Pradeep Gaur/Mint
Pradeep Gaur/Mint

Black side of white-label ATMs

Cost hampers a plan to reach the under-served areas of the country

The Reserve Bank of India (RBI) has authorized four non-banking entities to set up so-called white-label automated teller machines (ATMs) in the country, a full two years after making public draft guidelines on the matter in a bid to widen access to financial services.

The four non-bank companies are Tata Communications Payment Solutions Ltd, Prizm Payment Services Pvt. Ltd, Muthoot Finance Ltdand Vakrangee Ltd, RBI said on 7 February.

The central bank first issued draft guidelines on white-label ATMs—cash machines operated by non-bank entities—on 14 February 2012, inviting comments and suggestions. In June 2012, it released the final guidelines allowing non-bank entities to set up white-label ATMs. The aim of these guidelines was to increase the footprint of ATMs in semi-urban and rural areas, where ATM penetration is low. These entities have a mandate to deploy 67% of ATMs in rural locations (tier III-VI) and 33% in urban locations (tier I and II cities).

The process of authorizing entities and rolling out white-label ATM networks has moved at a snail’s pace, which may mean that it will remain on paper—at least for some more time to come.

In June 2012, when the guidelines were issued, 13 companies were given in-principle approval; they were among 19 that sought it. The latest announcement shows that only four companies have got the licence—of these, three have rolled out services.

Tata CommunicationsPayment Solutions, a wholly owned subsidiary of Tata Communications Ltd, set up the first white-label ATM in India in June 2013 in Chandrapada, a village in Maharashtra. It was followed by Prizm Payment Services, which opened a white-label ATM in Chendre, also in Maharashtra, in January this year. Muthoot Finance launched its first white-label ATM in New Delhi on 4 February. The fourth company, Vakrangee, which got its licence in late January 2014, is yet to roll out its network.

How these ATMs work

White-label ATMs are similar to other ATMs in that they can be used by any domestic debit, credit or prepaid cardholder to withdraw cash, make a balance inquiry, change the personal identification number or ask for mini statements. Charges for customers remain the same as those levied by a card-issuing bank. So, the first five transactions in a month are free at these ATMs too. The card issuing bank will pay the interchange fee for the “free" transactions, but will charge you for anything beyond that limit.

White-label ATM operators need a sponsor bank to operate the machines. According to RBI rules, these sponsor banks will be liable to settle transactions and maintain cash at these ATMs. Maintenance and servicing will be the white-label ATM operator’s job.

However, it will be a while before we get to see more such ATMs. Here’s why.

Cost calculation

When the draft guidelines were issued in February 2012, the interchange rate that card-issuing banks pay to another bank whose ATM the customer uses was 18 for withdrawal and 8 for balance enquiry and other services. The math worked out fine and the white-label ATMs made business sense. So, as soon as the guidelines were issued on 20 June 2012, 19 companies approached RBI for approval.

But in August 2012, the interchange rates were slashed to 15 and 5, respectively, which meant tossing out the math book. “The WLA (white-label ATM) operators did not come back to get the licence because they could not make a business case," said an executive with a private bank who did not want to be named.

According to him, the finance ministry wanted the interchange rate to go even lower to 10 because it wanted to rescue government-owned banks that were paying huge interchange amounts to private banks. However, since white-label ATMs were a pet project of RBI, the central bank intervened and the rate was kept at 15.

At the moment, non-bank entities are not sure which way to go. “WLA operators may be waiting and watching for interbank charge for transactions to go up from 15 to 18, as envisaged by some banks, and then plan to roll out services," said Navroze Dastur, managing director (financial services), NCR Corp. India Pvt. Ltd, which manufactures and manages ATMs in India.

“The WLA operators, to be sure that their business is not hampered in the future, have taken an assurance from RBI that the charges will not go below 15 per transaction and it has not," said A.P. Hota, managing director and chief executive officer (CEO), National Payments Corp. of India Ltd(NPCI), the nodal agency to manage and promote retail electronic payments in India.

The private bank official quoted earlier also said that others may be waiting to see if the operators that have rolled out services are making any gains. According to him, the existing white-label ATM operators see on average 60 transactions per day whereas bank ATMs record around 180 transactions a day. However, Santosh Dash, CEO, retail and BFSI (banking, financial services and insurance), Vakrangee, said that “35-40 transactions per day will be enough to reach break-even".

Security costs are another inhibiting factor. The presence of a security guard has been made mandatory for all ATMs and, according to Indian Banks’ Association’s estimates, it will cost an additional 4,000 crore per year for the banking industry to run the nearly 140,000 ATMs across the country. “This will add at least 5-6 per transaction for the operators," said the private bank official.

Other issues

In addition, white-label ATM operators will have to pay a fee for the cash that the sponsor bank deploys in the ATMs—an extra burden for white-label ATM operators as banks do not pay a charge for the cash that they put in their own ATMs. “Banks do factor in the opportunity loss when they deploy cash in ATMs, i.e., had the cash been lent, it would have earned interest. But they definitely do not pay out of pocket unlike WLA operators," added Dastur of NCR Corp.

If white-label ATM operators do not enter a contract with a bank with a pan-India presence, they cannot roll out the service across the country as regional banks will only be able to provide cash in their particular region. However, sponsor banks are allowed to tie up with other banks to provide cash at locations in which they do not have a presence.

This essentially means that a white-label ATM operator may have to enter into multiple contracts with regional banks if it is does not find a bank with a national presence.

“Right now our sponsor bank is Ratnakar Bank Ltd. Since we plan to roll out in Maharashtra, this will work as Ratnakar Bankhas a presence in this state. However, going forward, we will have to sign contracts with other banks as well," said Dash. He declined to comment on the commercial arrangement with Ratnakar Bank. The cost paid to the sponsor bank will differ from bank to bank.

Further, even after getting the in-principle approval, an entity needs to get the required approval from the Foreign Investment Promotion Board, and a certification from NPCI, among other clearances. “They need to draft their entire plan, have a switching system in place, customize solutions for India, put in place risk control measures, and finally have a financial structure in place before getting authorizations," said Hota of NPCI.

“Tata Communications Payments and Prizm Payment were able to do it so quickly because they already had a foothold," he added.

Srei Infra Finance Ltdand BTI Payments, a subsidiary of Banktech Group of Australia, are two others that are in discussions with NPCI, but these are at very preliminary stages.

Banks on their part will be happy to have more white-label ATMs as it will save them the cost of running their own ATMs, but they are reluctant to become sponsor banks. “I will be putting my reputation at stake—after all, as a sponsor bank, I will be answerable to RBI," said the private bank official mentioned above.

So, till these hurdles remain, we have no choice but to join the long queues at nearby ATMs.

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