Multiple challenges continue to ail the ATM interchange fee conundrum

Eight months after RBI raised ATM interchange charges, banks are still split on what next as Rs 2,000 notes vanish, costs climb, and withdrawal volumes soften

Eight months after the Reserve Bank of India allowed hiking ATM interchange charges - the fees one bank pays another for the use of the latter's ATM by an account holder of the former - by Rs 2 to Rs 19, industry experts are still undecided on where to go from here, given multiple headwinds.

 

While some suggest indexing the interchange fee to the amount being withdrawn by a customer, or even link it to the rising cost of maintaining an ATM network, others say banks could charge the customer a flat fee per withdrawal, which is a global practice.

 

The primary issue, of course, is the gradual disappearance of the Rs 2000 note, which was first introduced during the November 2016 demonetization exercise to meet currency requirements following the abrupt withdrawal of legal tender status of all Rs 500 and Rs 1,000 banknotes. Once other denominations became available in requisite quantities, the printing of Rs 2,000 banknotes was stopped in FY19.

 

Now, the central bank has directed banks to increase the supply of currency notes below Rs 500 in ATMs. In real terms, this means that the same amount of withdrawal will now deplete the ATM faster, and will require more withdrawals by the user.

 

While it is argued that banks and white-label ATM deployers (non-banks) may stand to earn more by way of inter-change as customers have to perform more transactions, the reality is that average ticket size of cash withdrawals is at about Rs 4,500, with the largest single-swipe withdrawal of Rs 10,000 (at a different bank ATM) is an outlier. Industry sources say that if anything, the cost of loading these ATMs will go up as more cash in denominations lesser than Rs 500 have to be put in, which will increase the number of trips by cash vans to refill the ATMs.

 

The latest RBI data (November Bulletin 2025) shows that the number of cash withdrawal transactions at ATMs fell to 4,395.46 lakh in September from 4,625.94 lakh in August. With the value of withdrawals also declining, the gap between operational costs and earnings will only widen.

 

Meanwhile, the deployment of recyclers (ATM machines in which you can both withdraw and deposit cash) has led to rising costs for banks. It was earlier felt that with cash recyclers will take off cash logistic costs. But there is a catch here too.

 

As Rupinder Sandhu Anand, chief executive officer of OKI India (the Indian arm of Japan's Oki Electric Industry Co which produces recyclers) explains, the growing preference for cash recyclers clearly reflects banks’ intent to optimise cash-handling costs - at both branches and offsite locations - by reducing cash-logistics dependence.

 

“However, recyclers do carry a higher upfront price, and when rentals or OPEX models are added, the operating cost can rise further," she says.

 

A recycler costs around Rs 6 lakh, whereas a legacy ATM comes for around Rs 3.5 lakh. As she sees it, “There is a strong case for aligning interchange more closely with transaction ticket size to ensure a balanced and sustainable economics for all stakeholders.”

 

The current deployed ATM base is around 260,000, of which about 20 per cent are recyclers. After years of a lull in demand, request-for-proposals floated by banks indicate an order book for 17,000 new ATMs (both recyclers and cash-dispensing-only units). It is believed that this renewed interest — the first since demonetisation, when the installed base stood at 220,000 units — will aid direct benefit transfers by adding more cash-out points.

 

According to Vishal Maru, global processing head at Financial Software and Systems, the biggest cost is managing cash – its sourcing and replenishment. “Linking the interchange to the ticket-size makes it pay-per-use for the consumer. If someone wants to withdraw more, then pay more," he suggests.

 

The 2019 report of the 'Committee to review ATM interchange fee structure’ headed by former Indian Banks’ Association’s chief executive officer V G Kannan is in the spotlight, having been used for a review of the interchange and ATM usage charges at stipulated intervals to be decided by the RBI.

 

As things stand, the block in the ATM channel is that costs have gone up because of other operational factors too: higher lease rentals, power charges, and adhering to security protocols set by the ministry of home affairs.

 

K Srinivas, executive vice chairman, India1 Payments, says: “Costs are never static. Effecting a change in ATM interchange to reflect costs takes time, a logical way out is to index the interchange to inflation and reset it on a periodic basis. As costs move up, so will the inter-change”. An alternative mechanism, he says, is to allow the operators to charge a customer surcharge (or a convenience fee) “as is the practice in the rest of the world”.

 

The ATM interchange hike, effective May 1 this year, came on the back of another hike to Rs 17 from August 1, 2021 from Rs 15 which had been unchanged for nearly a decade. The argument against a hike is that banks save on costs when they push business from branches to digital modes and the ATM channel. The flip side is that these modes are not cheap and banks must account for investments in technology. For ATMs, there are additional charges in the form of higher lease rentals, power charges, and cash-loading costs.

 

A related fallout of all this is that the move to introduce the global practice of lockable ATM cassette-swaps remains largely on paper. The idea was to do away with the practice of open-cash replenishment into ATMs so that Cash-In-Transit (CIT) firm personnel, tasked with loading cash into ATMs, would not have to touch the cash anymore; it was to be done by CITs at the cash centre, and the task of taking into account the amount of cash remaining from the previous cassette-load would also be made simpler. The four-phased plan across 30 cities was to cover the entire network of 265,000-odd ATMs in the country by FY24, pushed back from its first deadline of 2021. So far, that deadline is yet to be met.

 

The main issue: The withdrawal of the Rs 2,000 denomination note, the RBI diktat that availability of smaller denominations under Rs 500 be made more available, and the deployment of recyclers has led to costs of the channel going up.

 

Other factors: Costs have gone up because of higher lease rentals, power charges, and adhering to the Ministry of Home of Affairs security protocols

 

What the alternatives are: Index the interchange to inflation and reset it on a periodic basis, or link to value of withdrawals

 

What the latest RBI data says: The number of cash withdrawal transactions at ATMs fell to 4,395.46 lakh in September from 4,625.94 in August.

 

Related fallout: The move to introduce the global practice of lockable ATM cassette-swaps remains largely on paper.