From more slides that released today, as part of Raghuram Rajan’s speech at the FICCI-IBA Annual Conference:
While its true that banks aren’t required to charge customers, and it’s only that they are now free to charge customers rather than restrict them by RBI rules, remember that banks can’t charge you for clearing incoming cheques (from the same city) even though it costs banks money.
The bigger problem in that regulation was not that banks can charge their customers to use other banks’s ATMs, which was only applicable to such usage in the top 6 cities. It was that banks can charge you to use their own ATMs. (more than 5 times a month, no matter which location)
While I’m all for opening up regulation, I think this is not well thought through and listens only to bankers. Let me explain.
Banking: Not A Sum Of Profitable Parts
The banking system does not operate in silos. It’s not like every single action is to be profitably on its own. You can’t be productive every hour of the 24 hours of a day, it’s the sleeping in the 8 hours that lets you be productive in the remaining 16.
In the same way, it cannot be – and should not be – that the ATM or cheque clearing charges should be paid directly by customers to make those operations "profitable". These operations are part of the reason why people trust banks – so that when it’s time to take my money out, I can do it without a fee.
ATMs may cost banks, but it’s because they have ATMs that we keep our money with them at 4% interest when we can get 9% elsewhere. That 5% difference or spread, system wide, should allow banks to subsidize the cost of ATMs, no matter where they are used. And indeed, after looking at the ludicrous profits banks make, this is true.
Today people have become banked because of this freedom. And now, to allow them to charge people will push people to distrust banks again. That means more people will just keep cash with themselves rather than in banks. And this is undesirable.
Why Non Financial Transactions Limited?
It doesn’t cost banks much to get a non-financial transaction (read: no money exchanged) through an ATM. The interchange costs are piddly, so we should not be charging anyone anything for something that’s been largely setup and managed by the NPCI for a cost that’s a fraction of a rupee per transaction.
Yet, it’s RBI’s folly that they have decided that interchange fees between banks cannot be less than Rs. 8 (or around that) for a non-financial transaction. To allow white-label ATMs they mandate that much as the minimum. This makes no sense whatsoever – a non-financial transaction should not have to be charged at all and should simply be the cost of not having a teller around.
(Imagine if your bank decided to charge you for it’s server hosting costs when you use netbanking!)
And Where’s the Competition?
If RBI were to ease this regulation they should have five hundred banks vying for customers to bank with them. Where are these banks? Nowhere, because the RBI won’t allow new banks to happen.
Yes, they’ve said they will happen and granted one bloody miniscule license after months of prodding around. Come on.
We need more banks. If you want to open up these regulation, you have to introduce competition, and you have to introduce it first. Let a hundred banks bloom and then, let them duke it out. If you do it in reverse you’re just fattening the existing banks.
Does it Add Up?
Let’s look at the figures:
- The average number of transactions per ATM in the country are around 3453 per month. (Source: RBI ATM transaction data). These are based on ONLY financial transactions.
- We can guess that average costs per ATM are of the order of Rs. 30,000 to 50,000 per month.
- We can assume that the number of transactions can only go up per ATM, as more people get banked. (At least for the near future)
- This has the ability to reduce costs to less than Rs. 10 per transaction (while keeping non financial transactions free)
- And yet, we should consider that banks earn tremendously from having our money in SB accounts at lower interest rates. Let me use the same "silo" logic that banks use when they bullshit us about how much it costs them.
- Current "demand deposits" (on which banks pay very low interest) in the system are about 7.3 lakh crore (Rs. 7.3 trillion)
- Assume that the banks earns a spread of 5% (that is, it pays 5% less for such deposits) – that’s a sum of 36,500 cr. , or Rs. 3041 cr. per month of "profit".
- For all the ATMs in the country (around 165,000), that would be a profit of Rs. 1.8 lakh per ATM per month just to have money in "demand deposits"
- For an average of 3453 transactions per ATM (financial) that’s a profit of Rs. 52 per transaction. (using similar "silo" logic to what banks use when they tell you it costs them to run ATMs)
- If banks begin to charge for transactions on ATMs, you can bet that the profit would fall as people will yank money out of SB accounts and keep it as cash instead – banks will end up losing substantial amounts.
These are just base figures. If you do the math, you find the spreads are larger. And the amount in savings bank accounts is much greater than the "demand deposits" figure mentioned (as banks attempt to calculate only amounts that are likely to be withdrawn from SB accounts as the demand part of the SB account; the rest is a "time deposit". So, your minimum balance isn’t counted as a demand deposit). Thus, the profit per ATM is even higher.
Thus, banks aren’t losing money per transaction – their profit is Rs. 50+ per transaction while the cost is just Rs. 15. They should indeed make all ATM transactions free!
Such silo thinking will refute whatever logic RBI is being given by bankers to justify their itch to charge customers just about anything.
What Should The RBI Do?
Get More Banks.
Understand the non-silo part of the overall banking equation and how this will create mistrust.
Reduce friction in card based payments and make such things more trustworthy so we don’t need ATMs, rather than ask banks to charge for usage.
Bring back regulation that requires banks to keep own-ATM transactions free, unlimited until they have fostered competition.