The Road Ahead for Self-Service Banking in India

As a Product Manager for Diebold Nixdorf located in Mumbai, I’ve witnessed some interesting trends around self-service usage throughout India, driven both by changing consumer preferences and by governmental regulations. This post explores where the market has been, where it’s headed, and how financial institutions (FIs) can be successful in a swiftly changing environment.

Overview of the Indian banking space

Banks in India are broadly classified into three categories: Scheduled Commercial Banks (SCBs)—of which there are two sub-classes, Public Sector Unit Banks (PSUs) and Private Banks; Regional Rural Banks (RRBs); and Cooperative Banks.

The PSU banks are the ones in which the government of India has a majority stake (more than 50%) and are the biggest in terms of deposits, branches and ATM deployments. Altogether, they corner about 70% of the market share.

Private Banks are a mix of Indian private banks such as HDFC, ICICI, Axis, etc. and foreign private banks such as CitiBank, Standard Chartered Bank, etc. and they total nearly 30% share of deposits. These are mainly located in the metropolitan areas.

RRBs are local-level banking operating in different States across India. They were created with the objective of offering people in rural areas of India basic banking and financial services. These banks also carry out government operations like disbursement of wages under employment schemes such as MGNREGA (the Mahatma Gandhi National Rural Employment Guarantee Act), pensions, etc.

Cooperative Banks such as Saraswat Cooperative Bank are smaller banks organized and managed on the principals of cooperation, self-help, and mutual help and are generally confined to a small geographical area.

India ATM landscape

There are about 220,000 ATMs deployed in India, and the majority of them are deployed by PSU banks. State Bank of India (SBI) is the largest ATM deployer by far with more than 58,000 terminals, followed by the larger private banks, i.e. Axis, ICIC and HDFC, which each have in the range of 10-15K terminals each.

It is interesting to note that the number of ATMs was growing at about 20% not too long ago, doubling from 100K to 200K between 2012 and 2015. More recently, that growth has slowed, and current ATM deployment has hovered around the 220K mark for the last couple of years. Meanwhile, the number of debit card transactions on ATMs has decreased to an average of 660 million a month from over 750 million per month in 2016.

What could be the cause of this trend, and what does it hold for the future?

In India, ATMs are not only challenged by technological developments in payments and smartphones, but also by regulatory issues and the demonetization drive initiated by the government toward the end of 2016, which changed the paradigm. As part of the demonetization drive, the high-currency notes of Rs500 and Rs1000, which constituted 86% of the total cash value in circulation, were withdrawn by the government. After demonetization, since cash was scarce, consumers started relying heavily on digital transactions with major banks.

Axis Bank, for example, reported that the value of transactions completed through mobile phones now exceeds the value of transactions conducted at ATMs. Mobile banking transactions surged to 390 million in 2015-16 from 53 million in 2012-13, data from the regulator shows. The advent of wallets such as Paytm, which can be used to pay for everything from bubble gums to television sets, has made the younger generation increasingly more likely to skip cash payments.

The recent lowering of interchange fees (the fee X Bank pays to Y Bank when its customers use Y Bank’s ATM) has impacted the profitability of ATMs as well. In perhaps one of the earliest signs of a fall in ATM popularity, foreign banks have been steadily reducing the number of terminals deployed in the country. A close look at Reserve Bank of India data on ATMs deployed by foreign banks across geographies reveals a fall of almost 18% in the three years between 2014 and 2017. This could be due to the stress that these foreign banks are under globally and with the low interchange regime in India, they find it more profitable to leverage the ATM network of other banks for their customers.

What does the future hold for the ATM industry?

FIs, and our industry in general, can look at these changes as a challenge … or an opportunity. We are starting to see evolving business models that are lowering operating costs, maximizing the value of deployed ATMs and increasing customer retention by integrating with the mobile channel, so that ATM and mobile channels work in a more complementary, seamless fashion.

For most FIs, the cost of handling cash represents a significant part of ATM operating costs. A cash recycling machine is an ATM designed to recycle deposited cash for use in subsequent withdrawal transactions. The benefit of deploying a cash recycler is enhanced efficiency — both in terms of operations as well as costs. It minimizes the cash handling costs by requiring fewer cash replenishments, enables 24 X 7 availability for deposits and withdrawals and enables better utilization of branch teller time. Also, deployment of recyclers in areas that do not have physical bank branches will go a long way in easing transactions that would otherwise have to be conducted at the physical branches. For these reasons, we’ve been working with more and more clients on building cash-recycling ATMs into their strategic roadmap.

Using ATMs to upsell financial products and services is another emerging trend in the marketplace. Using CRM software gives banks the ability to make direct, personalized contact with their customers (as well as “off-us” potential new customers) at the ATM, through advertisements, messages, surveys or other information. The customer’s response is delivered directly to the marketing system and acts as a link between the bank’s existing CRM system and its ATM network. This type of functionality helps the bank generate revenue through third-party advertising, and also reduces advertising costs while increasing customer loyalty through personalized marketing and sales campaigns.

India’s mobile phone subscriber base has reached the one-billion-user mark, according to data released recently by the Telecom Regulatory Authority of India (TRAI), the country’s telecom regulator. The smartphone user base is estimated to be over 300 million. Not only does this high mobile penetration give FIs an opportunity to lower operational expenses by pushing routine transactions (such as balance inquiry, last five transactions, etc.) to the mobile channel—which are significantly cheaper to process vis-a-vis the same transaction done at a branch—but it also allows FIs to increase the “stickiness” with their customers by offering them a seamless user experience across multiple touchpoints.

For example, a cash-withdrawal transaction can be pre-staged on the mobile phone and a secret PIN is provided to the user, so the user can then walk up to the bank’s ATM and withdraw their cash by just entering the secret pin, bypassing the regular sequence of screens presented as part of the standard ATM withdrawal. The experience is faster and more enjoyable for consumers, and offers a direct bridge between physical and digital channels that may prove to be one of the most important success factors for FIs as we move into the connected commerce future of cash and payments.

Interested in finding out how your organization can bridge physical and digital channels? Let’s start a conversation.