White Label ATM And Laws Related To It
This Blog is written by Ayush Meena from Narsee Monjee Institute of Management Studies, Indore. Edited by Naina Agarwal.
“White Label ATMs” (WLAs) are Automated Teller Machines (ATMs) which are owned and operated by non-bank entities, and these machines are deployed by Non-Banking Financial Institutions (NBFC). White label ATMs are like normal ATM, but this ATM doesn’t have any branding of bank and cash deposit facility is not permitted at the WLA.
The Reserve Bank of India authorized white label ATMs under the Payment and Settlement System Act, 2007 which provides for the regulation and supervision of payment systems held in India. Then in the year 2012, RBI permitted the non-bank entities incorporated in India under the Companies Act, 1956 to open white label ATMs were given the statutory allowance to open in 2011 by the payment & settlement systems Act 2007; and after that in the year 2013, RBI started providing licenses.
There was a need to allow non-bank entities for setting up of WLAs because the banks weren’t able to reach with their ATM facilities in every place and to ensure more geographical reach, non-bank entities were allowed by RBI to set up white label ATMs keeping the population of the country in mind. This was done to keep the customer services in check and to increase the geographical spread of ATMs throughout the entire banking process. These white label ATMs have been introduced to ease the pressure on the bank of a hectic task, such as queuing up at a branch of the bank you have your account in and filling up your form, which is very time-consuming. This provides private companies a way to make a profit out of the financial system which also ends up helping common people.
The Reserve bank of India now allows White label ATM Operators (WLAO) to buy wholesale cash directly from the central bank, offer non-bank services like bill payments, and advertise even non-financial products in their premises increasing the revenue earning scope for these companies.
SIGNIFICANCE OF THIS DEVELOPMENT
Since 2006 banks have to press RBI to introduce white label ATMs in India too. In 2012, RBI issued DRAFT guidelines and asked the comment of the bankers and the public in this regard. Thus, these guidelines are still not applicable but are likely to be soon approved.
The WLA operators to buy wholesale cash, “above a threshold of 1 lakh pieces of any denominator” directly from RBI offices and currency chests, and any scheduled banks. Like before they won’t have to depend on the sponsor banks to get the cash for its ATMs. White label ATMs are ATMs that are owned and operated by non-banks entities but provide services to banking users via the issuing bank cards. WLAs cannot charge bank customers for their usage, but their operators can receive a fee from the banks for the usage of the ATM.
The ATM penetration in India hasn’t been good. There is less than 100 ATMs on approximate 10 lakh population, where China and the USA have 200 and 1400 ATMs respectively. The government, therefore, trying to invite more and more private institutions to invest in building ATM which are need of the masses. According to data, there is only 1 ATM for every 13000 people in the country, in the age of digitalization basic necessity of ATM is crucial. So, it is very urgent to increase ATMs otherwise increase in population will lead to a scarcity of the financial sector in the country.
While the WLA Operator is entitled to receive the share from the banks for the use of ATM by the bank’s customers, WLAs are allowed to charge bank customers directly for using WLAs, but WLAO is allowed to display advertisements and offer value-added services as per the regulations in force occasionally. WLAO are also allowed to have more than one sponsor bank, as sponsor banks have a responsibility to manage the cash at the WLAs. Then banks make necessary arrangements with other banks for servicing cash requirements at various places. While the cash would be owned by the WLAO, it was also the responsibility of WLAs to ensure the quality of cash like any other sponsor bank.
In a bid to accelerate the growth and wider spread of ATMs, RBI issued draft guidelines for permitting non-banking entities to set up, own and operate such money dispensing machines. Non-bank entities proposing to set up such service will have a minimum net worth of Rs 100 crore, RBI said. “The RBI has sought views/comments on the draft circular from banks, authorized ATM network operators, non-bank entities and members of public,” it said, adding that the stakeholders can make suggestions.
The central bank said that it has reviewed the extant policy on ATMs. “… it has been decided to permit non-banks to set up, own and operate ATMs to accelerate the growth and penetration of ATMs in the country. Such ATMs will be in the nature of White Label ATMs (WLA) and would provide ATM services to customers of all banks,” the draft guidelines said.
“The WLA operator will be the ‘acquirer’ for all transactions at the WLA and earn his fee accordingly”, it said. The WLA operator would earn their revenue by offering value-added services and extra revenue through advertisement. “The advertisement placed on such ATMs would be subject to Advertising Standards Council of India (ASCI) codes and other regulations”, the RBI draft proposed.
It also added: “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.”
As per the draft guidelines, the WLA operator would not be entitled to any other fee from the issuer bank other than the ‘Interchange’ fee payable to 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,” it said, further suggesting that regulatory guidelines relating to compensation for failed ATM transactions at WLAs.
“General guidelines governing the operations of bank ATMs would apply ‘with things changed that should be changed’ to WLAs”, the draft guidelines said. For the purpose of the settlement bank, the operator will have one ‘Sponsor Bank’ which will deal with all the transactions at the WLAs. ATM Network with whom the operator has established connectivity will do the settlement of all the transactions at the ATMs through the books of the Sponsor Bank.
The responsibility to redress the grievance of customers related to failed ATM transaction will put with the issuing bank, the necessary support in this regard, including, making available records and information are under sponsor bank.
The banking sector has seen considerable growth in ATMs during recent years with around 87,000 machines operational across the country. However, they are mostly presented in urban and metros areas. Although there has been a 30 percent year-on-year growth in the number of ATMs deployed in the country since 2008. “There is, therefore, an abundant scope and a felt need to deploy more ATMs, particularly in Tier III to VI areas of the country,” the apex bank said.
The central bank has not announced a policy change, but industry sources said it had been conveyed to deployers that they would now be evaluated on an annual basis with more realistic targets and the kind of cities (from Tier-I to tier-VI) in which ATMs were put up. These targets are confidential and player-specific. Deployments by white-label ATM (WLATM) firms have been poor at 23,597 units, seven years after they began operations. This is way off the 1,000-25,000 ATMs that would have been added annually by each operator based on the schemes they had opted for. Industry sources say as many as 200,000 WLATMs would have been deployed if the run rate had been maintained.
The current interchange fee has been set by RBI at Rs.15 per transaction with a cap of five free transactions per customer, which the Confederation of ATM industry or CATMi feels is not enough for the sustenance of daily operations. The WLATM business model was premised on the fact that customers will swipe on ATMs and deployers could pocket the interchange fee of Rs 15. The interchange is the pay-out by a card-issuing bank when you swipe at other banks’ ATMs (and this includes white-label units). The promise of a hike in the interchange fee to Rs 18 has also not materialized so far. The model was turned on its head when footfalls fell at these WLATMs and operating costs soared. Another blow was when banks started to plonk their ATMs next to WLATMs to cut back on the interchange paid.
In effect, the poor deployment of WLATMs has tripped what the central bank sought to achieve back in 2012 when it noted: “While there had been a nearly 23-25 percent year-on-year growth in ATMs, deployment has been predominantly in the Tier-I and -II centers. There is a need to expand in tier-III and tier-IV centers.”
A high-level committee set up by the RBI earlier in 2019 to recommend ways to increase ATM penetration in the country had submitted its findings to the central bank in December. The primary recommendation of the six-member committee was to hike the interchange fee, for urban areas where the population is more than 1 million the ATM committee has recommended an interchange fee of Rs 17 on financial and Rs 7 on non-financial transactions. It has also suggested capping free ATM withdrawals to three. For rural and semi-urban areas where the population is less than 1 million, the committee has recommended an interchange fee of Rs 18 for financial and Rs 8 for non-financial transactions, while free transactions could be six.
As per the latest RBI data, there are 227,000 ATMs operational across the country, of which 21,300 are white-label machines and the rest are owned by the banks. Historical central bank data shows that the growth of teller machines peaked in 2018 as banks stopped installing them owing to high costs. Data also showed that only one out of five ATMs were deployed in rural geographies. For private sector banks, the rural deployment rate is less than one for every 10 ATMs.
India’s ATM penetration is among the worst for any major economy in the world. While China, the US, Germany, Brazil, and South Africa all had a per capita ATM deployment rate of under 2,000, India’s ATM per capita deployment rate was at 5,919 in 2017 as per RBI’s Benchmarking Payments report. “The entire industry is eagerly looking forward to a hike in interchange to make their ATM operations and future deployments viable,” the CATMi letter said, “We request you to implement the recommendations of the committee at the earliest as the matter impacts the very viability of White Label ATM Operators (WLAOs) and Managed Service Providers (MSPs).”
The company shall open a minimum of 1000 White Label ATMs in the first year. In the second year, the number should be twice than those in the first year; subsequently, a minimum of three times the number of WLAs installed in the second year.
A minimum number of 5000 White Label ATMs should be opened every year for three years wherein the ratio of 2:1 would be applicable, i.e. for every 2 WLAs installed in Tier III to VI Centres, 1 WLA can be installed in Tier I to II Centres. Out of the WLAs installed in Tier III to VI Centres, a minimum of 10 % should be installed in Tier V & VI Centres.
The ratio of 1:1 is applied here. Out of the WLAs installed in Tier III to VI Centres, a minimum of 10 % should be installed in Tier V & VI Centres.
The introduction of White label ATMs in India by RBI is a positive measure in the banking sector. As the population of the country is rapidly increasing and already 2nd most populous country. The number of banks is very low in proportion to the population. The major concern was the number of banks in rural areas which are quite low compare to urban cities, not only this but the process in banks takes a quite long time. White label ATMs are handy as we can easily withdraw and deposit money in the bank which is very efficient. RBI has issued draft guidelines that tend to improve the condition of WLAs in India and become effective.
The decision to open more ATMs, through non-banking entities has been a brilliant option. The schemes that regulate the working of such White Label ATMs have ensured that these institutions don’t just keep in mind the incentives, but also works for the needs of the rural people in the country. After opening a given number of WLAs in rural centres, they will be allowed to open a WLA in an urban setting. The biggest beneficiaries of this White Label ATMs will be commercial banks themselves, as WLAs will serve as an extended arm of a bank and provide cash dispensation to their accountholders at a nominal cost, without the need to set up a branch or an ATM of their own, thereby considerably saving on the 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. O(1) pening of White label ATMs will not only help to inculcate banking habits among the rural population but will also result in the financial inclusion of a large number of people who are presently outside the banking system.