Indian ATM Sharing Reminiscent of Earlier US Pattern

A recent article reports that the Reserve Bank of India will permit Indian banks to charge usage fees when “foreign” bank customers use their ATM’s more than 5  times in a month. Henry Polmer, the author of this analysis and former general counsel to the Cirrus ATM System, compares the development of the ATM industries in India and the US and concludes that India could fairly rapidly expand to half a million or more ATM’s from its current 40,000 if the RBI broadens its current liberalization.

by Henry M. Polmer

 

 

            A recent article in the Economic Times reports that the Reserve Bank of India, which five months ago prohibited Indian banks from charging any ATM fees to depositors of other Indian banks (“foreign banks”), has now authorized Indian banks to charge customers of foreign banks for using their ATM’s more than five times in a month. In the United States, “foreign” ATM fees, known as surcharges, are common, but it wasn't always this way. A review of the situation in India and the United States highlights differences in the two countries’ approaches to ATM sharing and related regulation; it also suggests that India may simply be at an earlier stage of shared ATM development.

 

 

            Whereas the first ATM’s in the United States appeared in the 1960’s, the ATM is a fairly new phenomenon in India. The total number of ATMs in India, a country of 1.15 billion people, has increased approximately 30% this year to 40,000, mainly in urban areas. By contrast, in the United States with a population of only 305 million people, ATMs are ubiquitous. Their number peaked at 395,000 in 2005. 

 

 

            In both the United States and India, ATM’s began as a way for banks to better serve their depositors’ needs for cash at a lower cost to the banks. Banks bought ATM’s and deployed them on their premises. In both countries, ATM convenience was a hit, and big banks realized they could exploit a competitive advantage by deploying significantly more ATM’s for their depositors than their competition. 

 

Driven by the desire to compete for deposits with other banks (i.e., the banks providing the greatest ATM access offered depositors the most convenience) and the realization that banks with the most ATM’s could make money, or at least off-set ATM costs, by receiving a network-prescribed usage fee from their competitors for each foreign transaction, both US and Indian banks eventually developed competing ATM networks. In the United States, those networks developed first within urban areas (e.g., the MOST system in Washington, DC), then spread to regions (like the Honor system in the Southeast). It didn’t take long before banks formed exclusive national ATM sharing networks like the Cirrus and PLUS systems, each of which eventually offered access to about half the ATM’s in the country. 

 

 

In India, by contrast, reports indicate that banks still see service to their own customers as the driving force for ATM deployment. Although there are bilateral and multilateral ATM sharing arrangements among Indian banks, those banks still view their ATM’s as a core banking business and continue to add proprietary ATM’s. In general, these ATMs are available to depositors of other banks, but they are not viewed by their bank owners primarily as money makers. 

 

 

In line with this view, the Reserve Bank of India, which tightly regulates the ATM business, ruled in 2008 that banks could not charge depositors from other Indian banks more than 20 rupees (about $.10) for a cash withdrawal, and that they would have to eliminate even this modest fee by April of 2009, which apparently they did. Last week, however, the RBI modified its decree to permit banks to charge up to 20 rupees per transaction starting in October if a customer of another bank uses its ATM’s more than five times in a month. Part of the RBI’s rationale for limiting fees was that a bank’s fees to non-depositors were generally not disclosed at the ATM and that was discouraging usage. 

 

From an American perspective, the RBI’s gift to consumers using foreign ATM’s could be considered a mixed blessing. Although consumers may pay less for ATM transactions, the economic incentive to deploy large numbers of ATMs, even in places where transaction volume will be relatively low, will not exist until the ATM networks are seen as a commodity services, and ATM owners are free to charge market rates for transactions.

 

 

            The movement in the United States to surcharge at market prices developed fairly slowly, but it wasn’t constrained by government regulation. In the 1980’s bank ATM networks opposed surcharging foreign ATM customers because they believed it would anger depositors and cause them to use their network ATM’s less frequently. That made sense because the networks received a flat fee each time a foreign bank depositor used a network ATM. Also, it reflected the even division of power in the networks between banks that were net providers of ATM’s (which received a relatively modest fee from the customer’s bank on each transaction) and those who were net users (which paid these modest fees). 

 

            By the mid-1990’s, pressure from banks that had deployed large numbers of their ATM’s into the networks and banks that wanted to sponsor ATMs owned by non-bank third parties (so-called “white label” ATM’s) pushed the networks into dropping their prohibitions against surcharging. Owners of ATM’s at popular locations started surcharging customers of foreign banks relatively small amounts that rapidly grew to more significant fees. (Today $1.50 to $3.00 is a common surcharge, and surcharges of $10 per transaction can be seen at casinos.)

 

            Much of the ATM-using public was outraged over surcharges, and some politicians took up the anti-surcharging banner. US Senator Demato of New York was a vocal promoter of legislation to ban surcharges altogether. He characterized surcharges as double-dipping. (i.e., the ATM owner charged the user for the transaction and also received a flat fee from the user’s bank through the ATM network. Then, the user’s bank generally marked up the fee it paid and passed it on to the user.) 

 

 

In the end, however, the marketplace won out. Today both bank and white-label ATM operators in the US routinely surcharge transactions. ATM network exclusivity has ended, virtually all ATM’s accept all cards, and the ATM population grew from approximately 150,000 in the mid-nineties to nearly 400,000 by 2005. Moreover, a very high percentage of off-premise ATM’s are owned or leased by non-bank third parties, which value their ATM’s solely for the fees they produce. 

 

In response to surcharging, many smaller banks have multilateral agreements to share ATM’s without surcharging, and some banks without large proprietary ATM networks reimburse their depositors for the foreign surcharges they incur. Partially as a result of surcharging as well as the ability to get “cash back” for free when  using a debit card at the point of sale (and because the United States is fast becoming a “plastic payment” society), ATM usage in the United States has declined somewhat. Nonetheless, it is a very large and profitable business.

 

Federal and state regulators in the United States have been largely absent from the ATM surcharging debates, except that the Federal Reserve’s Regulation E requires all ATM operators to prominently display at the ATM and on the screen any fees they will charge a user and then give the user the option to cancel the transaction without a fee. 

 

A cursory look at the RBI’s newest ATM fee regulations could lead one to believe that India is on a very different ATM sharing path than the United States. ATM fees are constrained and non-banks cannot easily deploy white-label ATM’s. An obvious conclusion would be that India will be a society with relatively few ATM’s that are available to consumers at low or no cost -- when they can be found. 

 

Alternatively, it may be just as likely that economic opportunities and pressures will cause the RBI to lighten its regulatory approach as it recently has to a minor extent by permitting some fees and making it easier to establish off-premise ATMs.  Also, press reports indicate that non-banks like First Data Corporation are already being permitted to deploy some ATM’s as long as their bank partners manage all the banking operations. If India broadens its opening to non-banks and permits market-based surcharging, it is probably not unreasonable to believe that the Indian ATM industry could fairly rapidly expand to half a million or more ATMs from its current 40,000.   

 

Copyright 2009 by Henry M. Polmer