India ATMs: Banking on convenience

In 1987, HSBC set up India's first automated teller machine (ATM) in Mumbai. Almost all other banks followed suit. Twenty-five years later, the country now has close to 90,000 ATMs, but is still one of the least penetrated markets in the world.

There are 59 ATMs per million people, three times less than China, but each machine handles an average 53,595 transactions each year, 40% higher than China and three times the US level. The mismatch is largely explained by an inadequate banking infrastructure and growing demand for cash-free services: There are 260 million debit cards in circulation in India and the total is expected to reach 400 million by 2015.

Hoping to improve service levels, a consortium of Indian state-run lenders has in recent months launched an ambitious tender: to outsource 63,000 ATMs across various service providers. Suddenly the market has opened up for independent ATM services companies and manufacturers who preparing to bid for these contracts. Many are supported by private equity and venture capital players.

"The ATM market in India is expected to grow three-fold over the next three years and banks are increasingly looking to reduce costs by setting up ATMs instead of full-service branches," Thomas Davenport, regional director at International Financial Corporation (IFC), tells AVCJ. "Given this market context, the ATM market is bound to attract long-term investors."

Just one month ago, IFC, the investment arm of World Bank, committed $2.7 million to Vortex Engineering, an Indian ATM manufacturer already backed by Tata Capital and Bamboo Finance. In March, The Blackstone Group and Bain Capital were also reportedly negotiating to buy the ATM business of Euronet Worldwide India. Other private equity names in the sector include TPG Capital, Sequoia Capital and New Enterprise Associates (NEA).

Cost efficient

The average set-up cost for an ATM in India is $16,000-20,000. In order to offset the expense of setting up and maintaining entire networks of machines, lenders traditionally levy a fee of INR20-INR35 per transaction on users that aren't part of their networks. Whether or not this covers underlying costs, there is another burden - time. From identifying sites and negotiating with landlords, to arranging power supplies and installing the machines themselves, setting up an ATM network is a protracted process.

This explains the emergence of a "brown label" concept, whereby ATM management is outsourced to vendors, with banks retaining responsibility for settlement and banking processes only. It enables ATM networks to be established rapidly without banks having to lock up capital in a fast-depreciating asset. The venders are paid on a per transaction basis so they are suitably incentivized to identify the best locations.

"The core business of a bank is to deal with customers, not manage ATM logistics, so it's better using a third party can boost operational efficiency," says Srinivas Chidambaram, managing director of Jacob Ballas, which in 2010 committed $20 million to Financial Software and Systems (FSS), an Indian payment company that provides ATM procurement and installation services. "This model works both for small and mid-sized and for public sector banks, which don't have the scale to run their own ATM networks as well as for larger banks in managing their existing network and new rollouts."

Leading players such as FSS, Prizm Payment Services and AGS Transact Technologies have moved quickly to secure partnerships with major banks, including State Bank of India (SBI), ICICI Bank and Axis Bank, and each now operates 10,000-15,000 ATMs. However, given the high barriers to entry, it is questionable whether there is still room for new players.

Private equity investors have already made their views clear by backing incumbents. Last August, Sequoia put in another $8 million in Prizm Payment Services, taking its total investment in the company to $15 million since 2008. AGS Transact Technologies, which has tie-ups with Axis Bank and Dhanlaxmi Bank among others, received $32 million from TPG to finance its outsourcing pipeline earlier in the year.

This trend has also manifested itself in secondary transactions. Two years ago, Jacob Ballas and NEA picked up 34% of FSS, facilitating the exit of The Carlyle Group, which first invested $10 million in the company in 2001. "A brand new player who doesn't have experiences in the ATM industry will find it difficult to meet the banks' requirements," says Chidambaram. "I think there will continue to be a fair amount of private equity investments into existing players."

Innovative approach

While several larger companies have been dominating the ATM outsourcing services market, Bamboo Finance and IFC argue that there is still scope to back rising stars on the manufacturing side, particularly companies that offer tailor-made solutions to the underserved rural population.

According to market reports, approximately 40% of India's rural population still lack access to bank accounts, but the small transaction volumes in these areas don't justify the introduction of full branches. ATMs are an efficient means of providing basic financial services.

Vortex, for example, has redesigned its ATMs to feature energy saving systems, solar power panels and fingerprint authentication system, making them viable for use in rural areas where air conditioning is rare and illiteracy is high. The company has already won a contract from the SBI to supply close to 600 ATMs in less developed regions.

"ATMs produced by Vortex do not provide the same functions as the ones you see in Mumbai or New Dehli because they are designed for rural or semi-urban markets, where operating cost must be optimized given the low transaction size ," Eric Berkowitz, CIO of Bamboo Finance, tells AVCJ. "New comers always need to offer differentiated technology at low costs; I'd say the entry barrier is quite high."

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• Topics
• Financials
• Expansion
• South Asia
• India
• Financial Services
• Growth capital