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17/1/2014 Mrunal » [Banking] White Label ATM: Meaning, Features, Advantages, Limitations, Financial Inclusion, Nested Design, Contagion Risk » Print

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[Banking] White Label ATM: Meaning, Features, Advantages,Limitations, Financial Inclusion, Nested Design, Contagion Risk

1. What is White label-ATM?

2. What’s the difference between Brown label vs White label ATM?

3. Stakeholder/Players in White label ATM game?

4. Why do we need White Label ATM?

5. How does White Label ATM help in financial inclusion?

6. Facilities @White label ATM?

7. Where does the Commission come?

8. White label ATM: Challenges/Limitations/Problems

9. Mock Questions

What is White label-ATM?

Traditionally, Automated Teller Machines (ATMs) have respective bank’slogo. So just by looking, this is SBI’s ATM, this is ICICI’s ATM and so on.But White label ATM doesn’t have such Bank logo, hence called White labelATMs.RBI has given license / permission to non-bank entities to open such ATMs.Any non-bank entity with a minimum net worth of Rs.100 crore, can apply forwhite label ATMs. (not just NBFC, any non-bank entity can apply.)Late 80s: first ATM in India; 2012: RBI issues guideline for White label;2013: RBI gives license/permission.Tata Communications Payment Solutions Limited =the first company to getRBI’s permission to open White label ATMs.They started their chain under brandname “Indicash”.Other White label= Muthoot Finance, Srei Infra., Vakrangee Software, PrizmPayments, AGS. More than 15 companies given such permission.

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What’s the difference between Brown label vs White label ATM?

Brown Label ATM White label ATM

When banks outsourced the ATM operationsto a third party.

When ATMs are owned andoperated by non-bank entities butthey are not doing ‘outsourcing-contract’ from a particular bank.

The private company owns & operates theATM machine, pays office rent. Theynegotiate with the landlord, electricitycompany, telecom company and so on.

Same

The bank (which has outsourced this work)provides cash for that ATM.

Sponsor bank provides the cash.

ATM has logo of that bank (which hasoutsourced this work).

No. White label ATM doesn’t havesuch logo. Not even of the sponsorbank.

No such compulsion.They’ve to compulsory open a fewATMs in (tier 3 to tier 6) areas.(explained after a few paragraphs)

RBI not involved directly. Theseoutsourcing companies have contractualobligation with their respective banks.

RBI directly involved because thesewhite label Companies have toseparately get license/permissionfrom RBI to run business.

Initially, RBI did not permit White label ATMs, and Banks wanted to reduce the

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operational cost, so they came up Brown Label ATM (outsourcing) system.

So in a way, the evolution is: (Bank’s own ATM) =>(Brown Label) => (white label)

Stakeholder/Players in White label ATM game?

RBI

Gives license/permission to open White label ATMs. UnderPayment and Settlement Systems Act, 2007. (And NOT underBanking regulation act or SARFAESI Act, Ombudsman or anyother act.)

(non-bank)White LabelATMcompany

Rents the place, looks after maintenance and servicing of themachine.

Sponsorbank

Loads the cash in those White label ATMs. This also ensurescounterfeit/fake currency notes are not circulated through whitelabel ATM.

Paymentnetworkoperator

Visa, Mastercard, the National Financial Switch (NFS underNational Payment Corporation of India.)They provide technical connectivity in the system.

Why do we need White Label ATM?

1. ATMs offer convenience to customer (Because he doesn’t need to visit Bankbranch every time). ATMs are open 24/7, and even on holidays.

2. Convenience to bank, because they don’t have to keep large staff/office(compared to a system without ATMs). It reduces their cost of branch-operation.

3. But in India, ATM penetration has been very low. Observe:

Country Approx. No. of ATMs per 10 lakh population

USA 1400

UK 500

China 200

India less than 100

Most of the ATMs concentrated in urban areas- that too only at prime locations e.g.near shopping malls and airports= financial inclusion not achieved.

How does White Label ATM help in financial inclusion?

RBI requires White label-ATM companies to install machines in the ratio of

Two ATMs in (tier 3 to 6 place) : One ATM in (tier 1-2 place).

Confused? Observe:

census



Center city

definition:

population is____

White Label ATM

Metropolitan Tier1

10 lakh andabove

if company wants to Setup ONE ATMhere,

Urban 1 lakh and above

Semi-Urban

Tier2

50,000 to99,999

Tier3

20,000 to49,999

Then, company must install TWO ATMshere.

Tier4

10,000 to19,999

Rural

Tier5

5,000 to 9,999

Tier6

Less than 5,000.

For example, RBI has permitted Tata to deploy 15000 White label ATMs. Meaning[2/(2+1)] x 15000 = 10,000 ATMs will be setup in the rural and semi-urban areas. =more access to ATM= financial inclusion.

Facilities @White label ATM?

1. Any customer from belonging to any bank, can use it.2. Every month, Five transactions are free.3. White label ATM users can also withdraw a maximum of 10,000 per

transaction.4. Open 24/7 and on holidays5. Value added services like mobile recharge, utility bill payments etc.

Where does the Commission come?

White ATM Company doesn’t run for charity or goodwill. Company has to makeprofit. So where does the asli-maal/commission come?

Before White label ATM With White Label

1. If you used card in your own bank’s ATM=everything free.

1. First fivetransactions freeevery month.

2. Then, transaction fee~Rs.15 and balanceinquiry fee ~Rs.5BUT thiscommission is paidby your bank to the



2. If you used card on other bank’s ATM= firstfive transactions free (every month). After thatcommission charges of Rs.~17-20 for takingout money and Rs. 5-9 for making balanceinquiry or mini statement. (This commissiondirectly charged on your account.)

White labelCompany.

3. White label companycannot directlycharge money onyou. (RBI rules).

4. Although it doesn’tmean White labelATM=totally “Free”because your bankwill cut thosecharges from youraccount.

Additionally, White Label ATM company can make commission from

1. value added services @their ATM e.g electricity /telephone bill payments,mobile recharge, DishTV-Tatasky recharge etc.

2. Selling advertisement space in the room and above the door.

White label ATM: Challenges/Limitations/Problems

1. For a white label ATM company, biggest challenges = office rent + Securityguard.

2. If they want to make profit, every White ATM needs to get at least 75-125transactions per day= very unlikely, especially when RBI requires them tosetup 2/3rd of the ATMs in semi-urban and rural areas.

3. Even in Bangalore, some of the white-label ATMs are getting barely 2-3customers every week=loss making business at the moment.

4. Despite the entry of White Label ATM companies, the regular banks have notslowed down their ATM expansion drive, because branded ATM=passiveadvertisement and customer loyalty. Result? ATMs everywhere =too muchcompetition= small players will bleed out just like in aviation business.

5. Last year, a lady was brutally attacked in ATM booth in Bangalore. Police havewarned all banks to put security guards=input cost increased. Banksthemselves admitting “five transactions free every month=loss making” in thisscenario.

6. SBI has the largest ATM network in India (30,000+)= economies of scale=they’re supposed to be making profit. But this week, even SBI chairmanherself has admitted their ATM business is making losses. So, it is unlikelythat White label ATM companies will run profitably for a long period of time.

7. Customer complaint: failed ATM transactions = matter falls into IssuingBank (=bank where you have account). Some critiques fear it will lead totaarikh pe taarikh because data records are with sponsor bank and machinemaintenance is under ATM company’s responsibility.

Nested Design



RBI appointed Nachiket Mor Committee on financial services, talks about thislimitation.

The White label-ATM does not have direct access to the settlements system.(like SBI or ICICI has access to RBI monitored NEFT online moneytransfers.)Instead White label ATM is tied with a ‘sponsor-bank’. And the sponsor banklooks after the settlement. Sponsor bank loads and withdraws the cash fromthose “machines”. Example Federal Bank is the sponsor bank for Tata’s Whitelabel ATMs.

Mohan Ok so what’s the problem?

Nachi Nested Design= contagion risk.

Contagion = Bad condition in one institution leads to negative effects in theother institutes in the market.Suppose few of Tata’s White label ATMs break down for xyz reason (hacking,staff negligence or whatever) and some clown starts baseless rumoring onfacebook/twitter/whatsapp that Tata’s ATMs not working because federal bankhas stopped supplying cash.Another clown then starts rumor mongering that Federal Bank is about tocollapse because of NPAs and hence not honoring its obligation to Tata.

Result: Fed.Bank account holders panic and line up at other ATMs (sponsored orowned by other banks) to pull out their money = these type of “runs” destabilize thebanking system. Extreme cases lead to situation like Cyprus-Banking crisis.

MohanBut don’t the banks have CRR and SLR to arrange cash in suchemergency situations?

Yes they have. But with nested design, they’re exposing themselves to

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Nachiadditional “contagion-risk” from other banks/White-label ATMcompanies. Especially when White label ATM company grows too largein very short time and sponsor bank cannot foresee the cashrequirements.

Mohan Then what’s your recommendation?

Nachi

White label ATM companies should be directly linked tosettlement system, without sponsor banks.RBI should allow White Label Banking BusinessCorrespondent agents. [Same like earlier BC, but they can workwith multiple banks at the back-end.]Potential candidates= NBFCs, mobile phone companies, consumergoods companies, the post office system, existing corporate BCs,and milk/agri./sugar etc. real sector cooperatives.

Mock Questions

1. Who among the following can operate White label ATMs?A. Nationalized BanksB. Scheduled Commercial BanksC. Retail BanksD. None of above.

2. What is “Indicash” ATM?A. Brown label ATM chain under Indus BankB. Brown label ATM chain under Bank of India.C. White label ATM chain owned and operated by TataD. White label ATM chain owned and operated by Prizm payments

3. Correct statements about White label ATMsA. RBI permits non-bank entities to setup White Label ATMs under

Banking regulation Act.B. Only Non-Banking financial companies with 15 years of experience can

open White label ATMs.C. In case of failed transaction, the complaint is automatically sent to

Banking Ombudsman.D. None of above.

4. Correct statements about White label ATMsA. Company has to open 2/3rd of its ATM in areas having tier 3 to tier 6

level population.B. Before opening such booths in rural areas, the company has to get

permission from NABARD.C. Both 1 and 2D. Neither 1 nor 2

5. Incorrect statements about White label ATMsA. The operator company is required to maintain SLR and CRR reserves

similar to a scheduled commercial bank.B. To prevent conflict of interest, RBI has forbidden White label

companies from providing Value added services in such booths.



C. Both 1 and 2D. Neither 1 nor 2

6. What is the role of a Sponsor bank in White label ATM system?A. provide maintanance and service to the equipmentB. provide cash to the equipmentC. both 1 and 2D. Neither 1 nor 2

7. Suppose RBI rules require the company to open ATMs in Urban: Rural areasin the ratio of 5:9. If Muthoot Finance owns total 3500 ATMs, how many ofthem are located in the rural areas?

A. 225B. 1250C. 2250D. None of above

8. Suppose RBI rules require the company to open ATMs in Urban: Rural areasin the ratio of 1:1,at the end of the given year. In January 2014 MuthootFinance owns total 3000 ATMs but its rural:urban ratio is 8:7. So, by 31stDecember 2014, How many new rural ATMs should they open to comply withRBI’s rules?

A. 400B. 300C. 200D. none of above

9. The ratio of Indicash White label ATMs in urban: rural areas is 4:5. IfIndiacash opened 360 new ATMs each in both urban and rural areas, then ratiowill be 7:8. So, originally, how many ATMs did Indicash have in rural areas?

A. 640B. 560C. 600D. None of Above

10. The ratio of Indicash’s urban:rural ATMs is 3:2 and total number of ATMs is600. If Indicash wants to change this ratio to 7:3, what should it do?

A. Add 200 ATMs in rural areaB. Add 200 ATMs in urban areaC. Add 200 ATMs each in both rural and urban areasD. None of above

Descriptive:

1. Despites certain risks and limitations, the White label ATM has a potentialrole in financial inclusion. Elaborate. (10m | 200 words)

2. Define White label ATM. What are its features, advantages and limitations?(10m | 200 words)

3. What are the differences between White label and Brown Label ATM? (5m |100 words)

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URL to article: http://mrunal.org/2014/01/banking-white-label-atm-meaning-features-advantages-limitations-financial-inclusion-nested-design-contagion-risk.html

Posted By Mrunal On 14/01/2014 @ 20:33 In the category Economy

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