Is India’s ATM Disappearing Act A Digital Payments Boon?

In India, get ready for new lines. News came this week that as many as half of the ATMs that dot the country’s landscape may be shuttered by March of 2019.

The estimate is courtesy of the Confederation of ATM Industry (CATMi), which focuses on the domestic ATM industry. The number is a significant one, as there were more than 2.2 million ATMs across India, per data from the Reserve Bank of India (RBI).

The reasons, as reported by CATMi, may seem a bit technical, at least at first glance. Chalk it up to “unviability of operations” in the wake of new regulatory guidelines, mandating upgrades that focus on the actual management of the physical cash at those machines.

Amid those new rules, RBI stated in the spring of this year that service providers and firms helping with cash logistics are required to have a minimum net worth of Rs 100 crore (about $14 million USD). In addition, the vans and other conduits of getting cash to machines must have tech upgrades, spanning CCTV connections to tubeless tires.

New rules mean new compliance activities, which, of course, mean additional compliance costs for these stakeholders — as much as $489 million.

“These requirements were never anticipated by the industry participants at the time of signing contracts with the banks. Many of these agreements were inked four to five years ago when no such requirements were in sight,” said CATMi.

Now comes the tipping point, said the industry group, where the ATMs may simply shuttered, ostensibly as the aforementioned compliance costs are too great to bear.

“If this happens, [India’s] financial inclusion program would be severely impacted, as millions of beneficiaries under the government’s Pradhan Mantri Jan Dhan Yojana (PMJDY) scheme, who withdraw subsidies in the form of cash through ATMs, may find their neighborhood ATM shut,” said CATMi, which warned that there will be long lines to get cash out.

However, amid the scramble to take advantage of sunset-ing ATMs, might there be additional torque behind efforts to bring India’s payments infrastructure — as well as consumer habits and financial inclusion — further into the digital age?

The Opportunity Ahead

The looming specter of lines snaking around ATMs is redolent of two years ago when Prime Minister Narendra Modi began demonetization efforts, stating that 500 rupee and 1,000 rupee notes were no longer to be accepted in the country, rendering 86 percent of the legal tender then changing hands to be no longer legal. Since then, critics have noted the lack of effectiveness in achieving at least some of Modi’s stated goals, namely, combating black market activity. (By the way, cash usage has been on the upswing, as the central bank estimated late this last summer that the value of cash grew by more than 37 percent in 2018.)

Even though cash remains a favorite conduit of commerce, it should be noted that digital payments have gained a foothold — indeed a parallel leg up — in the wake of demonetization. The domestic digital payments market is projected to rise to a value of $1 trillion by 2023, as estimated by Credit Suisse, up fivefold from recent tallies. That comes as eCommerce is slated to be worth as much as $200 billion by 2026, according to Morgan Stanley estimates, growing at 30 percent, compounded annually.

Greenfield Opportunity For Payment Heavyweights

As has been well-documented in this space, the greenfield opportunity has led to a slew of heavy hitters entering the space and jockeying for a share of (digitally wielded) wallet in India. Google has been retooling Tez, now branding it as Google Pay, and bringing instant loan offerings to consumers, in partnership with several Indian banks. Facebook has been wanting to get into the market through its ownership of WhatsApp, and is looking to bring a payment service to market that would be nationwide in scope. Amazon, which is seemingly everywhere, is also expanding its visibility and offerings in India with a feature that leverages Amazon Pay as a bill payments tool, through which consumers can pay for utilities such as electricity and broadband internet service.

Side note: Walmart has come to India in a big way with an ownership stake in online marketplace Flipkart, and thus has its own online payment offerings. Walmart is, of course, pursuing a multi-pronged strategy in the country, having just announced via Walmart India that it will spend $500 million to open 47 stores in India through 2022.

The marquee name in the digital payments space is Paytm, as the smartphone payments app has found its way onto hundreds of millions of devices across more than 350 million users and underpins as many as 500 million transactions monthly. In recent months, Paytm was the recipient of an investment worth roughly $300 million per Berkshire Hathaway, as well as investments from Japan, via SoftBank Group, and China, via Alibaba and Ant Financial.

The Walmart and Paytm activity speaks to an emerging and likely long-lived phenomenon — namely, cross-border pollination. The recognition of a sea change in how India pays for what it buys is grabbing foreign interest and capital. A lot of capital, as witnessed by both Amazon’s commitment to spend about $7 billion in the country and the $16 billion Walmart spent to buy its controlling stake in Flipkart.

The Data Debate — And All Eyes On Competition

With new entrants comes concern over competition — at least, for some observers within India. In the world of mobile money, competition and competitive advantage revolve around data. Thus, the rising concerns over this emerging market are tied to data.

The Wall Street Journal (WSJ) noted earlier in the month that a Paytm executive approached the National Payments Corporation of India (NPCI) through a written letter, contending that the data collected by Google’s payments app may affect “the privacy of Indian users and the security of the country.” In addition, the tech giants mentioned above, such as Google, may be able to combine data on payments with data tied to users and other services that are on offer. Neil Shah, an analyst at Counterpoint, told the WSJ that customized services could be an advantage that the homegrown player Paytm would not have.

The movement toward shoring up at least some local payment players has gathered steam in recent days. Earlier this month, India’s Minister of Finance Arun Jaitley touted stats in a statement: “Visa and Mastercard are losing market share in India to the indigenously developed [Unified Payment Interface (UPI) payment system] and RuPay Card, whose share has reached 65 percent of payments done through debit and credit cards.”

The card giants still have the lion’s share of monthly payment transactions in terms of value. Prime Minister Modi, though, said that using local networks — where RuPay, the domestic card scheme, is tied to roughly 500 million debit and credit cards — is a “service to the nation.” Mastercard has publicly come out against such “protectionist measures,” while still supporting the overall goals of digital payments adoption.

Protectionist or not, there is clearly a will and a way to access the market. Visa noted on its most recent earnings call that it has been storing its data on local card users in India. It’s a step toward compliance with RBI dictums that payment companies must store that transaction data on local servers. Visa also recently took a minority stake in BillDesk, an online payments platform, signaling further resolve to gain share in India.

The card companies — as well as Google and Facebook — had looked for extensions of the Oct. 15 deadline for data localization, but there now seems to be a nod to the fact that getting in on the nascent market outweighs the initial regulatory challenges that must be satisfied. Writ large, then, the shortage of ATMs may just be the latest wave that helps transform a payments ecosystem.