News
Off-premise ATMs: Look beyond the bottom line
Ken Karant urges financial institutions with off-premise ATMs to consider the value of their network, not just its profitability. According to Karant, value includes customer service, retention and acquisition.
October 31, 2002
In the U.S. today an ATM can be found just about anywhere we go! The advent of surcharging in 1996 and the anticipated fee income opportunities fueled deployment of ATMs (mostly cash dispensers) at a rate that we would have never imagined.
For the average bank, however, the cost of deployment is not being met with current revenue and transaction volumes. According to an executive at a large regional bank, "Convenience remains king, but its cost is killing us!" Financial institutions are taking a much harder look at their off-premise deployments and are considering removal and/or relocation of their "non-profitable" ATMs.
 |
Ken Karant |
An analysis of recent ATM performance based on transaction volumes reveals why the profitability is suffering. In 1996 the average number of transactions per month per ATM was 6,400, while at the end of 2001 that number had fallen to 4,479, a 30 percent decrease. The profitability of the ATM network is not what it used to be!
Consumer sensitivity to costs (surcharging and foreign fees) has shifted transactions from foreign ATMs back to those owned by consumers' banks and to the retailers who offer cash-back with on-line point-of-sale debit transactions.
Seeing clearly now
What can be done to help? First of all, have a clear understanding of your strategy for deploying off-premise ATMs. Is it: Customer service? Retention? Acquisition? Fee generation? Transaction migration? Brand awareness? Differentiation?
Is it for all of these reasons? Can a deployment be successful if the strategy includes all of them?
Customer service and revenue generation have opposing strategies. Customer service and brand awareness don't generate direct revenues. Having a mixed strategy is good, but to measure the success of the network requires a very succinct definition of "profitability" or "success."
Next, get a clear understanding of the cost structure associated with deployment. Considering that almost 90 percent of the costs are fixed (e.g., depreciation, cash service, communications, etc.), the importance of understanding and managing these costs is paramount!
Surcharging has become unpopular with consumers, but they continue to pay for convenience and are now paying an average of $1.48 per transaction. Some institutions are inching surcharges upward in order to compensate for lost revenues and the fact that retailers have become very savvy and look for more share of the revenue generated.
Consumers today are more aware of the alternatives to paying for convenience to obtain cash: seeking out their own financial institution's ATMs, non-surcharging ATMs or getting cash back with PIN-based POS at the supermarket or their favorite retailer. Establishing a strategy to attract more transactions taking this into consideration is necessary. The strategy must include ways to overcome the consumers' fee sensitivities.
Beyond the bottom line
Consider the value of the ATM network, not just its profitability. Value includes customer service, retention and acquisition. Consider the following hypothetical scenario:
An institution has an ATM placement contract with a convenience store chain in 50 locations. The financial analysts performed a profitability analysis on the ATMs and found that monthly costs exceed revenues by an average of $450 per ATM. Based on this, the CFO suggests to not renew the contract, remove the ATMs, find new sites and relocate the ATMs to become profitable.
However, the analysis revealed that over 70 percent of the transactions are on-us. They exceed the total of on-us transactions at the branches! Can the institution afford not to have these "inexpensive valued transaction points" to serve their customers? Absolutely not!
The value of these ATMs from a customer service and retention standpoint exceeds their profitability. Profitability determination should include the value of the ATM delivery channel to your institution. What does it cost to acquire a new customer? What does it cost to lose a customer?
To further increase the value of the network, take advantage of the thousands of transactions per month as opportunities to market the institution's products and services to existing customers and to the competitor's customers. Each interaction is an opportunity to sell the brand, products and services. What is the value of selling a new auto loan, opening a new credit card or line of credit, selling a CD, originating a new mortgage loan, etc.?
So, should the question be "Is the ATM network profitable" or "What is the value of the ATM network"? Can it be both? Of course it can, but a clear definition of strategy, costs and how to evaluate the profitability or value of the network are prerequisites.
It is undeniable that the ATM channel is a very important component to overall retail delivery strategy, and that access to free ATMs is a primary consideration to the consumer when selecting a financial institution. Customer service, retention and acquisition must be a primary consideration when planning ATM delivery strategies in the future.
The author, Ken Karant, is president and chief executive of Morphis, Inc., a developer of currency management software. Prior to joining Morphis in May of 2002, he was a senior consultant with Diebold for four years with emphasis on the ATM self-service delivery channel. He has been a guest speaker at national, international, and regional conferences for industry associations or organizations including the Star Network, NYCE network, ACI, Bank of America and others. Prior to his ATM consulting activities, Karant spent 25 years in mortgage lending as a senior vice president with a national mortgage banking firm in Dallas.
Included In This Story
Diebold Nixdorf
As a global technology leader and innovative services provider, Diebold Nixdorf delivers the solutions that enable financial institutions to improve efficiencies, protect assets and better serve consumers.
