The Indian government’s push for digital payments has worked quite well so far. The Unified Payments Interface (UPI) has set new records for transaction volumes and value almost every month.

In July 2021, the value of transactions rose to Rs 6 lakh crore, down from Rs 3 lakh crore in 2020. The value of transactions in the UPI ecosystem has increased at a rapid rate.

The push for digital payments

The government has pushed customers and merchants to embrace digital payments. It even reduced transaction fees for UPI to zero, which means there will be no friction costs for customers transacting through UPI.

The Central Commission for Direct Taxes (CBDT) issued a circular in August 2020, ordering all banks to allow UPI transactions free of charge and charge no fees.

Unlike cash, the government can keep tabs on the flow of money through digital payments, which is one of the main reasons for the government’s push.

Using cash in today’s environment is a losing proposition, as obtaining and holding cash also comes at a cost. To get money, you have to go to the nearest bank or automated teller machine (ATM), which increases transaction costs.

In addition, the time spent waiting to withdraw money and the fees charged for transactions put cash users at a disadvantage. Withdrawing money would also mean forgoing any interest that could be earned on the money, as people usually withdraw more than their immediate needs.

Additionally, digital payment apps, which are quite well funded, offer rewards to customers who make payments through them, making cash payments an unfavorable proposition.

Collateral damage

But the rapid adoption of digital payments is hurting the ATM industry. The ATM industry grew by 14% per year between 2012 and 2017, aided by a rapid rise in ATMs across the country.

Now growth has fallen to 4%, according to a Reserve Bank of India (RBI) report, with some months showing contractions. According to an RBI report, the number of ATMs remained at around 222,000 between fiscal 2017 and 2019.

Cash withdrawals have grown at a compound annual growth rate of 9% in volume and 10% in value over the past five years, which is well below the growth rate of digital payments.

Almost 83% of debit and credit card use was attributed to card payments. However, now the figure has dropped to 50 percent as users use these cards for payments.

Additionally, cash is seen as a store of value rather than a means of payment, as evidenced by the higher demand for higher denomination currency.

In contrast, the share of small denomination currencies as a percentage of gross domestic product (GDP) has declined.

The pandemic has had a profound negative impact on the ATM industry. The risk of infection has kept people away from ATMs and cash.

Can ATM operators survive?

Declining demand for cash means less frequentation at ATMs. ATMs make money through interchange fees that banks pay to ATM operators or banks where the card is used.

Lower footfall means lower transaction volumes, which means lower revenues for these ATMs. In addition, operating an ATM network requires high fixed expenses such as rent, employees, rental of security vehicles, installation of a camera, maintenance and other expenses.

The increased cost of fuel can also increase the cost of transporting cash. Lower revenues for a business with a high proportion of fixed costs could make operations unsustainable.

The highly regulated nature of the business further adds to the pain of ATM operators. In another case, the RBI seeks to penalize ATM operators if ATMs run out of cash for more than 10 hours per month.

Such regulatory issues could increase the burden on existing players and deter new players from entering the industry.

Some white label ATM players like Muthoot Finance and SREI have already left the company during the pandemic period. White label ATMs are operated by non-bank entities.

To make the business sustainable and attractive, the RBI has increased the fee per transaction to Rs 17, from Rs 15 for financial transactions.

The fee for non-financial transactions was increased to Rs 6. The last fee increase was in 2012.

But an increase in fees would mean higher transaction costs for users, which could end up reducing footfall.

With the government’s subtle push towards digital payments and the rapid digitization of commerce, the use of cash in some segments may be lower. While cash will remain king for some time, the negative to low growth of the ATM industry is expected to continue going forward.