One ATM system for all banks? Reserve Bank proposal explained

You can also listen to this podcast on iono.fm here.

JEREMY MAGGS: You might have seen the Reserve Bank is looking at a major shake-up of South Africa’s cash system. Here’s the interesting part, it would include a proposal for shared ATMs across all banks.

Now, as I understand it, the idea is to cut costs, improve access and make cash infrastructure more efficient at a time when cash usage is declining, but obviously still essential for millions of South Africans.

Listen/read: Sarb plans ATM and cash system transformation

But a single ATM network, I think, raises big questions around competition, around fees, around security, and perhaps even who has ultimate control over access to cash.

In that respect, we’re going to talk now to honorary professor at Wits Business School and economist at Altitude Wealth, Professor Jannie Rossouw. It’s always good to talk to you and thank you so much, indeed. What’s your assessment here? Why do you think the Reserve Bank is pushing for a shared ATM system, and why right now?

JANNIE ROSSOUW: Jeremy, looking at this matter from the Reserve Bank’s perspective, the one element is, of course, cost. The other element is reduction of risk.

Cash is a risky business. We know that in South Africa. The Reserve Bank will not only focus on containing costs, but will also focus on containing risk.

In respect of a single ATM system, it implies less cash movement through South Africa to serve a single ATM system, rather than each institution serving its own ATMs. From that perspective, from the risk reduction perspective, the single system will make sense.

Read: South Africa set for biggest cash-system overhaul in decades

At the same time, the switching costs between different ATM systems will disappear when people do not have access to the ATMs of their own banks. However, it reduces competition, and it also introduces the risk of the single ATM system falling over and not working at a particular point in time.

JEREMY MAGGS: How, Professor, do you think the banks are going to respond then to this proposal?

JANNIE ROSSOUW: The Reserve Bank is the type of institution that would have discussed a proposal of this nature with the banks before making a public announcement. My sense would be that the banks, in principle, might have agreed to this proposal, or else the Reserve Bank would not have made the public announcement.

The banks would also look from their side at the risk and cost. It might reduce their risk; it might reduce the costs.

JEREMY MAGGS: What type of costs do you think could be reduced? Would they be substantial?

JANNIE ROSSOUW: Well, number one, the switching costs between using different ATM systems of different banks would be a cost reduction to the public. That would, of course, be an income reduction to the banks. At the same time the risks would be reduced, which is a difficult cost to estimate. But banks would be interested in reducing the risk and cost of moving cash.

All in all, this might lead to a cheaper system, but there would be a few losers like the security industry and so on.

When we talk about cost savings, it will generally be the public that benefits and some of the service providers will have less income.

JEREMY MAGGS: Professor, you mentioned the possibility of a reduction in competition between the banks. Explain that to me, and how would that occur?

JANNIE ROSSOUW: Banks compete with one another in terms of placing their ATMs and making their ATMs available to the public, and they try to find a competitive advantage in the locations of the ATMs. If we have, as the Reserve Bank calls it, brand neutral ATMs, then the competitive advantage of certain banks will disappear.

Listen/read: Insights on how SA’s payment tech stacks up globally

JEREMY MAGGS: Professor, who do you think would own and control a one-ATM-for-all-banks model?

JANNIE ROSSOUW: The Reserve Bank has in mind a public utility type of company with various shareholders, admittedly, but the utility type of company would control the ATMs. The related matter, of course, is that the use of cash in the economy might be on a decline.

In recent years, the demand for cash grew at a much lower rate than before.

If the growth rate of cash falls away, if we see negative growth in cash, the Reserve Bank will, of course, lose its o seigniorage on cash in circulation, so the Reserve Bank’s profitability might also come under pressure if the system leads to a reduction in the total cash holding in the economy.

JEREMY MAGGS: But inevitably this is a stepping stone, either towards a cash-lite or even a cashless economy. That is inevitable, isn’t it?

Listen/read:
ATMs closing across SA: Will we become cashless?
Is a cashless society on the cards for SA?
Cashless, clever and cautious: The new face of SA consumer spending

JANNIE ROSSOUW: I would not use the word inevitable in my lifetime, Jeremy. I remember when I was young, about 40 or 50 years ago, when I studied at university, we had to write papers on a cashless society and how that would work. Fifty years later, we still have cash with us.

Clearly, cash is being phased out of the economy. But in my view, we are far from a cashless society.

But yes, as we develop better electronic instruments, the demand for cash will decline.

JEREMY MAGGS: We have a single model that’s being proposed. Professor, to the best of your knowledge, is there international precedent for this kind of system, or are we an outlier here?

JANNIE ROSSOUW: I’ve seen references to the system used in the Netherlands. I have not studied the system used in that country, but I have seen some remarks that we will replicate a system used in the Netherlands.

I’ve just seen the Dutch reference, but I don’t know to what extent it will replicate or how comparable it will be. I have not done such a comparison, for the simple reason that very little on our system has been published to date. It is an announcement of discussions by the Reserve Bank that will follow next year.

JEREMY MAGGS: You mentioned switching costs. Ultimately, what would happen to ATM fees? Do you think in a system like this they would go up or down?

JANNIE ROSSOUW: They would definitely go down. If the fees go up, it makes no sense. Then rather just keep what we have. My expectation is lower fees. If the net effect is higher fees, there’s just no reason to do this.

JEREMY MAGGS: Professor, what might this mean for rural and township access to cash? As I said at the start of our conversation, millions of South Africans are still cash dependent.

Read: As banks close branches, Africa’s unbanked face a digital divide

JANNIE ROSSOUW: The expectation is that it would make cash easier and more accessible in outlying areas of the country. Again, if it does not achieve that objective, there is no reason to embark on this journey, then rather just keep what we have.

JEREMY MAGGS: Thank you very much indeed. It will be so interesting to see what emerges on this particular front in coming months. I’ve been in conversation with Professor Jannie Rossouw, honorary professor at the Wits Business School and also economist at Altitude Wealth. Jannie, thank you very much indeed. Appreciate the time.

Follow Moneyweb’s in-depth finance and business news on WhatsApp here.