Cash Is Not King: As India Moves Faster Towards Digital Payments, ATM Sector Faces Collateral Damage

The Indian government’s push for digital payments has worked quite well so far. The Unified Payments Interface (UPI) has been setting new records in terms of transaction volumes and value almost every month.

In July 2021, transaction values jumped to Rs 6 lakh crore, while it stood at Rs 3 lakh crore in 2020. The value of transactions in the UPI ecosystem has been growing at a rapid pace.

The Push for Digital Payments

The government has been pushing customers and merchants to adopt digital payments. It has even reduced the transactional charges for UPI to zero, implying that there won’t be any frictional costs for customers transacting through UPI.

The Central Board of Direct Taxes (CBDT) issued a circular in August 2020, directing all banks to allow UPI transactions for free and not charge any fees.

Unlike cash, the government can keep a tab on the movement of money through digital payments, which is a major reason behind the government’s push.

Using cash in today’s environment is a losing proposition, because procuring and holding cash has a cost too. To procure cash, one must travel to the nearest bank or automated teller machine (ATM), which adds to the costs of transacting.

Further, the time spent while waiting to withdraw cash and the fees charged for transactions put cash users at a disadvantage. Withdrawing cash would also mean foregoing the interest that could be earned on the money, as people usually withdraw a larger amount than their immediate needs.

In addition, digital payments apps, which are quite well-funded, offer rewards for customers who make payments through them, making cash payments an unfavourable proposition.

Collateral Damage

But the rapid adoption of digital payments is hurting the ATM industry. The ATM industry grew at 14 per cent per annum between 2012 and 2017, aided by a rapid ramp-up of ATMs throughout the country.

Now, the growth has dropped to 4 per cent, according to a report by the Reserve Bank of India (RBI), with some months showing contractions. According to an RBI report, the number of ATMs has remained at around 222,000 between fiscals 2017 and 2019.

Cash withdrawals have grown at a compounded annual growth rate of 9 per cent in volume terms and 10 per cent in value terms over the past five years, which is much lower than the growth rate of digital payments.

Almost 83 per cent of debit and credit cards usage was attributed to card payments. However, now, the figure has fallen to 50 per cent as users use these cards for payments.

Further, cash is seen as a store of value rather than as a means of payments, as is evident from the higher demand for the currency of higher denominations.

In contrast, the share of low denomination currency as a percentage of Gross Domestic Product (GDP) has fallen.

The pandemic had a deep adverse impact on the ATM industry. The risk of infection kept people away from ATMs and cash.

Can ATM Operators Survive?

The lower demand for cash means lower footfalls at ATMs. ATMs earn money through interchange fees that banks pay to the ATM operators or the banks where the card is being used.

Lower footfall means lower transaction volumes, implying lower revenues for these ATMs. Further, running an ATM network requires high fixed expenses such as rent, employees, hiring security vehicles, installing camera, maintenance and other expenditures.

The increasing cost of fuel can also add to the cost of transporting cash. Lower revenues for a business with high proportion of fixed costs could make operations unsustainable.

The highly regulated nature of the business further adds to the pain of ATM operators. In another instance, the RBI is looking to penalise ATM operators if the ATMs run out of cash for more than 10 hours in a month.

Such regulatory issues could add to the burden of existing players, and dissuade new players from entering the industry.

Some white-label ATM players like Muthoot Finance and SREI have already exited the business during the pandemic period. White label ATMs are operated by non-bank entities.

To make the business sustainable and attractive, the RBI has increased the fees per transaction to Rs 17 from Rs 15 for financial transactions.

The fee for non-financial transactions has been increased to Rs 6. The last increase in fees took place in 2012.

But an increase in fees would mean higher transaction costs for users, which could ultimately end up lowering footfalls.

With the government’s subtle push towards digital payments and the rapid digitisation of commerce, the use of cash in some segments might be lower. While cash will still remain king for some time, the negative-to-low growth in the ATM industry is likely to continue in the future.