The country's largest lender by assets, State Bank of India (SBI), on June 29 revised its service charges for customers holding basic savings bank deposits (BSBD) from July 1. Cash withdrawals by account holders of BSBD accounts will now be charged Rs 15 plus goods and services tax after the first four free transactions in a month. The charge will remain the same irrespective of which bank’s ATM the customer uses.
The revision in SBI’s ATM charges follows a notification by the Reserve Bank of India (RBI) earlier this month to raise the interchange fee on each financial transaction at an ATM to Rs 17 from Rs 15. Beyond the free transactions for customers, the ceiling on customer charges was raised to Rs 21 per transaction from Rs 20 earlier to account for the higher outgo on interchange for banks. The new interchange shall be effective from January 1, 2022.
Moneycontrol breaks down for you the concept of interchange and the rationale for charging customers for cash withdrawals.
What is interchange fee?
Each time Bank A's customer uses their card to make a transaction at an ATM deployed by Bank B, Bank A must pay a fee to Bank B, which is called the interchange fee. As per RBI guidelines, banks in India absorb this cost for the first five transactions -- financial and non-financial -- every month from the customer’s own bank ATMs. They also bear the cost for the first three transactions from other bank ATMs in metro centres and the first five transactions in non-metro centres.
How much can a bank charge a customer to compensate for interchange?
Once a customer has crossed the free transaction limit for a month, their bank is entitled to charge them to make up for its interchange outgo. In its circular issued on June 10, the RBI raised the cap on such customer charges to Rs 21 from Rs 20 per transaction. Of course, banks can choose to charge less than the prescribed cap.
Why was the interchange fee hiked?
For years, private banks and white label ATM operators had been seeking a hike in the interchange fee to Rs 18 from Rs 15, citing a rise in the cost of operations. Finally, in June 2019, the RBI set up a committee led by then chief executive of the Indian Banks’ Association VG Kannan to review the entire gamut of ATM charges and fees, with a particular focus on interchange structure for ATM transactions.
The RBI accepted the committee’s recommendations and accepted the industry’s contention that there had been an increase in the cost of ATM deployment and expenses towards ATM maintenance incurred by banks and white label ATM operators since the last change in interchange fee structure in August 2012. To account for the cost escalation, the RBI raised the interchange fee to Rs 17 from Rs 15 for financial transactions and to six rupees from five rupees for non-financial transactions in all centres.
What caused a spike in the maintenance cost of ATMs?
In the nine years since 2012, inflation has played a role in increasing the cost of maintaining and operating ATMs. In addition, the RBI’s April 2018 guidelines on cash management and logistics, which mandated GPS-enabled cash vans and armed guards to man them, among other things, led to a further escalation in operational costs for white-label ATM operators.
Who wanted an increase in interchange charges and why?It was predominantly private banks and white-label ATM operators who sought a hike in the interchange. Most private banks have a larger network of ATMs in urban locations than public sector banks. However, the size of the former’s depositor base is smaller than that of the latter. As a result, the likelihood of a public sector bank customer making a transaction at a private bank’s ATM is quite high. So while private banks stood to gain from a higher interchange fee, public sector banks would end up paying more in the event of a hike. White-label ATM operators wanted a hike in the interchange because many of them deploy ATMs on behalf of public sector banks in tier-III to tier-VI locations and the existing fee was insufficient to make up for the cost of operating in the interiors of the country.