The National Payments Corporation of India is poised to consider indexing the ATM interchange fee to the Wholesale Price Index and implementing a fresh hike, potentially increasing the cost of cash withdrawals for consumers across India.
Key Points
- The ATM interchange fee is likely to be linked to the Wholesale Price Index (WPI) to reflect rising operational costs.
- A fresh hike in the interchange fee from Rs 19 to Rs 21-22 is under consideration, which could increase costs for banks and potentially customers.
- The customer charge for transactions exceeding the free limit may also be reviewed, potentially leading to higher costs for frequent ATM users.
- Rising operational costs, including lease rentals, power charges, and cash-loading expenses (exacerbated by fuel prices and the withdrawal of Rs 2,000 notes), are driving the need for fee adjustments.
- The Committee to Review ATM Interchange Fee Structure had previously recommended periodic reviews of interchange and ATM usage charges.
The stage is set for linking the ATM interchange fee to the wholesale price index (WPI), even as a fresh hike to Rs 21-22 from the current Rs 19 is being considered.
A relook at the customer charge levied after the free transaction limit is exhausted may also be in the works.
The interchange fee is what one bank pays another when its debit card is used at the latter"s ATM.
The installed ATM base in the country stands at around 265,000.
Industry Deliberations and Proposed Changes
Industry sources said the issue is set to be taken up by the National Payments Corporation of India (NPCI).
This follows deliberations between the Reserve Bank of India (RBI) and the Confederation of ATM Industry (CATMi).
A senior CATMi official told Business Standard, on condition of anonymity, that: "The interchange has to reflect costs as they stand.
"One way is to have this aligned to the WPI and another is to have it reflect the size of the cash-pullout."
At present, the interchange fee is the same whether a customer withdraws Rs 5,000 or Rs 10,000 (the maximum amount permitted per transaction).
There could also be a revisit of the pricing after a customer exhausts the free transaction limit set by the card-issuing bank.
Currently, customers are entitled to three free transactions at other banks' ATMs in metros and five in non-metros. Beyond this limit, a customer pays Rs 23.
Historical Context and Rising Costs
K Srinivas, director at CATMi and vice-chairman of India1, the largest white-label ATM player, told Business Standard that the issue of linking the interchange to the WPI had been taken up with the banking regulator and NPCI.
"We hope to see a positive response."
The Committee to Review ATM Interchange Fee Structure, set up in 2019 and headed by former Indian Banks' Association chief executive officer V G Kannan, had recommended a periodic review of interchange and ATM usage charges at intervals to be decided by Mint Road.
A periodic reset of ATM interchange has been a long standing issue, with only three hikes since 2011.
The latest increase – up by Rs 2 to Rs 19 effective May 1 last year — followed an earlier hike to Rs 17 from August 1, 2021.
Before that, the interchange fee had remained unchanged at Rs 15 for nearly a decade.
The argument against a hike is that banks save costs when they push business to the ATM and digital channels from branches.
The flip side is both are not cheap and you have to account for investments in technology.
Factors Driving Operational Expenses
For ATMs specifically, higher operating costs stem from lease rentals, power charges, and cash-loading charges.
The latter is set to go up exponentially with the West Asia crisis leading to higher fuel prices, which cash-in-transit firms (which move cash to load it into ATMs) have to pencil in.
Another aspect is the move to withdraw the Rs 2,000 denomination note and the RBI directive to increase the availability of more banknotes below Rs 500.
This has meant more trips to load ATMs with cash.
While deployment of "recyclers" (ATM machines that allow both withdrawal and deposits) is increasing, the higher capital expenditure on such units has raised channel costs.
Incidentally, the total value of Rs 2,000 banknotes in circulation, which stood at Rs 3.56 trillion as on May 19, 2023 (when the withdrawal of Rs 2,000 banknotes was announced) has fallen to Rs 5,451 crore by April 30.
This means 98.47 per cent of the denomination in circulation (as on May 19, 2023) has been returned.
The Rs 2,000 notes, however, continue to remain legal tender.
