ATMs Out of Favor as Tool For Dispensing Mutual Funds

Just two years ago, bankers viewed automated teller machines as the next great delivery channel for mutual funds.

By providing access to mutual fund accounts side by side with checking accounts, the reasoning went, banks could truly position investment products as a core retail service.

Around the same time, a Federal Reserve study of 56 large banks found that three banks offered access to mutual funds via ATMs - and 16 more were planning to do so by 1995.

But today, the group of banks offering ATM access to at least some of their mutual funds remains stuck at three - Citicorp, Fleet Financial Group, and Wells Fargo & Co.

And the 16 wannabes - a group that included BankAmerica Corp. and BayBanks Inc. - seem to have lost interest.

"You don't hear that much about it anymore," said Janet Hanson, senior manager of investment services consulting at KPMG Peat Marwick, and an advocate of ATM access. "It's a topic that's definitely cooled down."

Recently, bankers who sell mutual funds were asked to rank the importance of 13 services to customers, by American Brokerage Consultants, St. Petersburg. They rated ATM access to mutual fund accounts last, ranking it after such services as access to fund accounts by telephone and fax machine.

Why the shift? Bankers and industry experts cite obstacles ranging from compliance concerns to technical problems to lack of customer demand.

"There's been such a ruckus about disclosure and differentiation between deposit and investment products that it has scared a lot of banks away," said a spokesman at one bank that has considered offering ATM access to mutual funds.

Banks could be criticized, for example, for failing to make clear to customers who make redemptions at an ATM that there will be tax consequences, Ms. Hanson said.

Another culprit is the slow growth of proprietary mutual funds. The three banks offering ATM access all have relatively successful proprietary mutual fund programs, Ms. Hanson said.

Meanwhile, banks in the middle tier are trying to build assets to justify having a proprietary fund family at all. "Most banks are facing bigger, more strategic issues" than ATM access, said Ms. Hanson.

Banks also face technical problems. While both major ATM suppliers, AT&T and Diebold, sell machines that can perform the transactions, the banks must also tie together back-office systems, linking the fund account data that resides on the funds transfer system with the bank's record-keeping system, which feeds the ATM network.

While that is a relatively straightforward task, the problem grows more difficult as banks merge.

Most difficult is developing the ability to market a mutual fund to a specific customer at the ATM. Very few banks are developing the massive data bases that would be required to make a customer profile available anywhere in a bank, including at the ATM screen, said John Stroia, marketing manager for the financial industry at Diebold in Canton, Ohio.

Banks also fear long lines at the teller machine. Some are looking to specialized devices to handle mutual fund transactions, where investors would not be standing in the same line with checking account customers.

Huntington Bancshares, for example, actually sells mutual funds at devices called interactive kiosks, where a customer can sit down and discuss products with an investment specialist over an interactive video. The kiosk also generates the documents for the customer to sign.

Huntington and other banks also are looking at home banking through the Internet as a way to make fund transactions more convenient. Huntington says it might use the Internet as a way for customers to place orders and redemptions. Huntington and Wachovia Corp. of Winston-Salem, N.C., are seeding an effort by Cardinal Bancshares, in Lexington, Ky., to create access to the Internet as a venue for home banking.

DST Systems Inc., a Kansas City, Mo., company specializing in mutual fund record keeping, also is working with mutual fund companies to make mutual fund transactions available to customers through Prodigy, Compuserve, or the Internet.

Such in-home banking would be more convenient than making customers go down to the corner ATM, some say.

"You're just a phone call away from your mutual fund provider," said an executive at DST Systems Inc. "Why should you drive down to the ATM machine?"

Nonetheless, the banks offering ATM access seem committed to it.

Citi and Fleet allow customers to trade shares of money market mutual funds over the ATM, while Wells Fargo also offers access to equity funds through the ATM.

Executing equity and bond trades is more complicated because of the fluctuation in share price. Wells deals with this by only allowing a customer to redeem up to 80% of a holding on any business day, putting the cash from the sale into a linked checking account, and making it available in two days.

Citicorp, noted for its advanced ATM technology, says it plans to go full steam ahead.

Last fall, Citi began allowing customers to trade stocks and bonds at the ATM, and it still plans to add other capabilities, including access to its proprietary Landmark equity funds, and ultimately, to third-party funds.

"Our bottom line is that we want to make as many transactions available at the ATM as possible," said Ed Dixon, a spokesman for Citicorp.

Observers say banks are turning to other electronic delivery systems - home banking or interactive kiosks - to sell mutual fund products.

"A lot of mutual fund complexes are looking at the Internet as the new wave of technology to make their products available to consumers," Ms. Hanson said. "They're skipping over the ATM fad and going straight to the Internet." That's even more convenient than making someone stand on a street corner.

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