Do banks make money on ATM interchange fee? – Banking & Finance News #IndiaFinance

By ashvin parekh

Transactions at ATMs are set to get costlier from May 1, after the recently announced hike in interchange fee. However, only a few large banks which have extensive ATM networks benefit when non-customers use their ATMs, putting smaller banks at a disadvantage, explains Ashvin Parekh

What is the interchange fee?

The interchange fee is the charge a card-issuing bank pays to the Automated Teller Machine (ATM) operating bank when a customer uses an ATM outside her own bank’s network. This fee is meant to compensate the ATM-operating bank for costs such as infrastructure, maintenance, and security.

The recent increase in interchange fees —by Rs 2 for financial transactions, such as cash withdrawals, taking it to Rs 19 from Rs 17, and Rs 1 for non-financial transactions such as balance enquiries, raising it to Rs 7 from Rs 6 beyond the free monthly usage — was needed due to rising operational expenses, including higher cash handling costs and stricter compliance requirements. Banks also face increased costs while expanding ATM access in semi-urban and rural areas, where transaction volumes are lower. Inflation and technological upgrades have further driven up expenses, making it essential for banks to adjust interchange fees to maintain profitability and ensure continued ATM availability. The Reserve Bank of India had last revised interchange fees in June 2021. These fees are usually passed on to the bank customer.

Need for ATMs despite growing preference for digital payments

Despite the rise of UPI and digital payments,ATMs continue to play a crucial role, especially in semi-urban and rural areas where cash transactions remain prevalent. While urban consumers increasingly rely on mobile wallets and online banking, many businesses and individuals including senior citizens and daily-wage workers, still prefer cash for their daily transactions. ATMs also offer essential banking services such as balance inquiries, mini-statements, and fund transfers. Additionally, they serve as a backup when digital systems fail, whether due to network issues, cyber threats, or power outages. While digital banking is growing, ATM cash withdrawals have not seen a significant decline, indicating sustained demand.

Instead of phasing out ATMs, banks should focus on optimising their networks by introducing cash-recycler ATMs that support both deposits and withdrawals. This hybrid approach ensures that customers can access cash when needed while also promoting digital payment adoption.

Smaller banks at a disadvantage

Smaller Banks often depend on larger banks’ ATM networks since they lack resources to deploy extensive ATM infrastructure. As a result, they pay higher interchange fees when their customers use ATMs operated by bigger banks, increasing operational costs. While they do earn interchange fees when non-customers use their ATMs, the revenue is often insufficient to offset expenses. The reliance on bigger banks like State Bank of India (SBI) and HDFC Bank, which have widespread ATM networks, puts smaller banks at a competitive disadvantage. This financial strain discourages them from expanding their ATM presence. Without strategic interventions like shared ATM networks or white-label ATMs, smaller banks may struggle to remain profitable in an increasingly digital banking landscape.

Most PSU banks also don’t benefit

State Bank of India (SBI), with its extensive ATM network, benefits significantly from interchange fees, as a large number of customers from other banks use its ATMs. Most other public sector banks (PSB), however, struggle as their smaller ATM presence results in more interchange fee payouts than earnings. This imbalance affects their profitability, as they end up paying more to other banks than they receive. ATM operational costs, including security, cash handling, and maintenance further reduce margins. All these make it difficult for many PSBs to turn interchange fees into a profitable revenue stream. To remain sustainable, banks need to explore cost-sharing models, better ATM placement strategies, and a push toward digital banking adoption.

Ways to optimise interchange fee

Increase ATM deployment: Smaller banks can collaborate to expand their ATM network, reducing their dependence on larger banks.

Enhance digital banking: Encourage customers to shift to digital transactions so as to reduce ATM usage, lowering interchange fee costs.

Review interchange fee structures: Regulators should revisit interchange fee rates to ensure fair compensation for ATM-operating banks while preventing excessive charges.

Invest in cash recycler ATMs: These enable both withdrawals and deposits, reducing cash replenishment costs and improving ATM profitability.

Public-private partnerships: Banks can collaborate with fintech companies and white-label ATM operators to expand access to banking services while managing costs efficiently.

Evaluate geographies needing more ATMs: Identify areas with high cash dependency to ensure ATM deployment where it is most needed, improving financial access in underserved locations.

While digital payments will continue growing, India is not yet a cashless economy. A balanced approach to ATM optimisation, fee regulation and digital banking expansion is crucial for financial inclusion and banking sustainability.

The writer is managing partner, Ashvin Parekh Advisory Services LLP.

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