Decoded: Life behind the ATM and how the cassette-swap mode will change it

Will the interchange fee after free transactions increase with the shift to cassette-swap mode?

Come June 1, and you will be able get better quality notes from ATMs because of the cassette-swap mode of loading cash. Over time, the initial four-phased roll-out across 30 cities will span the whole ATM network, which is 250,000-strong, and counting, albeit slowly.

So, what is a cassette-swap?

It’s a lockable mechanism, and way superior to the practice of open-cash replenishment at ATMs. That is, personnel at cash-in-transit (CIT) firms – that move cash to load it into ATMs – will no longer be touching it anymore. It may not be truly cutting-edge technology, but the cassettes have smart chips embedded in them, which store information on the number of notes and denomination, and other aspects like security codes.

Cash will be loaded onto the cassettes by CITs at the cash-centre; these cassettes will then be transported to ATM locations to be loaded. This will reduce counterfeits; and align the country’s cash-moving business with global standards. Think of the new protocol as being pre-packed tea compared to buying it loose.

The behind-the-scene wrangling

The move to activate cassette-swaps took time and has come after breathers given by the Reserve Bank of India (RBI) – to the end of March 2022 and 2023. That’s because banks, CITs and managed service-providers failed to arrive at a consensus on its execution and absorption of costs in the ecosystem.

A cassette-tray costs between Rs 12,000 and Rs 15,000, and its procurement in huge quantities was seen as a burden.

Then, you have what is called the inter-change. It’s the pay-out by a card-issuing bank when you swipe at other banks’ ATMs after five free transactions. It was increased in 2022 to Rs 17, and is the first revision since 2012, when it was revised southwards to Rs 15 from Rs 18. If you load the cost of moving cash and the earnings forgone due the five-free transactions, the math does not add up.

Will the ATM interchange fee go up now?

It’s still early to say if the inter-change fee will move up. An argument against it is that banks save a lot when they push business from branches to digital modes and into the ATM channel. So, there’s no reason for a higher inter-change.

The flipside is that digital and ATM channels also involve costs. In the case of digital, it is the investment in technology; in ATMs, it is the lease rentals and the power charges plus cash-loading costs.

That said, of the installed base of 250,000 ATMs, nearly 20 per cent are currency recycling machines (CRMs) – which not only dispense with cash but also allow you to deposit it in them.

The game-changer was the RBI and the National Payment Corporation of India’s move to allow interoperability among banks. Until then, recyclers were used largely as a teller-replacement tool, or for self-service by banks – you deposited cash in them with no human interface. But with interoperability, recyclers will be set up off-site as well. While recyclers are priced at around Rs 5.50 lakh per unit compared to the Rs 3 lakh for the ubiquitous cash-vending ATM, the bet is that this might reduce the cost of cash loading over time.

Do ATMs have a future?

You might think that with the huge growth in UPI, ATMs will be passé. That’s not true. In fact, the currency in circulation is well over three times from the time of demonetisation (November 8, 2016). Both UPI and ATMs will coexist.

Another aspect to look at is that it costs a bank branch Rs 45-60 to process a cash transaction. With recyclers, this cost is reduced significantly. Who knows, CRMs might even be used for purchasing food coupons, Metro train tickets or even for gift certificates.

Similarly, e-lobbies ensure enhanced customer service and convenience as they offer customers access to all banking services via ATMs and kiosks throughout the year. Further, ATMs are now being integrated with banking apps, thanks to interoperability. These integrations now allow customers to complete withdrawals and deposits by using OTP or UPI QR codes.

Look at the order book for ATMs

Request-for-proposals floated by banks show an order book for 17,000 ATMs – CRMs and dispensing-only (cash) ATMs. Orders for new ATMs work out to 6.8 per cent of the current installed ATM base; and more demand is seen flowing in over the next few months.

It is surmised that the renewed interest in ATMs in general — the first since demonetisation, when the installed base stood at 220,000 unit recyclers – will help direct benefit transfers (DBT) with that many more cash-out points.

What is not clear is the impact of micro-ATMs — point-of-sale (PoS) units, which also dispense cash. While cash-out at PoS, unlike ATMs, is not a 24x7 offering, it has the potential to affect the business of the ATM channel.