ATM withdrawal charges and payment banks

It has been a very interesting past few weeks. The RBI has taken two regulatory actions that are very interesting. First, it has allowed banks to charge their customers for use of ATMs over a threshold limit of transactions. It has also capped the amount that can be charged per transaction. We've had few of our biggest banks following this with charging their deposit holders money to withdraw cash from their ATMs from November above 5 transactions in metros. (Non metros your turn will come). Second, we've also had the RBI releasing the final guidelines for payment banks.

These two actions by the banking regulator are quite schizophrenic at first. One initiative allows banks to fleece their customers of more charges in the name of 'third class' service. The second tries to perform the Prime Minister's dream project of financial inclusion. Then why are banks wanting to charge their customers to withdraw money, when we are still struggling with inclusion?

I've been grappling with this question till I had my eureka moment. So we need financial inclusion. What's the solution to that? The Pradhan Mantri Jan Dhan Yojana apparently seems to be taking care of that. This will basically be used to route all the government doles and funding to our less fortunate citizens, who usually have to fend for themselves. It's basically laying the ground work for people to only transact through the official banking channels.

Banks usually collect deposits from their customers to transact their business. This can be done through Term Deposits or CASA. A lot of Current And Saving Accounts (CASA) are cheap funds for banks. They use that to fund their lending business. Someone called it lazy banking. But banks are not gonna have the available balance in the 'Jan Dhan' accounts for them to be profitable. Hence, they need to charge other customers money for hitherto free services like ATM withdrawals. 

This has its origin when the RBI allowed banks to unbundle their services. Remember the first time you found out that you require to pay a charge for an NEFT transaction? (Yes it was free for a while). That was the beginning of this phase of further unbundling of services. Now banks charge you for even breathing the air inside the bank. No, that's not true. But that's how banks function. They need to create different lines of businesses. No business can survive by only having a few lines of businesses. This diversification, within the construct of traditional banking, is what leads us to banks charging you even for a statement of account that one would require from the banks' branch.

Why is this a good thing?

Alright, the title sounds deceptive. Am I advocating that banks fleece their customers? Hell no! But people have to be smarter to realise what's the real game that is being played by the regulator. It wants to streamline the financial system so that all the transactions are captured within the control parameters of the financial system. This can never be done if we have a parallel cash economy that may or may not be funded by fake currency notes. So levying charges on people for cash withdrawals will lead them to use cash sparingly. But never under estimate the Indian mind. We haven't been used to ATMs for that long. So we might as well find people queuing up at cash counters to hoodwink all the well laid out plans.

Anyway, the establishment of payment banks will add to the aforementioned action. Payment banks basically take money as deposits and invest them in approved securities which don't have inherent risks of default. This basically means that if I am ready to invest up to ₹1 lakh in a deposit, I will get interest on it from a savings account with a payment bank and there will be less of a risk on that amount not being repaid to me. 

How does this work together with the charges on ATMs? Well, even companies which provide an online wallet service can become payment banks as per the guidelines of the RBI. This means companies like PayTM, Airtel(m-pesa), Vodafone etc. Basically, everyone who operates an e wallet facility. Better still, they will have to pay you interest on the money you've deposited. So, you'll have money stashed in a wallet that you can call for whenever you need to make a payment and as a result, this will lead to reduced use of cash. This achieves the RBI's objective of getting all financial transactions within the financial system. And tadaa! The apocryphal 'kala dhan' is firmly under the financial system's watch. 

It'll take its time, but these measures in tandem will lead people to sparing use of cash And that will help in controlling the uncontrollable, the generation of unaccounted money in the system.  Regulatory actions sometimes appear to favour a few, but the real picture only appears when the dust settles.