- With digital banking picking up, does cash transactions still hold value?
- Has the ATM industry reached its saturation point?
- Impact of demonetisation on cash transactions in India
An Automated Teller Machine (ATM) is one of the most crucial self-service channels for the retail banking sector that connects banks or financial institutions with customers. The 1st ATM was installed in 1967 by Barclays Bank in London.
In India, the ATM concept was introduced by the Hongkong and Shanghai Banking Corporation (HSBC) in 1987. This was followed by few domestic banks. However, the usage remained limited during initial years owing to low acceptability among the masses and high installation cost for banks. The numbers grew at a mere 1,521 ATMs up to 1999. Although, it picked up thereafter and crossed the 10,000 mark by 2003 and 20,000 by 2006. In the last decade it has grown by ~24% annually from ~25,000 (2007) to ~2,22,000 units (2017).
The deployment of new ATMs has continued to grow in the range of 20-40% each year up till 2014-15. However, mobile banking gained popularity with impetus from banks and the government, this reduced the ATM growth to as low as 5% in 2016-17.
India has the lowest number of ATMs per million adults despite a significant increase in the number of ATMs up to 2014-15 among BRICS (Brazil, Russia, India, China and South Africa) nations. According to an RBI (Reserve Bank of India) report, Russia tops the list with 169 ATMs per million adults and is followed by Brazil, China and South Africa, while India lags way behind with only 21 ATMs per million adults (as of 2016).
However, the Indian ATM industry has come a long way and has significantly evolved in the past two decades. It was initially driven by private banks, realizing that accessibility could improve among customers 24X7 without opening of numerous brick and mortar branches. It was deemed cheaper to set up an ATM than to open a new branch and incur several costs, including staff expenses. Hence, given the cost benefits, state-owned banks soon followed the league. Thereafter, innovation kicked in as India’s largest public-sector bank, the State Bank of India (SBI) launched a floating ATM in a ferry (in 2004). Further, it catered to the other extreme by setting up an ATM in Leh, primarily for the armed forces.
The ATM started off as a cash dispenser but evolved as multifunctional machine with the passage of time. In order to serve customer needs without their physical presence in banks, ATMs now help users with enhanced services such as cash or cheque, bank account balance, loan provisions, bill payments and numerous additional services. Hence, these machines have progressed from cash dispensing machines to cash recycling machines (CRM).
The ATM penetration is still very low in rural India despite a substantial growth in the ATM industry (accounting for only 17% of the 2,22,000 ATMs in India as of December 2017). While ATMs are progressing into the next era in urban and metro cities in India, rural India is yet to be fully covered by the basic version of ATMs; cash dispensing machines. There are only 35,000 ATMs in rural India, a full-fledged accessibility of ATMs in these remote areas is still a far-fetched dream. The public sector banks such as SBI have around 20% of its ATMs in rural India, while private banks have a mere 8% ATMs. However, over the last few years, the government together with the RBI has introduced several policies which encouraged banks to cover rural and remote unbanked areas in the nation. All public-sector banks are mandated to open Basic Saving Bank Deposit (BSBD) accounts with no minimum balance requirement and provide ATM cards. Further, each account opener is provided with RuPay (introduced by the government) card. Thus, as a result of these initiatives, the deployment of ATMs in rural India has increased by ~44% from 12,000 (2012-13) to 35,000 (2016-17).
While ATM services in India were evolving into the new era in urban areas and expanding their reach in rural regions, the entire Indian banking system trembled when demonetisation of high-value currency was announced by the PM Narendra Modi in November 2016. It made people short of cash for a couple of months as ATMs across the country completely dried up. In these tiring times, the Indian population was forced to switch to digital payments wherein internet banking and online payments such as Paytm instantly became the primary source of transactions.
The drying up of ATMs due to a sudden demonetisation diverted individuals to other means of transactions. The ATM transactions grew merely by 3% in the month of December 2016, while transactions from alternative sources such as mWallet grew by more than 50%. Although the usage of ATMs picked when the currency circulation was back to normal. However, compared to the pre-demonetisation phase, this is still low. The number of transactions from ATMs reduced by 6% from 802 million (October 2016) to 741 million (January 2018).
Nonetheless, this slowdown does not imply a downhill trajectory for ATMs in the country. Instead, ATMs are here to stay in the Indian banking system as cash still rules the nation. This was reflected in increase in the value of cash withdrawals from ATMs at 23% (FY 2017-18), in spite of a decline in the number of transactions.
Furthermore, its the transition from cash dispensing machines to cash recycling machines that provides a further surety to ATMs/CRMs and this will pick up in the future. CRMs enable customers to deposit as well as withdraw cash. It can also identify fake or invalid currency notes and accepts valid currency notes. This holistic cash management by a machine results in operational as well as cost efficiency. In addition, this can be deployed in areas with a lesser number of branches and will provide accessible banking services to the general public in these areas.
In conclusion, although new generation internet, digital, mobile banking and payment system has changed the way businesses are run. However, cash is still preferred in India for transactions. Therefore, ATMs/CRMs will continue to grow in India and all these channels; ATMs/CRMs, bank branches, mobile and internet banking and digital payment services are expected to complement each other in the near future.