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The introduction of white label ATMs will not be an unmixed blessing, unless RBI keeps a tight vigil over their operations. Whether they will prove white elephants or not will depend on what safety precautions will be mandated by RBI to be complied with by all the stakeholders
The Reserve Bank of India (RBI) had released draft guidelines last month for introduction of “white label ATMs” with a view to expand banking services in the country. So far only banking institutions authorised by the RBI were allowed to set up ATMs and operate them as per its guidelines. As present there are 87,000 ATMs owned and operated by banks in the country, but they are located mostly in urban and metro areas. With a view to further expand banking services in hitherto unbanked and under-banked areas, the RBI has proposed to grant licenses to set up ATMs to private companies fulfilling certain conditions and has invited comments from the public to finalise the guidelines shortly.
Simply put, white label ATMs (WLAs) are those ATMs set up, owned and operated by non-banking companies, which would like to run it as a business enterprise and earn profits. These WLAs do not display any bank logos or labels and hence they are called as white label ATMs and they will serve all banks’ customers, as these WLAs will be interconnected with the entire ATM network in the country.
The proposal to expand the ATM network, whether owned by banks or otherwise, to hitherto unbanked areas is no doubt a welcome addition to the banking network, as it will not only help to inculcate banking habit among the rural population, but will also result in financial inclusion of a large number of people who are presently outside the banking system.
In fact the biggest beneficiaries of this proposal will be commercial banks themselves, as WLAs will serve as an extended arm of a bank and provide cash dispensation to their account holders at a nominal cost, without the need to set up a branch or an ATM of their own, thereby considerably saving on cost which can very well be used for their mainline operations. It is by promoting the habit among the banks’ customers of using ATMs over a longer period, all the banks will benefit tremendously as it will result in lesser customers visiting the branches to withdraw cash and other banking needs, thereby saving in transaction costs, man-power cost, and fewer customer complaints of delay and such other problems generally encountered in branches of banks due to heavy rush observed particularly during the first week of the month.
The proposal, therefore, will be useful to both the banks and their customers, and deserve consideration. But before they do so, certain precautions and safety measures are to be put in place to ensure that these WLAs do not become white elephants to the consumers, who may be easily taken for a ride in the absence of strict rules and regulations and a mechanism to ensure their compliance.
At present customers of most of commercial banks enjoy ATM facility on the following terms.
1. A savings bank customer of each bank can use the ATM of his bank through the ATM card issued by his bank, any number of times free of all charges for withdrawing cash or for any other services offered through the ATM, provided he/she keeps an operating SB account with that bank.
2. If a customer of bank ‘A’ uses the ATMs of bank ‘B’ or any other bank, he will not be levied any charges for the first five transactions in a calendar month. Thereafter for every transaction, he or she will be charged Rs20 per each cash withdrawal and Rs8 to Rs10 per each non-financial transaction like balance enquiry, etc, if he uses other banks’ ATMs.
The RBI in its draft guidelines has suggested that the operator of the WLAs will be entitled for fees to be collected for every transaction completed by using their WLAs as detailed here under:
1. “Being non-bank owned ATMs, the guidelines on five free transactions in a month for using other bank ATMs would not be applicable for transactions effected on the WLAs. The charges for the transactions should be displayed on the screen before the customer initiates the transaction.
2. The WLA operator would not be entitled to any other fee from issuer bank other than the ‘interchange’ fee payable to the ‘acquirer’ bank under the present bank-owned ATM scenario. The WLA operator shall also not be permitted to charge any fee from the customers for the use of the ATM resources.”
These guidelines apparently show that the WLA operator will get their fees twice, once from the customer who uses the WLA and secondly from the ‘interchange fee’, the fee which a card issuing bank pays to the ATM operator to cover the cost of the transaction, and this cost is absorbed by the card issuing bank. The RBI should look into this aspect and clarify this matter for the benefit of the public.
However, if the proposed rules are implemented, the customer will lose the benefit of free five transactions in a month, if he uses the WLAs and will be charged for every transaction as decided by the operator of the WLA. This will be a disincentive for the banks’ customers to use these WLAs. As is well known, ATMs are predominantly used by the middle and the lower middle-class of our population, who are sensitive to bank charges. It is therefore, necessary for the RBI to ensure that the present benefits available to banks’ customers are not curtailed, nor the operators are allowed to charge fancy rates for using their ATMs,
More than anything else, the RBI should not lose sight of the most important aspect of inherent risks involved in allowing private entities to set up, own and operate WLAs as there is a distinct difference in attitude between banks and the private parties in owning and operating ATMs. Banks today look upon ATMs as a service to their customers and not as income generating activity per se, and take enough care to protect the interest of their customers with a view to protect their own image. All over the world ATMs are the cause of a large number of bank frauds, and India will be no different, more so when the nameless WLAs are installed, where the emphasis will naturally be on generating more income and protecting the interest of the user may receive secondary importance.
As per the report of the expert group constituted by RBI last year, 99% of the ATM cards issued by banks in India are magnetic strip cards and the data stored on them are vulnerable to skimming and cloning, meaning that they are more susceptible to frauds. The expert group has recommended that it is desirable to upgrade the magnetic strip cards to smart chip-enabled ATM cards with PIN, as these are considered safe from the user’s point of view. This is a massive job as there are about 240 million debit cards and 20 million credit cards in India at present, and most banks’ host systems are not ready for issuance of chip cards.
Besides all our existing ATMs numbering 87,000 are not currently enabled for accepting chip-based cards, though many of them are capable with upgrades to hardware and software. Most countries in the world have migrated to chip-based card with PIN on regulatory mandate as these cards provide protection against both counterfeit (skimming) and lost and stolen card frauds.
The RBI is yet to take a decision on upgrading the ATM cards and the related ATM infrastructure to chip-based PIN cards, as they are awaiting the progress of Unique Identification Project (UID) to determine as to whether UID based biometrics can be adopted as the second factor authorisation for all card transactions. In case UID based biometrics is to be adopted it will require an upgrade of the acquiring infrastructure including ATMs with finger print readers.
The RBI in its circular issued to banks in September 2011 had conveyed that the position of Aadhaar-based biometric authentication as a second factor authorisation for card transactions would be reviewed by December 2012 to assess the need for a complete switch over to chip and pin technology for card-based transactions. Now that the RBI has proposed to allow setting up of white label ATMs, it is all the more necessary for RBI to hasten the process of review and take a decision much earlier, so that all future ATMs, whether owned by banks or private entities, are geared to meet the highest safety requirements mandated by RBI to protect the interest of banks’ customers.
It goes without saying that the RBI should consider the interest of banks’ customers paramount and safety of their money more sacred than rushing ahead with white label ATMs to be set up by private parties, for any hasty decision can jeopardize the interest of the public with dire consequences.
As the saying goes, “it is better to be safe than sorry” and hopefully RBI appreciates this in its own enlightened self interest.
(The author is a banking and financial consultant. He writes for Moneylife under the pen-name ‘Gurpur’)