Chile's only state bank – and second largest in terms of loans - BancoEstado will undertake an ambitious expansion of its ATM network this year to speed the pace of the bank's ongoing modernization process, said BancoEstado chairman Jaime Estevez.

Since Estevez – an economist and former socialist politician - took the reins of the state bank some 20 months ago, he has given electronic distribution channels the highest priority on the bank's agenda.

"We are increasingly using automated channels to cut costs and to clear branches," Estevez said.

BancoEstado has been notorious for its over-crowded branches and never-ending lines, but Estevez has decided that ATMs, together with online and telephone banking, will help him change the bank's reputation as a customer-unfriendly and inefficient state dinosaur.

"We have gone from having one fourth of all our transactions electronically made to more than 50 percent, which is spectacular," Estevez said. "When I initiated this process, I was told it was going to be difficult because we cater to low-income segments of the population and rural and remote areas where people have problems of using technology -but it has been a success."

The ATM network will play a crucial role in the bank's effort to upgrade its alternative distribution channels, Estevez said, since the bank's online service is used by a small number of its customers - due to BancoEstado's focus on low-income segments.

When Estevez became chairman, BancoEstado had 800,000 ATM cards in circulation. Today, there are more than 2.5 million, Estevez said. "We have distributed approximately one million cards per year," he noted.

BancoEstado is Chile's largest ATM owner, with 750 machines. In the first phase of this year's expansion plan, the bank expects to add 50 machines to its fleet by March. For the full year, Estevez his network of mostly NCR machines to increase by 25- 30 percent

Throughout last year there was constant speculation in the Chilean financial press that BancoEstado was close to signing a link-up deal with Chile's largest ATM network RedBanc, which includes most foreign banks such as Citibank, BankBoston and the local subsidiaries of Spanish banks BBVA (NYSE: BBV) and SCH (NYSE: STD).

The link-up would permit BancoEstado's clients to use the ATMs of the RedBanc network and allow RedBanc affiliated banks' clients to use the competing GlobalRed network, which is dominated by BancoEstado.

However, 2001 came to its close and no deal was in sight. According to Estevez, the delay is due to some private banks' fear that the rejuvenated BancoEstado will become even more competitive with access to the RedBanc network, which includes more ATMs at off premise locations such as supermarket, cinemas and gas stations.

Estevez said.the link-up "would improve our competitive position and for some (private) banks that is seen as a problem, but that's absurd because it would also improve their competitive position."

BancoEstado is seeking the link-up, Estevez said, because "to go on duplicating (ATMs) is absurd." Also, he added, a network link-up would allow BancoEstado to increase bank penetration in areas of the country where it is now low.

Market observers say that BancoEstado stands to gain the most from a link-up because it would give its customers access to prime off premise locations. However, the RedBanc member banks would get access to BancoEstado's ATM network in remote areas of Chile, where the private banks have little presence.

"The link-up would boost BancoEstado's competitiveness, and it's no wonder some private banks fear increased competition in some segments," said Carlos Ballon, a banking analyst at the local Larrain Vial brokerage.

According to local rating agency Feller Rate's banking analyst Ana Maria Masias, BancoEstado does not pose a threat to private banks in the high-income segments but is beginning to compete more aggressively in the middle- and lower middle income segments, with more specific growth targets.

"Everyone has plans to expand (ATMs), and this year we will increase our ATMs significantly," said Santander Chile (NYSE: BSB)'s investor relations manager Robert Moreno, adding however that he does not see BancoEstado as direct competition for Santander in Chile.

Larrain Vial's Ballon mentions Santander Chile and Banco Santiago (NYSE: SAN) – both owned by Spanish financial group SCH (NYSE: STD) – as two banks he expects to invest heavily in ATMs this year. However, BancoEstado is likely to be the most aggressive in terms of expansion, since its stands to gain the most from an increased ATM presence, Ballon said.

Despite the higher cost and risk of duplication in the case of a deal with RedBanc, Estevez is still going ahead with plans to increase the bank's number of machines in off-premise locations.

BancoEstado has approximately 100 ATMs at off-premise locations, and Estevez said the bank will continue to install machines at locations such as supermarkets and commercial centers this year.

However, the installation of ATMs at off premise locations depends not only on a potential deal with the RedBanc network but also on the success of RedCompra, the new Chilean debit system.

RedCompra permits consumers to use ATM cards to make purchases at the point-of-sale instead of using cash. RedCompra has so far been a success story, with most stores allowing their clients to pay using the RedCompra system.

If Chilean customers become accustomed to using the RedCompra system on a large-scale basis, there may be less justification for installing more ATMs at off premise locations such as supermarkets, commercial centers and gas stations, Estevez said.

With or without RedCompra and RedBanc, BancoEstado's dynamic chairman has already decided that his bank will depend heavily on the use of ATMs in the future to meet its ambitious modernization targets.