Sunday, November 02, 2014

Are limits on free ATM transactions justified?

Banks will be free from today onwards to charge Rs 20 per ATM transaction once the number of transactions exceeds five per month. They will also be allowed to charge for more than three non-home transactions (that is, transactions through ATMs other than those of the bank of which one is a customer). See this news report.

Mind you, the norms don't make it mandatory for banks to charge for excess ATM use. They are free not to charge for over five transactions and they can set a higher free limit as well.

The rationale for levying charges on home and non-home transactions is that there is a cost involved for banks. If banks do not recover the cost of ATM transactions, they will recover it elsewhere. When charges are related to ATM use, then the more frequent users and people with more use for cash are penalised. When a general fee is imposed on all customers, the less frequent users of ATMs end up subsidising more frequent (and, possibly, richer) users.

The argument sounds plausible but it is somewhat flawed. First, ATMs are a means to move customers away from branches into a less expensive channel. The cost per transaction in a branch is much higher than in an ATM. So, banks save on costs by getting customers to use ATMs. This saving is large enough to cover frequent use of ATMs. Hence, the question of recovering the cost of ATM use should not arise. Indeed, banks may find that charging for ATM use is not in their interest as it may drive customers bank into branches.

Secondly, it is important to ascertain which are banks are complaining about the cost of ATM use. Are public sector banks complaining or are the complaints coming mostly from private sector banks? If the latter, the chances are that charging for ATM use is simply another way to augment revenues through fee charges which is a favourite ploy of private sector banks. (Indiscriminate and often hidden charges for various services are one reason for higher fee income at private banks and hence for higher profitability. By their very orientation, public sector banks do not follow this practice- and we criticise them for not matching private sector performance!). If it is the case that it is mostly private banks that want to levy charges for ATM transactions, then it is best that the RBI withdraws its guideline. Private banks make sufficient profit without having to levy an extra charge for ATM use.

Thirdly, charging for ATM use may come in the way of financial inclusion unless ATM use is made completely free for financial inclusion customers. If inclusion is to be pursued using technology and by avoiding costly branches, then it is important that transactions through channels other than branches not invite penal charges.

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