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Banking on unity

Arti Sharma and George Smith Alexander | June 21, 2003

They should be battling each other for customers. But next month four of the country's top banks -- UTI Bank, Citibank, IDBI Bank and Standard Chartered -- will be teaming up in a hi-tech alliance that will multiply their automatic teller machine reach across the country.

The new partnership will be called Cashnet and it will allow customers of the four banks to withdraw money from each other's ATMs.

In one stroke the banks will be able to give their customers better service and they'll be able to cut the stupendous cost of modernisation.

"With a shared network, a bank can go slow on deploying more ATMs," says Hemant Kaul, senior vice president, retail banking, UTI Bank.

But Cashnet won't be the only shared network reaching out to the customer. Four public sector banks -- the Bank of India, Union Bank of India, Syndicate Bank and Indian Bank -- are also tying the technological knot and pooling their ATMs.

This alliance, yet to be branded, will also be launched in July. A third consortium led by Punjab National Bank and Global Trust Bank is also thrashing out the details of an agreement and should be ready to team up and deliver pushbutton money in a few months time.

How do shared networks help customers? Take a look at Cashnet's fully-wired network that will now reach out further than ever before.

Customers of the four banks will be able to use 1,433 ATMs in different corners of the country. The bulk of these will come from UTI Bank, which already has 880 ATMs functioning.

Another 275 will come from IDBI Bank, and 200 more from Citibank. Standard Chartered, the smallest of the four in terms of ATM networks, currently has 75. However, both Stanchart and Citi will bring in a large number of cardholders to the deal.

Similarly, the Bank of India consortium -- which is starting with four banks -- aims to rope in six more banks so that it will eventually have around 1,000 ATMs in its network.

The shared networks are the next stage in a gigantic banking revolution that is sweeping the country. Back in 1997 there were only 400 ATMs throughout the country.

Today that number has zoomed to 9,000 and it is slated to double in the next two years. The State Bank of India -- with its associate banks -- already has 1,625 machines. It will be installing another 1,500 in the next 12 months. That's about four machines being put into action every day.

The SBI isn't the only bank that is trying to build a giant network by itself. ICICI Bank already has 1,700 and, if plans go according to schedule, this should rise to more than 2,000 ATMs by yearend.

Even the smaller banks are stepping up the pace in the race to install new ATMs. HDFC has 775 that will climb to 1,000 in the next six months.

And Corporation Bank, the fast-growing southern bank with big ambitions, already has 500 ATMs. What's more, it plans to have 1,000 by yearend.

"Our investments are in ATMs since we feel we are able to service a larger number of accounts through the ATMs," says Cherian Varghese, Corporation Bank chairman and managing director.

There's no doubt that the ATM revolution is poised to alter the face of banking in this country. Already banks say that 50 per cent of their customers use ATM machines for simple transactions like withdrawing money and checking their balance.

Two years ago the banks reckoned that 45 transactions a day were taking place at each ATM machine. That has now climbed to about 250 per day.

And, at some SBI and ICICI Bank machines, about 1,000 transactions are being carried out per day. What's more, the banks are also trying to encourage customers to use the machines for more complex transactions like bill payments.

But the rapid march of technology has placed all the banks in a dilemma. They are shelling out gigantic amounts of money to put the ATM network in place. And they aren't getting immediate returns.

"Setting up ATMs is not a bank's core business and there is no revenue generation. It's a dead weight," says D Krishnamurthy, general manager, information technology, Bank of India.

One part of the problem is that ATMs in India don't function as they do in other parts of the world. Everywhere else ATMs are simply holes in the wall and customers just stop by and punch in their numbers and carry out their transactions.

In India, by contrast, ATMs need an air-conditioned room in a busy location - so naturally rents are high. What's more, most come with guards, which would be unthinkable in other parts of the world. The result is an extraordinarily high cost structure.

It costs about Rs 13 lakh (Rs 1.3 million) to install a new ATM. So if a bank wants to set up 500 ATMs to be on the customer services radar, it means a capital outflow of roughly Rs 70 crore (Rs 700 million) to Rs 80 crore (Rs 800 million).

So, the banks are desperately looking for ways to cut costs and that's why the move towards shared networks is gaining urgency.

Then, there are the maintenance costs. Each ATM -- with its lobby, air-conditioning and guard -- costs about Rs 15 lakh (Rs 1.5 million) to Rs 18 lakh (Rs 1.8 million) annually.

Multiply that and it's clear that the costs are amazingly high. For a 100 ATM network, the maintenance charge is between Rs 15 crore (Rs 150 million) and Rs 18 crore (Rs 180 million) per annum.

"Earlier we wanted customers to migrate from branches to ATMs to cut costs. Now with a shared network, we can cut costs further," says Shameek Bhargava, head, ATMs, card products & merchant acquiring, IDBI Bank.

The banks need to start worrying about the high cost of technology. Euronet, reckons that India will need 40,000 more ATMs to increase the current per capita density of five to six ATMs per million people to 10-15 per million.

Euronet is the largest pan-European ATM transaction processor and it will control transactions for Cashnet. "It means a huge amount of capital. Banks will run dry trying to expand," says Kaul.

Many bankers believe that shared networks are the way forward. They point out that, for instance, UTI Bank already has tie-ups with five smaller banks -- BNP Paribas, Kotak, ABN Amro, Karur Vysya and Bank of Rajasthan -- which use its network. Kaul says that currently 13 per cent of total transactions come from other banks' cards.

Similarly, Corporation Bank has bilateral agreements with Oriental Bank of Commerce, Karnataka Bank, Dena Bank and two others.

Even Cashnet says it will soon start looking for smaller partners. At the moment it is teaming up banks with large numbers of ATMs (UTI and IDBI) with banks that have a large number of card-holders (Citi and Standard Chartered).

But in the next stage it will be looking for smaller regional partners, says Loney Antony, managing director, Euronet Services India.

Similarly, Krishnamurthy says Bank of India will try and rope in as many banks as possible in order to increase transaction volumes.

There may be a few question marks about how successful the shared network system will be. One question will be whether customers will be willing to pay the charges that are involved in using another bank's network.

That's because a Standard Chartered Bank client using a UTI Bank ATM under the Cashnet system will have to fork out Rs 27 for the service (Rs 5 per transaction will go to Euronet and the remaining to the bank which owns the ATM).

Bank of India will charge only about Rs 10 for its network. Says Krishnamurthy: "We want to be associated with nominal costs."

However, industry observers say that this seems extremely low and that as per the industry standard, the break even cost per transaction is about Rs 18 - Rs 20.

But bankers point out that shared networks do work despite the extra charges. In the US for instance, 75 per cent of transactions are completed on shared networks.

Then, there are questions about how the ATM network is developing. Everyone is putting up their ATMs in high traffic areas like popular markets So there is uneven geographical spread.

"We are all vying for the same customer rather than growing the market and usage," says UTI Bank's Kaul.

Of course, this isn't the first time that Indian banks have tried to set up a shared network. In 1997 the Indian Bank Association put together its Swadhan project to connect all public sector banks and IBA member foreign and private banks.

But Swadhan has not been a success. Though it connected over 900 ATMs, it failed to go online and therefore failed.

Says O P Srivastava, general manager, ICICI Bank, "The system was not hooked to a central switch and there was no core banking solution backing it. The banks were at different levels of technology and had very few card holders because of that."

However, some banks are still waiting for these networks to take off before joining. So far, SBI wants to go it alone.

"Why should we speak to other banks? By March 2004, SBI will have the largest number of ATMs in the country," says SBI's chief general manager, personal banking, T S Bhattacharya.

Still he adds, that globally no bank has stayed alone and that SBI is finalising its future plans. Currently, the bank has 2 million customers who have cards that can be used at any SBI or associate bank ATM without any charge.

Similarly, ICICI Bank and HDFC Bank are waiting and watching. "We will join one of the networks sooner or later. However, it's not a do-or-die situation since we have a respectable size," says Neeraj Swaroop, country head, retail banking, HDFC Bank.

The bankers insist that jobs won't go because of the ATM machines. They say that staff will be used for more complex jobs like cross-selling financial tools and advice.

"Banks will become sales and servicing centres. The processing work will ultimately get out of the branches," says Antony.

However, in most parts of the world the introduction of ATM machines has resulted in a top-to-bottom change in the banking system.

There are other problems ahead. But one thing is for sure. As the ATMs are put in place and banks put together plans for shared networks, the biggest beneficiary will be the customer.

Dispensing with costs

Next time you go to the ICICI Bank ATM in Vile Parle in suburban Mumbai, you might want to rush out in a hurry.

Why? Because, for the past two months, the bank has switched off the air-conditioning at the outlet. That's ICICI Bank's way of slashing costs.

This is only an experiment. If consumers don't make much of a noise about it, then there are plans to push for similar action in other ATMs as well.

"Currently, ATMs are used for customer acquisitions but they will soon become a commodity. That's when costs will be a huge burden," says O P Srivastava, general manager ICICI Bank.

Setting up an ATM costs a bank around Rs 13 lakh. Then there is the Rs 15 lakh (Rs 1.5 million) to Rs 18 lakh (Rs 1.8 million) maintenance cost per annum depending on the frills.

Moreover, globally, ATMs operate as hole-in-the-wall outlets. But in India, consumer perceptions about financial security is a roadblock.

That hasn't stopped banks from streamlining their ATM operational costs. Both IDBI Bank and Bank of India have outsourced the setting up and management of their ATMs. The latter has already spliced costs by 20 per cent.

IDBI Bank's strategy is simple -- match the hardware to the quality of transactions. So, low end ATM machines have been installed in certain areas that do not see any transactions other than cash withdrawals. It is also negotiating hard with hardware vendors for better service deals and has begun tracking cash requirements per ATM on a daily basis.

Shameek Bhargava, head, ATMs, card products & merchant acquiring at IDBI Bank, says these efforts have brought down operating costs by 12 per cent.

They are also looking at volumes to cut costs. So the accent is on high traffic destinations like railway stations (UTI Bank), hypermarkets and other retail outlets.

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