In the mid 1990s, with the opening up of the banking sector and entry of private banks, India’s central bank discussed the issue of customer service. Given the power of the unions, most bankers remained cold to suggestions to extend banking hours, and offer services on holidays. That was when policymakers thought of encouraging the installation, in a big way, of Automatic Teller Machines or ATMs to make it easier for customers.
Not surprisingly, considering the technology and cost involved, the early push came from foreign banks. ATMs — also automated teller machines, cash machines, or cashpoints — had first been seen in England in 1967, courtesy Barclays Bank. In India, Hong Kong and Shanghai Bank was to pioneer the machine a couple of decades later, in the late 80s — and other foreign banks followed suit.
Initially, ATM services were restricted to preferred customers — the high net worth and wealthier individuals. But around the turn of the century, Citibank launched its Suvidha programme, when a cluster of ATMs in Bangalore began to offer services to not just the privileged, but to all customers.
Expanding the ATM network helped foreign banks get around limitations imposed by the cap on the number of branches that could be approved annually — then 20, in line with the WTO agreement on services. In the first stage, banks that put up ATMs restricted their use to their own customers. A little later, some banks joined hands to run the machines and expand these services. In that phase, with its teething problems, the regulator addressed concerns relating to safety and security, especially at “offsite” ATMs, which were not attached to branches of banks.
In the early part of the last decade, private banks that were licensed in 1994 started to expand their networks, giving a big push to ATMs. Some of these banks — HDFC Bank, UTI Bank (which later became Axis Bank), ICICI Bank and IDBI Bank — started to offer free ATM cards to all customers. At that stage, banks had to still obtain approvals from the regulator to get around the provisions of the Banking Regulation Act that specified activities that could be carried out from the premises of a bank. The regulator found a way by allowing for post facto approvals.
Private banks realised it was far cheaper and more efficient to focus on expanding the ATM network than to build brick-and-mortar branches. Less cash could be kept in branches, staff costs could be cut, and cash could be given to customers at any time of the day or night. Internal calculations made by some banks over 15 years ago showed that the cost of dispensing cash through ATMs was a third or fourth of doing so at branches.
As state-owned banks, led by State Bank of India, joined the bandwagon, customers living away from the metros got access to ATMs. As the numbers swelled, some complaints came too — and the Reserve Bank of India found that charges varied from bank to bank. Governor Y V Reddy then set up a working group to formulate a scheme for ensuring reasonable charges, and to incorporate it in the Fair Practices Code. After completing its analysis, the RBI made all ATM transactions free, along the lines of the UK, Germany, France, among other countries.
Some bankers protested — saying there was a cost to offering this service. Reddy’s basic argument was that this was a public good: the cost incurred in delivering cash to customers — whether at a branch or through an ATM — did not matter because being granted a licence to accept public deposits was in itself a privilege, for which banks could well subsidise ATM services. He also delighted in pointing out that the ATM had, in a sense, democratised banking — with no special access for the privileged or the elite, the machines were the same for all customers.
Subsequently, however, the power to price these services returned to banks after the regulator eased its stance. But by then, the regional spread of ATMs had changed, as also the range of banking services they offered. From being just cash dispensing machines, they had started to offer payment and many other services, including for loan products, helping millions of customers reduce their visits to bank branches, especially in the cities. As the reach of banking has grown over the last decade, more banks, especially state-owned ones, have started installing more machines that can also accept cash — to support the lakhs of migrant workers who send money back to their families in the villages.
India now has over 2 lakh ATMs, with banking leader SBI alone accounting for over 43,000. But this growth is bound to reach some limits now. With the rising numbers of electronic transactions through debit and credit cards and PoS machines, the level of cash usage will decline, and the growth in ATMs should taper off. Globally, new generation Internet banks are changing the way the business is run — while India still retains plenty of scope for widening access to banking, the most important financial innovation of the past 20 years, as the former head of the US Federal Reserve Paul Volcker described it in the Wall Street Journal in 2009, may well have run its course.