ATM Outsourcing Pendulum : Where Industry is headed?

I was reading news about Indian public sector banks outsourcing it's ATM channel to the service providers (Local as well as MNC) and some of the services providers gaining good ground on it's market capitalization.


Let us try to sink in ATM outsourcing numbers that come up:

1. Total no. of ATMs to be deployed 

    in next TWO (2) Financial years      :         35381

2. Existing estimated ATMs  installed in India 
     (400 to 500 ATMs per Month is growth)     :     80000 Plus 

3. Interchange Fee from Acquirer to Issuer for Local Currency Txn  :            Rs. 18/- 

(Interchange fee has come down from Rs.35/- in 2004 to Rs.18/- in 2011)

What is not sinking the maths based on Bidder price for pay per transaction as given below:

Following is the very interesting numbers that comes up assuming Daily average transaction per month being 200 and ration of Financial to non financial transaction being 60/40.

 

Analysis Point:

• Monthly Fee Income of Highest Txn Fee Winner is almost 90% higher than Monthly fee income of Lowest Txn Fee Winner.
• Higher Txn. Fee of INR 12.1/- % is 30% lower 
• Lowest Txn Fee of INR 6.7/-  is almost 55 to 60% lower than existing Interchange fee.
•  Typical baseline Operating expenditure of INR 40,000/- to INR 45,000/- draws lot of attention to business case for lower monthly fee income players.
• Assume for next 12 to 18 months, Interchange rate remains at Rs.18/- then banks will be earning good fee based income at the cost of this margin.
• Assume for a bank with 5000 ATMs outsourced with net margin per txn being Rs.5/- and out of ava. 200 daily txn, 10% is interchange txn i.e. 20 will lead to Daily earning of Rs. 500000/- and yearly around Rs. 60,00,000/-.
• There is downside to some players as their fee structure (Refer to RFP for fine prints :)) is slab wise discounting thus, overall gap looks high but, this players are marginally higher than lowest fee earner in table.

Apart from certain benefit for the banks, No prize for guessing players in Comfort zone and Concern Zone, question to the banks and ATM Managers are following risks and it's mitigation and handling at business level:

1. Consistent Quality of Services:For the entire agreement length of 5 to 7 years, what assurance of consistent quality of services from players assuming inflation, disruption, competition and more such factor are re-inforced in pricing ? What if not? Apart from Cane of 'Financial penalty' what is the PLAN B being ready by them?

2. Availability of ATM channel:How will services will affect in case of Oil price based services like cash replenishment?  What is risk mitigation, as bank's customer will be with out cash at the outlet of some of these players? How revenue loss due to cash out situations are factored in ??

3. Competition: What are risk mitigation in case of higher ATM installation base by another public/regional co-op bank or private banks around this ATM sites? Average transaction will go down.

4.Reaching to Rural:. Semi Urban and Rural site allocation constitutes around 20 to 35% of this bid resulting Serviceable areas in terms of Uptime and cash services. Does the due diligence done before awarding the contracts??

There are challenges which business leaders will need to find solution. There is concern that, outsourcing of ATM site is slowly becoming transferring ownership of ATM Channel to the outsourcing vendor.

Indian self service industry is witnessing growth as well as new challenges for banks and service providers such as:

1. Does ATM Sites in India meet Disability assistance guidelines similar to ADA in US.?? 
2. Energy(Oil, Electricity) cost reaching it's peak and with lack of connectivity with Rural India, how non bankable and BPL (Below Poverty Line) citizens are taken care by banks?
3. How will mobile banking, Internet banking, TV Banking ( I would love to see it happening) will bring down transaction volume? Whether it will make business case viable in next three years.?? 
4.  As per India Banking 2010; McKinsey Global Institute analysis report, 12 ATM for 1 million population highlights the seriousness banking industry leaders and regulators as well as service provider need to have to avoid duplication of ATM sites and branches. Investment required for such outlets are very high and relocation cost also rising leads to smart deployment strategy required to protect the capital expenditure.

We will be witnessing the  ATM marketplace in India, to see more such challenges faced by bank as well as service provider and see the winners coming up with innovative ways of running self service channel.