What WLAs Bring to Indias Banking

In February 2012, the Reserve Bank of India finally acceded to the banking industry's long-standing demand for allowing non-bank entities to establish ATMs. RBI's u-turn to permit such White Labeled ATMs (WLA)-each of which will be associated with a sponsor bank' responsible for settling transactions conducted over it-was influenced by the following considerations:

• The government's thrust on financial inclusion
• The deep penetration of highly affordable telecommunication services, making conditions more favorable for the establishment of ATMs in hitherto underserved regions
• The need to improve ATM coverage in tier-3 to -4 areas.

It was quite apparent that banks, which were already juggling multiple priorities, did not have the bandwidth to expand their ATM network in these regions. Several public sector banks were yet to recover their investments in social banking' and were not likely to make fresh commitments. This reinforced the rationale of inviting non-industry players to take the country's ATM network forward.

Successful precedents from other parts of the world say that this is indeed a workable idea. In Canada, where WLAs have been permitted since 1997, NRT Technology Corp operates the largest number-15,000 units handling over 50 mn transactions annually. The Redbanc WLA network (called Banred in Uruguay) serves 21 banks in Chile. That being said, other than in the US and Canada, WLAs account for only 1 out of 4 ATMs, or less. Their role is quite clearly to supplement the bank-owned channel.

A Clear Need for More ATMs

Worldwide, the number of ATMs continues to rise, including in mature, saturated markets.

A comparison of the figures for 2005 and 2011 reveals that in the US the number of ATMs went up from 450,000 to 468,000; in Asia Pacific (including Australia) it grew from 476,000 to 641,000; and even Western Europe registered an increase in its ATM strength, going from 329,000 to 384,000.

The case of emerging economies is much more impressive. In Latin America, the ATM tally shot up to 231,000 from 171,000. In Central and Eastern Europe it rose a massive 132% to touch 174,000 and grew as spectacularly in the Middle East and Africa region, from 39,000 to 86,000.

Contrast this with India where in the past several years, ATMs have grown steadily but relatively modestly at a CAGR of 30% to reach a current strength of 87,000. Since most of this growth has come from large cities and towns, it clearly tells us that there is room for more.

A comparison of ATM densities also drives home the same conclusion. High-income countries typically have 3 ATMs per bank branch; in middle-income economies, this number drops to 2. But in India, there is less than one ATM (0.68 to be precise), per bank branch. Foreign banks lead with 3.6, followed by Indian private banks with 1.75, and public sector banks with a mere 0.5.

What's more, a growing economy and increasing demand for financial products will put enormous pressure on the banking system that will be quite unsustainable at the current level of infrastructure. To illustrate, India's GDP, which grew from `19.25 tn in 2000 to `54.75 tn in 2009, is expected to touch `155 tn in 2019. The deposit base, which was approximately `37 tn in 2009, will swell to `212 tn in 2019. Loans will follow a similar trajectory to go from `28 tn 3 years ago, to `185 tn by the close of the decade.

What this means is that the banking system, which had 100 mn accounts in 2000 and 400 mn in 2009, could potentially be dealing with over 800 mn by 2019. This expectation is based on the ongoing convergence of several factors, such as telecom-driven financial inclusion and programs such as Aadhaar, which will provide a no-frills bank account free of cost to the unbanked people enrolled under it.

It is fair to expect that by 2019, most of the nation's young workforce (65% of the population will still be below 30) will have moved to the cities in search of better prospects. Obviously, the current financial infrastructure will not be able to shoulder this additional burden. In fact, a rule of thumb calculation says that we will need to double our current branch strength to serve this demand.

But that is unlikely to happen for a number of reasons, not least of which is that branches are being upstaged by faster, cheaper, and smarter channels, such as the ATM.

On the other hand, the indications are favorable for the growth of ATMs. Today, although less than 37% of the Indian population uses a bank account, more than 50% owns a mobile phone, a circumstance created by the availability of affordable, accessible, and convenient mobile services. It is virtually certain that any move to make ATMs cheaper, more accessible, and easier to use, will likewise improve adoption. This is the premise underlying RBI's move to allow WLAs to operate in India.

Implications for Banks

For banks, the arrival of WLAs spells good news. WLAs will extend their reach into smaller tier locations where they are unlikely to invest on their own.

Purely from a cost per transaction perspective, ATMs are already more economical than branches, at `15 vs `50. In future, for transactions conducted through WLAs, banks' costs (`15 per transaction) will drop significantly because infrastructure, networking, and operating costs will be borne by the owner of the ATM. Should the cost drop significantly (which is likely), ATM transactions could become nearly as cost effective as internet banking transactions, to give banks a huge fillip in a market where customers are still more comfortable using the ATM than the internet.

If there's a downside for banks, it is this: RBI stipulates that WLAs must be established under a 3-way agreement between the sponsor bank, network, and actual owner. Consequently, disputes may take longer to settle and in the worst case, go unresolved.

Also, there's a real threat that WLAs may open the door for non-banking entities to enter the business later in a big way.

Just the Beginning

While RBI's move to allow WLAs is welcome, going forward, it is important to make the proposition attractive to potential entrants. Beyond financial incentives, WLA operators must be given the opportunity to provide VAS to make their ATMs competitive and customer-centric.

In time, the RBI could consider permitting WLAs to charge customers differentially, based on the nature and number of services provided. This could encourage the creation of sophisticated ATMs, complete with kiosk, internet access, co-created bundled products, and retail-type experience. The WLAs could also provide an alternative to the high-touch branch experience with high-tech co-browsing and audio-video chat with bank staff. In rural locations, ATMs could also emerge as an advisory channel in matters related to agriculture, education, health awareness, etc.

On its part, the ecosystem needs to invest in the education of target customers in smaller towns to encourage large-scale adoption, without which the WLA model will not be viable.

RAJASHEKARA V MAIYA
The author is lead product manager, product strategy, Finacle, Infosys
maildqindia@cybermedia.co.in