Global Outlook

Setting up of white labelled ATMs will not only help tap the rural populace but also aid financial inclusion in the country

Contributed by Nirmal Bang

To service people with bank accounts in rural and semi-urban areas in India, the Reserve Bank of India (RBI) has decided to introduce white labelled ATMs in the country. White labelled automated teller machines (ATMs) will be owned and operated by non-banking entities.

What Are White Labelled ATMs

Non-banking entities will set up white labelled ATMs and run them like any other business enterprise to earn profits. These ATMs will not display the logo of any particular bank and customers from any bank can access these ATMs to withdraw money. However, they will be expected to pay a small fee for every transaction.

In February ’12, the apex bank had released draft guidelines for the introduction of such ATMs. The guidelines are still under review and open for comments. The RBI had so far allowed only banks to set up ATMs. Though there are 87,000 ATMs in India today and a 30% growth in ATMs has been recorded over the past four years, the problem is that majority of these ATMs are still concentrated in Tier I and II cities.

Since the penetration of ATMs in Tier III and IV cities is abysmally low, the RBI feels that the roll out of ATMs by corporates will address this issue. Many large corporate conglomerates like Reliance, Tata, L&T and M&M seem to be interested in setting up such machines across the length and breadth of the country.

The RBI has stipulated that any corporate or non-banking entity that is interested in setting up a white labelled ATM must have a minimum net worth of Rs.100 crore and should be attached to a sponsor bank. In the draft guidelines, the RBI also stipulates that though the location of these ATMs can be chosen by the entities setting them up, they will have to meet the annual targets set by the RBI and also maintain a ratio of ATMs in Tier III and IV cities.

A Step Forward In Increasing Banking Penetration

In principle the idea of expanding the ATM network sounds great. It will be a useful addition to the existing banking network and will also be very effective in inculcating the habit of banking among the rural populace and thus give a much needed shot in the arm to financial inclusion in India.

Commercial banks too are expected to greatly benefit from this move. As white labelled ATMs are expected to serve as the extended arm of banks that will allow customers to withdraw cash at a nominal cost, the banks need not spend on setting up their own ATMs. This is expected to save their costs which will benefit their core banking operations.

Service providers who will set up such ATMs seem gung ho about the decision of the apex bank. They  believe that white labelled ATMs will go a long way in bringing about efficiency of ATMs and also bring the overall costs of banking down. They say it will only be a matter of time before the RBI allows white labelled ATMs because over the last two years banks are already in the process of outsourcing 50% to 60% of their ATM operations to service companies who are performing functions like cash management, switching and technical management for banks.

Concerns That Need To Be Addressed

Despite the benefits that white labelled ATMs are likely to offer, a number of issues need to be ironed out. The first concern is with regards to safety. Precautionary measures need to be taken to ensure that these ATMs do not take unsuspecting customers for a ride.

Currently, a bank customer can use his savings bank account ATM card at any ATM of his own bank free of cost.  If he is using the ATM of another bank to withdraw cash, he is not charged for the first five transactions in a single month. Thereafter, he is charged Rs.20 every time he withdraws cash. For every non financial transaction, he will be charged Rs.8-10.

In the draft guidelines, the RBI has said that the first five free transactions are not going to be applicable at all and customers will be informed about the charges for every transaction upfront. This means that charges for each transaction will be displayed on the screen. In addition to this, the white labelled ATM operator will not be allowed to charge any “interchange” fee from the customer.

The interchange fee is a fee that will be paid by the bank, which is the issuer of the card to the white labelled ATM operator for processing the transactions and the cost to do so. This means that the white labelled operator is eligible for a fee from both the customer as well as the bank. Experts believe that this distinction should be made clear for the benefit of the customers who are likely to use such ATMs.

The other worry is that customers may not be too enthused about the idea of paying a fee for every ATM transaction. Since people from middle and lower income groups use the ATMs most frequently, they are the one’s who are most sensitive to charges levied for such services. Therefore, taking away the benefit of at least five free transactions in a month may not be a good idea.

The chief concern is over the risks involved in this venture. There will be  difference in attitude between banks that offer ATMs as a service as against private entities who will set up white labelled ATMs to earn income.

This may increase fraudulent transactions and the protection of customers may be at risk. Also in case of a disputed transaction, the resolution process may take long as it will involve three entities - the white label ATM operator, the bank that is the issuer of the ATM card and the sponsor bank.

Bankers also do not seem overly excited at the idea of white labelled ATMs coming up in India. The proof is they have no plans of easing their ATM expansion drive. Banks treat ATMs as a cornerstone of their alternate channel strategy. It is an extension of their brand and helps in creating awareness about their brand as well as retaining customer loyalty.

Unless rental charges of setting up their own ATMs are very high in particular locations, banks seem to be more compatible with the idea of setting up ATMs on their own rather than depending on white labelled ATMs, at least for the time being.