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Business News/ Companies / ATM operators struggle to pass on higher capital costs
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ATM operators struggle to pass on higher capital costs

ATM operators struggle to pass on higher capital costs

Major share: An ATM in Kolkata. Equipment cost forms the biggest chunk of the Rs 6-7 lakh needed to set up an ATM centre. By Indranil Bhoumik/MintPremium

Major share: An ATM in Kolkata. Equipment cost forms the biggest chunk of the Rs 6-7 lakh needed to set up an ATM centre. By Indranil Bhoumik/Mint

Chennai: The operators of automated teller machines (ATMs) in India are unsuccessfully trying to convince ATM makers to charge per transaction as an increasing number of banks are?outsourcing the entire process from purchasing to managing the machines.

Major share: An ATM in Kolkata. Equipment cost forms the biggest chunk of the Rs 6-7 lakh needed to set up an ATM centre. By Indranil Bhoumik/Mint

“We don’t want to become fund houses for ATM operators," said an executive of Diebold Systems Pvt. Ltd—a unit of US payment technology firm Diebold Inc.—who didn’t want to be named. So far, Diebold has sold 32,000 machines priced at 3-3.5 lakh apiece to banks and ATM operators in India. Since 2009-10, many private banks have transferred the purchase and operations of ATMs to third parties, such as FSS India and Prizm Payments Services, that previously only maintained the cash booths—a job referred to as managed services. The payments for this model were tied to customer usage, against a fixed fee.

Latest Reserve Bank of India (RBI) data show the total number of ATMs, largely managed and some fully outsourced, in February was 87,000, and growing at a 30% clip annually. But the volumes of fully managed ATMs is set to rise as state-run banks—comprising 75% of the Indian banking industry—too, recently outsourced the purchase and management of 60,000 ATMs due for completion in the next two years.

Under the outsourcing or operational expense model, contracts are given for three to five years, after which the service provider can change banks. Last week, Pranab Mukherjee, who resigned as finance minister on Tuesday, told bankers to outsource ATM operations, a move that could more than halve the cost per transaction of banks to 5-6. “The move from managed services to outsourcing—where we buy the equipment, find the site and run the location—has made this business an infrastructure play," said Loney Antony, managing director of Prizm Payments that manages 5,800 ATMs purchased by banks and offers end-to-end services for another 5,200, for which it has borne the capital costs.

The Chennai-based firm touched 340 crore in revenue in fiscal 2012 and is hoping to touch the 1,000 crore sales mark by fiscal 2014.

“Access to cheap capital is a challenge and it is getting tougher to find suitable locations to set up an ATM," said Antony, who is discussing with vendors to consider a more spread-out payment mechanism based on customer withdrawals as equipment cost is the biggest chunk of the 6-7 lakh needed to set up an ATM centre.

“Various types of experiments in pricing are happening but we would prefer a one-shot payment over the transaction model as we don’t have a say in site selection," said Stanley Johnson, president, managed services, AGS Transact Technologies Ltd, which is the marketer for German ATM producer Wincor Nixdorf. The choice of location is key to ensuring good customer traffic that stokes per-transaction fees. In developed countries, ATMs are owned by either banks or contractors or even by non-financial firms, in which case the machines are called white-label ATMs. In February, RBI, too, allowed white-label ATMs—cash machines that don’t belong to any particular bank and where customers pay a small fee each time they use the machines.

Service providers warn that if there’s neither a drop in ATM prices, nor a sharing of costs by manufacturers, the consequences for the entire ecosystem could be dire. “In the long run, the current model will fail if only one party in the chain takes on all the risk that others feed off," said Nagaraj Mylandla, managing director of FSS, which has bought and maintains 10,000 ATMs in addition to another 20,000 that it only services. “There has to be a collective risk mechanism."

An investment banker said the business becomes less lucrative to firms managing ATMs if they have to buy the machines as well. “The economics of the business can get skewed with the large number of machines the service providers will need to buy from manufacturers, who, in turn, will say, ‘I need my money to make the next set of machines’," said K. Ramakrishnan of Chennai-based Spark Capital.

anupama.c@livemint.com

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Published: 28 Jun 2012, 11:53 PM IST
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