Most of India is still ATMnirbhar

The reason for higher ATM interchange fees, which RBI announced earlier this week, is that growth in the segment is slowing down precipitously. Interchange fees are what banks pay each other for the use of ATMs. The change takes place from May 1. Bank mergers have led to a de-duplication drive among individual ATM networks. Banks are moving to a model of operating two ATMs per branch, one of which is onsite. This is designed to funnel more money through available ATMs to make them financially viable. It does not matter as much in dense urban clusters, but makes its impact felt in rural banking where the need for cash is relatively high, and ATM density is low. Higher interchange fees could help stabilise ATM numbers by improving their profitability.

The flip side of higher fees would be to encourage cashless transactions. The limits on free transactions have been retained in the interests of customer service, but the deterrence of higher fees should influence consumer behaviour. ATM numbers have been dwindling while the share of cash in circulation has been rising. Online payments are facilitated by publicly funded digital infra, but banks incur costs in setting up and maintaining ATM networks. The policy support for cashless transactions influences banks' approach to ATMs but they need a critical mass of these machines for normal banking operations.

The need to hold cash is affected by the size of India's informal economy. The pace of economic growth raises transaction demand for cash. Factors like inflation and interest rates, which tend to depress cash holdings, are offset by the level of financial inclusion. India has a considerable demand for cash that is serviced in a cost-efficient manner by ATMs. The business model of making ATMs pay for themselves can be limiting if transaction pricing is not market-driven. India is not anywhere near the tipping point where cashless transactions dominate economic activity. It needs to keep privately funded ATM networks in play for a while longer.