As an emerging pillar of the retail distribution network, the remote ATM must come out of its operating silo and be integrated into strategic planning.
Bank-branded automated teller machines primarily have been located in branches, with remote units usually avoided unless they can generate sufficient fee and interchange revenues from ATM users wanting cash but having their accounts with other institutions.
But this simple framework – branch-housed ATMs exist to deliver convenience while remote ATMs provide fee generation – is crumbling as ATMs begin to play a more prominent role in retail distribution. Already, many of the largest U.S. banks (and many community banks as well) have successfully deployed image-enabled ATMs to shift significant volumes of deposit activity out of the branch, permitting accelerated branch consolidation in some markets.
Such instances mark the emergence of the remote ATM as a strategically important tool in transitioning distribution networks. While most customers are not ready to dispense with branches, many are willing to accept the ATM as a robust substitute for day-to-day transactions, even to the point that these installations can potentially play a significant role in building market share.
To take advantage of this trend, however, most banks need a sharper vision and network strategy for the ATM. At many banks today, the remote ATM remains sequestered in an operational silo, managed with a standalone emphasis on features, cost control and fee revenue generation.
Banks often misunderstand the full organizational benefits of remote ATMs, moreover, and rarely embrace them as distribution factors that can help in crafting the leaner local networks that will be needed in the future. So rigid are the financial models associated with these installations that they would need to be able to physically open accounts in order for many banks to recognize the value of the ATM in driving sales.
There are three critical priorities for regional branch banking companies with respect to their ATM networks. First, they need to offload even more branch deposit-taking activity to image-enabled ATMs, a path that has already been established to increase customer convenience while reducing local staff and branch count. Second, a broader network strategy is needed, using the principles of local market responsiveness that have been developed to refine branch networks. A third priority is to review and refine the ATM customer experience, not only convenience but also the growing possibilities for differentiation, brand reinforcement, marketing and lead generation.
Such efforts are part of the larger migration to a multi-channel banking market where each conduit – web, mobile, branch, contact center, ATM – has a synergistic impact on the other, requiring much more coordination than in the past. Especially with the ATM, this interplay has a strong and growing dollar impact.
Financial institutions currently operate (or control via branding arrangements) roughly 205,000 ATMs in the United States, according to government and industry estimates, with about two-thirds situated in or near various kinds of banking outlets and the remainder stationed ”off-site.” About 220,000 additional units are operated by independent companies.
Banks historically have viewed the ATM as a supplemental service point, primarily meant to dispense cash. Units stationed within branches also took deposits which could later be manually processed, usually by tellers at the same facility, but with unfavorable funds availability. Even today, the majority of ATMs still serve as disadvantaged extensions of the teller line
By contrast, off-site ATMs seldom took deposits, both because of a high servicing burden and typically low customer usage. Thus the value of remote ATMs was generally based on a simple determination of whether “off-us” withdrawal fees exceeded operating costs. The exceptions, particularly with the largest national players, are partnership arrangements that place a bank’s brand on externally-operated machines. Fee arrangements differ but the main goal is marketing.
Viewed narrowly, remote ATMs may seem to have a somewhat limited future, given the overall consumer migration to electronic payments. Consumers are now able to use cards for most types of small-dollar purchases. And for depositor convenience, some bankers see mobile remote deposit capture as a “leapfrog” opportunity, leaving ATMs as an expensive band-aid.
On this basis, some retail bankers view the ATM mostly as a necessary business expense that needs to be tightly controlled. But elsewhere, game-changing developments have given ATMs a starring role in retail distribution strategy.
The introduction of imaging technology has made it possible for the ATM to serve as a nearly complete substitute for the teller line, accepting both deposits and cash on the same terms as the teller without immediate human intervention. Combined with many other enhancements permitted by improved technology and application development, this has radically changed the customer value proposition, making full service remote ATMs a viable distribution offering (Figure 1).
At banks that have deployed these new machines, consumers have massively shifted deposit transactions from the branch teller to the ATM. JPMorgan Chase & Co. revealed in an investor presentation that the proportion of consumer deposits handled by tellers has fallen dramatically, from 90% in the fourth quarter of 2007 to 51% in the fourth quarter of 2012, with the ATM handling the lion’s share of the redirected deposit activity. Novantas research indicates that other retail banks have been rewarded with similar dramatic shifts as they deployed image-enabled ATMs.
Recent Novantas research also shows a small-but-growing influence of the ATM on bank selection, with the importance of ATMs near home and work increasingly cited by consumers in recent years.
Underscoring the power of this trend, our research shows that customers of banks with image-enabled ATM deployments are two to three times as likely to cite ATMs as their preferred channel for making deposits, compared with customers of banks without ATM imaging for deposit capture. Recent Novantas research also shows a small-but-growing influence of the ATM on bank selection, with the importance of ATMs near home and work increasingly cited by consumers in recent years.
Energized by the recent resurgence in consumer interest, the ATM community has responded with an uptick in innovation. Some vendors envision mobile banking customers using their smart phones to tee up cash withdrawals on their way to an ATM, for example, and techniques for identification and authentication are being enhanced. The on-screen experience is much improved and video capabilities for live interaction with a representative have been introduced.
While there is an exciting road ahead in terms of further technology innovation and expanded functionality with the ATM, there is also a conspicuous risk of missing out on larger strategic possibilities. Compared with branch network management, there is precious little analytical grounding for ATM network decisions in local markets.
This is a critical issue, given our research showing that in certain circumstances bank-branded remote ATMs can be of definite assistance in maintaining local market deposit share, in lieu of maintaining a fuller complement of expensive branches. Because ATM scale benefits will vary by bank and by market, there is a pressing need to understand the customer and competitive dynamics that influence each network setting. In some markets remote ATM expansion can drive share with attractive returns, but in others, the costs outweigh the benefits, both direct and indirect.
For at least the next five years and likely the next 10, regional banks will need a formal two-part physical component to distribution strategy. The branch will increasingly share the stage with the remote ATM, which will shoulder more of the load in providing local market coverage; reinforcing brand presence; supporting marketing and sales lead generation; and providing more low-cost fulfillment of transaction services.
Traditional incremental cost/benefit analysis will fail in guiding this transition, given that the benefits of remote ATMs will mostly accrue elsewhere in the organization, not only further branch cost reduction but also intangibles such as brand reinforcement and customer acquisition and retention. It is important therefore that the ATM become a fuller focal point for customer data analysis. Along with transaction patterns, banks will want to specifically understand the kinds of current and emerging customer needs that are implied by inquiries and account activity observed at the ATM and elsewhere.
Senior executives face three major questions about remote ATMs, including the potential for further scale benefits; specific performance drivers; and the action plan:
Scale Benefits. In considering the possibilities to build market share at low cost, the bank will want to review competing remote ATM networks in each market that it serves, both regional and local, and evaluate the likely impact on customer acquisition and balance formation in coordination with other network priorities. Partnerships and their further possibilities should be evaluated. “White space” locales that offer clear potential for expansion should be identified and further explored.
Performance Drivers. The bank also needs a realistic understanding of where and why it is winning or losing with remote ATMs today, relative to its own goals and the observed stance of competitors. This includes the influence of partnerships, where negotiation on specifics such as signage should be on the table. Returns should be assessed not only on the basis of incremental fee revenues, but also with respect to the scale benefits that ATMs provide in customer acquisition and retention.
Action Plan. In preparation for 2014 and the next few years, the bank needs a cohesive plan for the remote ATM, including priorities for expansion, pruning or market exit, and revisions in partnerships and deployment strategy. This type of planning requires an expanded perspective on how the remote ATM drives value, including market share effects, and necessarily entails a multi-disciplinary team to evaluate the costs, benefits and tradeoffs of proposed actions, integrated as part of the overall market and distribution planning process.
This level of planning elaboration reflects a new level of legitimacy for the remote ATM, which steadily is assuming more of a quasi-branch role, yet at a fraction of the cost of a traditional branch. But the charge cannot be led purely by features, functions and incremental operating margins. As an emerging pillar of the distribution network, the remote ATM must come out of its operating silo and be integrated into strategic planning.
Ethan Teas is a Principal in the Chicago office and Kevin Travis is a Managing Director in the New York office of Novantas Inc., a management consultancy. Also contributing was Brandon Larson, a Manager in the New York office. They can be reached respectively at email@example.com, firstname.lastname@example.org, and email@example.com.