Industry Analysts Predict the Future of the ATM

eFunds asked several ATM industry analysts about their thoughts concerning the future of the ATM, and its impact on the banking community and on consumers. Analysts from TowerGroup, Financial Insights (an IDC company) and Gartner provided commentary on the topic. They welcome your feedback and questions (email addresses for the analysts are listed at the end of the survey).

Q: What is your short-term (1-5 years) prediction for the ATM as it will impact financial institutions and the banking community?

Jerry Silva, senior analyst, Retail Banking, TowerGroup: I think some banks will have to deal with the fact that their ATMs have become utility machines, and that for those banks, the strategy will be to lower costs as much as possible, leading to increased outsourcing opportunities and shared networks to spread those costs among a number of smaller institutions. For ISO (independent service organization) ATMs, surcharging will continue to drive revenue opportunities, but less so going forward as the market becomes saturated and fewer potential locations are identified. Banks have tried, and will continue to try to break "back into" the convenience market by white-labeling ATMs, but I think they'll have difficulties matching the revenue models used by the ISOs while at the same time dealing with the inherent contention with their own bank brand.

For other banks, the search continues for the "killer application" that will raise the ATM's value. The check truncation legislation in the U.S. will have a significant impact on the use of automation to process check deposits at the ATM, and lower costs significantly for banks, but banks will have a challenge re-training the consumer to use the ATM for that purpose. I also believe that the ATM's value as a communications device between bank and consumer is being seriously under-used. With over 40 billion global transactions annually, banks should be able to leverage that time spent with the consumer to do some personalized marketing. Even common courtesy-type communications will increase the goodwill between bank and customer, increasing retention.

Globally, the Asian market will continue to see substantial growth in ATM deployment as the whole bank infrastructure is developed in that area, and in India and China in particular.

Richard Bell, research manager, Retail Channels, Financial Insights: The impact will vary significantly depending on geography. In emerging markets such as Asia, there is still significant opportunity for continued deployments of traditional bank owned ATMs. In some of these markets there are opportunities for advanced function ATMs used as true remote branches or in non-cash roles. In much of Europe there remain significant opportunities for non-bank owned cash dispensers that will reduce transaction rates for bank owned machines. In the US where the market is largely saturated, there is some potential for shared depository networks.

Brad Adrian and Stessa Cohen, analysts, Gartner Financial Services, Gartner: Multifunction ATMs with greatly extended functionality are not going to be the norm in the near future. Consumers are not necessarily demanding additional ATM features, so banks will add those which can most directly create cost savings. For example, banks are increasingly interested in offering check deposit imaging at the ATM and "envelope-less" deposit capabilities to speed processing and reduce ATM replenishment costs. As banks move toward holistic payment management and implementation of software solutions that consolidate all of a bank's payment systems, banks will use fewer systems to process transactions which originate from disparate sources (ATMs, point-of-sale, etc.) in a similar way and to capture richer transaction-related information.

Q: What is your short-term (1-5 years) prediction for the ATM as it will impact consumers and banking customers?

Jerry Silva, senior analyst, Retail Banking, TowerGroup: Consumers have more choice and convenience with regard to ATM use than ever before. While debit-based POS and cash back will continue to erode ATM transaction volume, cash will still be king, and consumers will still rely on the increasing size of ATM networks to obtain that cash. The use of machines to deposit checks will get some pushback from consumers, but I believe that particular behavior will change if the educational processes, and perhaps incentives, are put in place to help them along. The other concern will be the timeliness of the ATM transaction if more functionality is moved there, making transaction times longer, and delaying the customer that just wants their $60.

Richard Bell, research manager, Retail Channels, Financial Insights: In Asia I see considerable improved access to cash and financial services by customers. Likewise, in Europe. I see little near term change for consumers in the U.S.

Brad Adrian and Stessa Cohen, analysts, Gartner Financial Services, Gartner: Consumers will continue to view ATMs as offering primarily cash-related transactions. There are a few new ATM functions that consumers will desire and use, though. For example, in the U.S. consumers desire the ability to top-off prepaid mobile phone accounts, but banks will only offer these additions if no hardware modifications are required and customers will only use them if the transactions can be performed quickly and easily. ATM "ubiquity" will reach "saturation" as more non-financial organizations place ATMs wherever possible. Consumers will never be far from an ATM, but fees for using non-member ATMs will remain relatively high.

Q: What is your long-term (5-10 years) prediction for the ATM as it will impact financial institutions and the banking community?

Jerry Silva, senior analyst, Retail Banking, TowerGroup: For many banks, the outsourcing and sharing of today will be met with a need to differentiate their own brand from their competitors, even if they share a network. Outsourcers, even though they are providing a "utility" service, will have to become more sophisticated and offer differentiated services to fulfill this desire. Web-enabled ATMs as well as new technologies such as Web services will be a key to their ability to respond to these needs. It is not unlikely that 10 years from now, I may be using someone else's ATM, but the interface, the menus, and the products and services offered look and feel like my bank or like my personalized online banking web page. Leading-edge banks will continue to explore the combinations of sales and service that will raise the ATMs value to the bank. As they become more successful at moving the customer to automated channels, banks will have to figure out how to sell to a customer base they see less and less in the branch. The ATM as a sales channel will be important, and differentiated machines will be necessary to implement sales while not intruding on basic banking transactions.

Richard Bell, research manager, Retail Channels, Financial Insights: As with near term predictions, the impact will vary by geography and local market conditions. In the U.S. over the long term, advanced function ATMs promise to play a more significant role as institutions continue in their efforts to move routine transactions to the ATM and consumer adoption rates continue to gradually climb. We see some opportunities for increased ATM usage within the institution's branches. Kiosk, a close cousin to ATMs, also promise to play a more significant role. In Asia, we see a continued expansion of ATM usage and functionality as the banking market in this region continues its evolution and growth. Likewise in Europe, we see continued gradual evolution of ATMs as European institutions continue to push automation.

Brad Adrian and Stessa Cohen, analysts, Gartner Financial Services, Gartner: Changes in the ATM market will not be earth-shattering. By 2006 more banks will begin adopting selected enhanced ATM functionality, particularly as older machines are replaced. Even so, the types of features added will be those that support rapid, easy transactions. The more complex types of transactions, such as purchasing theater tickets or postage or obtaining product information will be relegated to full-featured, multi-media kiosks in order to minimize their impact on ATM queuing and traffic flow. ATM operating systems will undergo gradual, yet widespread replacement. Formal support for OS/2, the most common ATM operating system, will completely disappear, driving banks to Windows-based systems. In addition, the stability and open source of Linux will attract banks to that operating system; Linux ATMs will, however, still take a back seat to Windows-based ATMs.

Q: What is your long-term (5-10 years) prediction for the ATM as it will impact consumers and banking customers?

Jerry Silva, senior analyst, Retail Banking, TowerGroup: In 10 years, the lines between automated devices will continue to blur - cash back at POS (point of sale), buying cellular minutes at the ATM, bank vs. convenience store, etc. Radio frequency identification (RFID) used at gas stations today could be the primary means for customers to withdraw a "custom cash" amount at the ATM simply by walking up to it and confirming the transaction. The new class of machines that can speak, recognize machines, play videos, and connect the consumer to a variety of services is already here. It's a matter of the customer adopting the ATM as a feature-rich and convenient point of contact.

Richard Bell, research manager, Retail Channels, Financial Insights: Over time we expect that much routine banking activity will move to ATMs in all geographies.

Brad Adrian and Stessa Cohen, analysts, Gartner Financial Services, Gartner: Consumers will continue to use ATMs primarily for cash dispensing and other simple transactions. Various new technologies will be applied to ATMs that will enhance customers' interactions. Most commonly, technologies will be implemented that can impact security and transaction speed. As a result, biometrics for identification and verification of the user and card- and wireless device-based tokens will be rolled out.

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Analyst Contact Information:

Jerry Silva, senior analyst, Retail Banking, TowerGroup

jsilva@towergroup.com

Richard Bell, research manager, Retail Channels, Financial Insights, an IDC company

rbell@financial-insights.com

Brad Adrian and Stessa Cohen, analysts, Gartner Financial Services, Gartner

brad.adrian@gartner.com, stessa.cohen@gartner.com