New Money. Is the sun setting on ATMs?

The Covid-19 pandemic and the lockdowns that ensued severely dampened cash use worldwide. Consequently, the use of ATMs declined, and a perceptible shift towards digital modes of payment was observed. India was no exception to this; but what was exceptional was the country’s ‘shift’ from ATMs to other modes of electronic payments had begun much before 2019 when the pandemic set in.

We offer two explanations for this. The first indicator is the number of ATMs per 100,000 adult population which is plotted in Chart 1 for India and the world. One can observe that India grew at a fast clip up to 2014 but thereafter its growth slowed down with the growth trajectory almost flattening out. On the contrary, the world growth pattern remained quite buoyant and, particularly, after 2017 the growth hastened, widening the gap between the two curves.

Our second indicator is what we call the ‘substitution effect’ . Paul Volcker, one of the most notable governors of the Federal Reserve, called ATMs the “only useful innovation in banking”. Ironically, the hardest blow to ATMs today is sourcing from technological innovations per se in the form of m-Wallet, mobile banking, Point-of-Sale (PoS) machines and maybe, in future, from the Central Bank Digital Currency (CBDC).

If one compares the relative shares of each transaction mode in the total of all modes from 2014 to 2021, one can observe a ‘substitution effect’ of the other modes on ATM transactions, volume- and value-wise.

In terms of volume, while the ATMs’ share declined drastically from 82.1 per cent in 2014 to 15.9 per cent in 2021, that of mobile banking rose continuously from 1.3 per cent to 65.8 per cent over the same period. The share of PoS machines rose steadily from 15.2 per cent in 2014 to 26.0 per cent in 2018 but thereafter declined to 18.3 per cent in 2020 and 7.9 per cent in 2021 (Table 1).

By value, while the ATMs’ share plummeted from 87.7 per cent in 2014 to 22.6 per cent in 2021, that of mobile banking rose from 1.0 per cent to 71.0 per cent. The share of PoS machines rose steadily from 11.1 per cent in 2014 to 17.0 per cent in 2018 but thereafter declined to 11.2 per cent in 2020 and 5.2 per cent in 2021 (Table 2).

It is important to note that the figures during 2020 and 2021 represent the Covid-induced shutdown effects. Irrespective of Covid lockdowns, ATMs are fast losing their sheen following the onslaught by the two technologically advanced transaction modes, i.e., mobile banking and PoS machines. The number of PoS machines per ATM has almost tripled during 2014-21, and the transactions put through these machines have been equally remarkable.

Looking head

Besides the ‘substitution effect’, as discussed above, the fast emerging fintech industry is poised to further erode the utility of ATMs for both banks and non-banks, which have deployed these, as well as customers. In fact, the entire payments system all over the world is constantly under churn, both in scale and scope. Managing these changes will define the future landscape of the payments system.

The first and foremost imperative is to consolidate the vast number of ATMs — a process which has begun, but needs to be fast-tracked. As recommended by the Nandan Nilekani Committee on Deepening of Digital Payments, ATMs have to mutate and be seen “as an access point for customer education, awareness, and support.”

Further, they have “to support the gamut of banking facilities including cash deposit, bills payment, funds transfer, tax deposits, mobile recharge, etc.”

Pricing of ATM transactions needs to be done on cost-plus basis, keeping in view the regulatory changes introduced by RBI from time to time. The cost should be on ‘incurred’ basis, and no ‘imputed’ cost should be considered. Besides, one way could be to fix fees through comprehensive ‘inter-bank agreements’ after quantifying all possible technical and non-technical parameters.

Even if ATMs are declared as ‘public good’ like water or electricity, some charges will have to be recovered from the users beyond a certain amount of usage. Even for the ‘public goods’, the user fees are charged.

RBI regulates ATM business of banks under Section 10(2) read with Section 18 of Payment and Settlement Systems Act 2007, and it allows some freedom to banks, even if it regulates ATM business of banks. Still, banks should work towards getting more freedom. Intervention by the regulator should only be of supervisory nature.

Utility and salience of ATMs are inextricably linked to the cash use in an economy. If cash loses its importance as ‘the-king’, the survival of ATMs could automatically head towards an end. Threatened by the ongoing march of cryptos, many central banks across the world are no longer loath to experiment with digital currency.

China, Japan and Sweden have begun trials of CBDC. Bank of England and European Central Bank are preparing their own trials. The Bahamas has already rolled out the world’s first official digital currency. El Salvador has recognised bitcoin as legal tender. RBI is the latest to join the bandwagon.

Writing for the New York Times , Eswar Prasad, a professor of trade policy at Cornell University, asserts that “the idea is for central banks to introduce these currencies in limited circulation — to exist alongside cash as just another monetary option — and then to broaden their circulation over time, as they gain in popularity and cash fades away.”

However, it’s too early to write an obituary for cash as well as ATMs. Possibly, increasing number of ATMs may be replaced with cash recyclers. Legacy intermediaries like banks could lose market share to new-age fintech companies.

Rath is former Chief General Manager, RBI, and Das is former senior economist, SBI. Views are personal