Banking White Label ATM: Meaning, Features, Advantages, Limitations, Financial Inclusion, Nested Design, Contagion Risk

Banking White Label ATM: Meaning, Features, Advantages, Limitations, Financial Inclusion, Nested Design, Contagion Risk What is White label-ATM? . Traditionally, Automated Teller Machines (ATMs) have respective bank‘s logo. So just by looking, this is SBI‘s ATM, this is ICICI‘s ATM and so on. But White label ATM doesn‘t have such Bank logo, hence called White label ATMs. RBI has given license / permission to non-bank entities to open such ATMs. Any non-bank entity with a minimum net worth of Rs.100 crore, can apply for white label ATMs. (not just NBFC, any non-bank entity can apply.) . Late 80s: first ATM in India; 2012: RBI issues guideline for White label; 2013: RBI gives license/permission. Tata Communications Payment Solutions Limited =the first company to get RBI‘s permission to open White label ATMs. They started their chain under brandname ―Indicash‖. Other White label= Muthoot Finance, Srei Infra., Vakrangee Software, Prizm Payments, AGS. More than 15 companies given such permission. What’s the difference between Brown label vs White label ATM? Brown Label ATM White label ATM 1 When ATMs are owned and operated by non- When banks outsourced the ATM operations to a third bank entities but they are not doing ‗outsourcing- party. contract‘ from a particular bank. The private company owns & operates the ATM machine, pays office rent. They negotiate with the landlord, Same electricity company, telecom company and so on. The bank (which has outsourced this work) provides cash Sponsor bank provides the cash. for that ATM. ATM has logo of that bank (which has outsourced this No. White label ATM doesn‘t have such logo. work). Not even of the sponsor bank. They‘ve to compulsory open a few ATMs in (tier No such compulsion. 3 to tier 6) areas. (explained after a few paragraphs) RBI directly involved because these white label RBI not involved directly. These outsourcing companies Companies have to separately get have contractual obligation with their respective banks. license/permission from RBI to run business. Initially, RBI did not permit White label ATMs, and Banks wanted to reduce the operational cost, so they came up Brown Label ATM (outsourcing) system. So in a way, the evolution is: (Bank‟s own ATM) =>(Brown Label) => (white label) Stakeholder/Players in White label ATM game? Gives license/permission to open White label ATMs. Under Payment and Settlement RBI Systems Act, 2007. (And NOT under Banking regulation act or SARFAESI Act, Ombudsman or any other act.) Rents the place, looks after maintenance and servicing of the machine. (non-bank) White 2 Label ATM company Loads the cash in those White label ATMs. This also ensures counterfeit/fake Sponsor bank currency notes are not circulated through white label ATM. Visa, Mastercard, the National Financial Switch (NFS under National Payment Payment network Corporation of India.) operator . They provide technical connectivity in the system. Why do we need White Label ATM? 1. ATMs offer convenience to customer (Because he doesn‘t need to visit Bank branch every time). ATMs are open 24/7, and even on holidays. 2. Convenience to bank, because they don‘t have to keep large staff/office (compared to a system without ATMs). It reduces their cost of branch-operation. 3. But in India, ATM penetration has been very low. Observe: Country Approx. No. of ATMs per 10 lakh population USA 1400 UK 500 China 200 India less than 100 Most of the ATMs concentrated in urban areas- that too only at prime locations e.g. near shopping malls and airports= financial inclusion not achieved. How does White Label ATM help in financial inclusion? RBI requires White label-ATM companies to install machines in the ratio of Two ATMs in (tier 3 to 6 place) : One ATM in (tier 1-2 place). Confused? Observe: 3 Center city census definition:population is ____ White Label ATM Metropolitan 10 lakh and above Tier 1 if company wants to Setup ONE ATM Urban 1 lakh and above here, Tier 2 50,000 to 99,999 Semi-Urban Tier 3 20,000 to 49,999 Tier 4 10,000 to 19,999 Then, company must install TWO ATMs here. Tier 5 5,000 to 9,999 Rural Tier 6 Less than 5,000. For example, RBI has permitted Tata to deploy 15000 White label ATMs. Meaning [2/(2+1)] x 15000 = 10,000 ATMs will be setup in the rural and semi- urban areas. = more access to ATM= financial inclusion. Facilities @White label ATM? 1. Any customer from belonging to any bank, can use it. 2. Every month, Five transactions are free. 3. White label ATM users can also withdraw a maximum of 10,000 per transaction. 4. Open 24/7 and on holidays 5. Value added services like mobile recharge, utility bill payments etc. Where does the Commission come? White ATM Company doesn‟t run for charity or goodwill. Company has to make profit. So where does the asli-maal/commission come? Before White label ATM With White Label 1. If you used card in your own bank‘s ATM= everything free. 1. First five transactions free every 2. If you used card on other bank‘s ATM= first five transactions month. 4 free (every month). After that commission charges of Rs.~17-20 2. Then, transaction fee ~Rs.15 and for taking out money and Rs. 5-9 for making balance inquiry or balance inquiry fee ~Rs.5 BUT mini statement. (This commission directly charged on your this commission is paid by your account.) bank to the White label Company. 3. White label company cannot directly charge money on you. (RBI rules). 4. Although it doesn‘t mean White label ATM=totally ―Free‖ because your bank will cut those charges from your account. Additionally, White Label ATM company can make commission from 1. value added services @their ATM e.g electricity /telephone bill payments, mobile recharge, DishTV-Tatasky recharge etc. 2. Selling advertisement space in the room and above the door. White label ATM: Challenges/Limitations/Problems 1. For a white label ATM company, biggest challenges = office rent + Security guard. 2. If they want to make profit, every White ATM needs to get at least 75-125 transactions per day= very unlikely, especially when RBI requires them to setup 2/3rd of the ATMs in semi-urban and rural areas. 3. Even in Bangalore, some of the white-label ATMs are getting barely 2-3 customers every week=loss making business at the moment. 4. Despite the entry of White Label ATM companies, the regular banks have not slowed down their ATM expansion drive, because branded ATM=passive advertisement and customer loyalty. Result? ATMs everywhere =too much competition= small players will bleed out just like in aviation business. 5. Last year, a lady was brutally attacked in ATM booth in Bangalore. Police have warned all banks to put security guards=input cost increased. Banks themselves admitting ―five transactions free every month=loss making‖ in this scenario. 6. SBI has the largest ATM network in India (30,000+)= economies of scale= they‘re supposed to be making profit. But this week, even SBI chairman herself has admitted 5 their ATM business is making losses. So, it is unlikely that White label ATM companies will run profitably for a long period of time. 7. Customer complaint: failed ATM transactions = matter falls into Issuing Bank (=bank where you have account). Some critiques fear it will lead to taarikh pe taarikh because data records are with sponsor bank and machine maintenance is under ATM company‘s responsibility. Nested Design RBI appointed Nachiket Mor Committee on financial services, talks about this limitation. The White label-ATM does not have direct access to the settlements system. (like SBI or ICICI has access to RBI monitored NEFT online money transfers.) . Instead White label ATM is tied with a ‗sponsor-bank‘. And the sponsor bank looks after the settlement. Sponsor bank loads and withdraws the cash from those ―machines‖. Example Federal Bank is the sponsor bank for Tata‘s White label ATMs. Mohan Ok so what‘s the problem? Nachi Nested Design= contagion risk. 6 . Contagion = Bad condition in one institution leads to negative effects in the other institutes in the market. Suppose few of Tata‘s White label ATMs break down for xyz reason (hacking, staff negligence or whatever) and some clown starts baseless rumoring on facebook/twitter/whatsapp that Tata‘s ATMs not working because federal bank has stopped supplying cash. Another clown then starts rumor mongering that Federal Bank is about to collapse because of NPAs and hence not honoring its obligation to Tata. Result: Fed.Bank account holders panic and line up at other ATMs (sponsored or owned by other banks) to pull out their money = these type of “runs” destabilize the banking system. Extreme cases lead to situation like Cyprus- Banking crisis. Mohan But don‘t the banks have CRR and SLR to arrange cash in such emergency situations? Yes they have. But with nested design, they‘re exposing themselves to additional ―contagion-risk‖ Nachi from other banks/White-label ATM companies. Especially when White label ATM company grows too large in very short time and sponsor bank cannot foresee the cash requirements. Mohan Then what‘s your recommendation? . White label ATM companies should be directly linked to settlement system, without sponsor banks. RBI should allow White Label Banking Business Correspondent agents. [Same like earlier Nachi BC, but they can work with multiple banks at the back-end.] . Potential candidates= NBFCs, mobile phone companies, consumer goods companies, the post office system, existing corporate BCs, and milk/agri./sugar etc.

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