the opex model, third parties install and manage ATMs and get paid for each transaction. In the capex model, a bank has to manage everything—from the selection of sites to buying the ATMs and managing them on a daily basis.
A standard ATM costs at least Rs 1 lakh and with rents, cash-handling charges and maintenance involved, costs shoot up for the bank. Additionally, bankers say some ATMs become unviable as usage is low, since the cost of per transaction is standard. This is particularly the case in rural areas.
However, the settlement and providing of cash will be done by the banks themselves.
The opex model is gaining ground. A 1 March article in The Hindu Business Line newspaper pointed out that a consortium of banks had sought bids for more than 40,000 ATMs to be run on the opex model. As per the latest Reserve Bank of India (RBI) data, the total number of ATMs in February was 87,000, a number that’s been growing 30% every year.
“This is a new model and the current trend for the last 18 months shows that almost 80% new deployment would be through this approach. In India, as per the recent MOF (ministry of finance) directive, all PSU (public sector unit) banks will be deploying close to 63,000 ATM’s in the next two years under the opex model,” said Navroze Dastur, senior general manager, South Asia, channel and strategic alliances, at NCR Corp., an ATM maker and service provider.
“The success of this model is based on finding the right site where one can get maximum footfall,” he said. “This will allow banks to understand better their channel performance as it will now be managed by experts like NCR.”
Under the capex model, any transaction would cost a bank Rs 12-18 if the customer uses its machines and Rs 17-25 if using an ATM of another bank. Under the opex model, the cost comes down to Rs 5-6 per transaction in case of own bank transaction.
“One issue that was discussed in the meeting was how the transaction cost can be brought down. The finance minister wants us to go for the opex model as it will substantially reduce the cost,” said a bank chairman who attended the meeting, requesting anonymity.
Under the opex model, ATMs will still have the branding of the bank and it operates like any other cash machine. The cost of the transaction is borne by the bank and customers won’t be charged extra. Since the cost of the transaction will drop, a bank may be obliged to pass this on to the customer.
“Eventually we will try to pass it on to the customer but it is a cost to the bank. Customers anyway get free service, so we will see what can be done,” said another bank chairman, who also didn’t want to be named.
Under the opex model, contracts are given for three to five years after which the service provider can change banks. The bank, in its tender, spells out the location it wants and the number of ATMs needed.
“It is a win-win for the bank as well the service provider but banks have to be on guard whether the total number of transactions that the service providers submit to us are genuine or not. Also, a problem that we have faced is that the service provider wants to change the location of a particular ATM because there were not enough clicks for the company to break even. That defeats the purpose from a bank’s perspective and gives the bank a bad name,” the banker said.
Analysts said this model could help banking expand in rural areas. Also, as the number of ATMs swell, managing them could be a problem for banks.
“Not all banks are technologically that advanced to maintain so many ATMs on their own. Also, as any industry matures, outsourcing becomes the norm because availability of capital is scarce and banks would not want to spend the capital on capital expenditure. Opex is the way forward,” said Hatim Broachwala, analyst at Karvy Stock Broking Ltd.
To encourage more ATMs in the country, RBI in February allowed non-banking companies to set up so-called white-label ATMs, popular in developed countries. Such ATMs don’t belong to any particular bank and customers pay a small fee each time they use the machines.
RBI allowed these ATMs as there was “an abundant scope and a felt need to deploy more ATMs, particularly in tier III to VI areas of India,” it said. Final guidelines on such ATMs were issued on Wednesday.
Remya Nair contributed to this story.