American Banker  |  Thursday, November 13, 2008

By Marc DeCastro

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The modern automated teller machine will soon be turning 40, and after years where the basic technology was relatively stable, it is suddenly going through a period of rapid evolution.

Several major banking companies, including JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp., and Wells Fargo & Co., are upgrading their ATM fleets or planning to do so, and these efforts are good news for the ATM industry.

Increased Functionality
Deposit processing is a good example of the new ATM capabilities that have caught the attention of U.S. banks.

Image-enabled ATMs can accept roughly 30 to 50 checks at once without an envelope, display the images on-screen, and print the images on a receipt. This bulk processing holds plenty of appeal to small-business owners with busy schedules.

Turning paper checks into electronic files enables banks to process the deposits faster, which makes the funds available sooner, and has further appeal for customers.

Bankers also benefit from lower transaction processing costs. The initial results have been so encouraging that JPMorgan Chase plans to install image-scanning capabilities at all 5,000 of its deposit-taking ATMs by 2010.

Cash recycling is another emerging feature that allows for the deposit of large amounts of bills and coins into an ATM. The bills are counted and the total is displayed to the depositor. The ATM then adds the deposited money to its supply of cash that is available for withdrawals. Cash recycling units in areas where frequent cash deposits are made can reduce the need for armored cars to restock ATMs.

Another area that continues to draw bankers' interest is personalizing the customer's ATM experience. More machines are remembering customer preferences and tailoring services according to frequent transaction behavior. For example, Wells Fargo's ATMs immediately display a customer's three most common transactions as shortcut buttons.

Some newly introduced ATMs have Internet connections that offer two-way interactions with a live agent, display personalized offers or ads for bank products, and include biometric security capabilities.

In addition, self-service automation within the branch is facilitating a range of services, including customer identification, line management, and service processing, combined with online banking capabilities. These enhancements are enabled by re-engineering multiple branch work flows — a process that frees up branch staff to process more complex transactions and account openings.

But banks need to weigh the benefits of deploying such technologies — especially if it increases the average transaction time. In particular, banks with one lobby unit should be careful about adding functionality that could create a line at the ATM and force customers back to their tellers.

Another benefit of Internet-enabled ATMs comes when it's time to service them. Banks can provide support vendors a more holistic view of their machines through a connection with a central monitoring system. This may allow things like informing the branch manager by e-mail or cell phone if a unit is low on receipts or has an easy-to-fix fault.

After 26 years of using proprietary ATM designs, Citigroup has finally joined the rest of the world, selecting NCR, Diebold, and Nautilus Hyosung Inc. as its ATM suppliers. Their machines will replace Citi's remaining 2,000 proprietary units in the United States. It has another 10,000 ATMs deployed internationally.

Among the issues facing Citi was closing the functionality gap, such as processing envelope-free deposits and taking advantage of modular ATM configurations. Current financial pressures may have also contributed to this decision.

Industry Challenges
Financial institutions face challenging and competing demands that will vary by market: Determining how the ATM/self-service channel facilitates customer acquisition, retention, and relationship optimization will be one set of demands. The channel's relevance in achieving success over other financial institutions and nonbank organizations will be another.

Some institutions are trying to identify how to use the ATM channel to serve various customer types, such as small businesses, with new services.

Evaluating the network operating strategy is yet another type of demand, balancing brand and control against cost and other variables.

Retailers and other establishments, looking to add value for patrons and gain rental and/or fee revenue, will seize on gaps in their market to create a competitive wedge against financial institutions and other retailers.

Network operators and independent ATM deployers (IADs) may have a long-term advantage over proprietary networks, particularly where equipment upgrades favor the operators.

Interchange fees may be another issue that affects participation in some markets. And regions that are experiencing rapid growth, such as China and India, may have intense competition to gain the upper hand as early as possible.

ATM vendors should be segmenting their customers by market and/or country. Particular attention should be devoted to deposit-taking institutions by analyzing customer preferences and identifying how customers respond to ATMs and self-service kiosks in the context of developing an effectiv multichannel strategy.

International Perspective
A "glocal" phenomenon is a global issue that has attributes unique to local markets. In this case, the fact that ATMs have achieved global penetration is well established.

The Asia/Pacific region now accounts for the largest share of the machines (about 31%), ahead of North America (about 29%) and Western Europe (about 21%). In many markets, nonbank or off-premise ATMs are well established.

Often the demand for ATM deployment is determined by banking practices and preferences at the country or regional level.

For example, the United Kingdom and Spain are both well-developed ATM markets. Both countries have over 1,000 machines for every million people, rivaling the United States and Japan for density.

The United Kingdom is the largest market in Western Europe, with about 64,000 ATMs deployed. Over the past several years it has been the fastest-growing ATM market there, because of a large increase by IADs.

U.K. bankers and ATM operators have a strong preference for concentrating on speed in processing cash withdrawals and minimizing ATM waiting time. In other words, cash is king.

In 1998 financial institution-centric ATM operating rules attracted the attention of the competition authorities and launched the IAD phenomenon. Following the success of ATMs at U.S. convenience stores, U.K. IADs now operate 6,500 machines.

Spain has been willing to innovate with multipurpose ATMs, offering ticket purchasing and other nonbanking services.

Over 20% of ATMs at Spain's third largest bank, La Caixa, are multifunction ones that let users buy tickets to cinemas, theaters, sporting events, and concerts, as well as pay bills, make cash or check deposits, and load prepaid mobile phone cards. Whether these types of non-banking features will appeal to the U.S. and U.K. markets is unclear.

The ATM may indeed be facing midlife issues in mature markets like the United States, Canada, and Japan. Some of the issues are tied to saturation, the development of competing channels through online banking, cash options at the point of sale, legacy infrastructure, institutional inertia, and costs. In addition, mobile capabilities and peer-to-peer payment options across public networks may add to the challenges.

ATM sponsors and market participants have to consider creativity, quality execution, and the total cost of ownership versus other options available in the local market. Co-optation may well be a common thread that stretches across most markets. Another may be the re-engineering of network capabilities that leverage infrastructure and connectivity improvements like the Internet.

Banks must take advantage of timing in both the replacement and expansion of their networks. Whenever ATMs are due for replacement, decision makers should be reviewing the mix of capabilities that may provide more revenue opportunities, reduce processing costs, enhance the customer experience, and/or leverage infrastructure and connectivity improvements.

Also, in considering market expansion opportunities, bankers should examine their machine mix to maintain the best balance for all locations.

It has been a long time since Chemical Bank first launched the modern magnetic stripe-reading unit in 1969 in New York. The machine only dispensed cash back then. It was not until 1971 that it was modified to accept deposits and transfer funds, becoming a true alternative to visiting a teller for most transactions. It has been around now for quite some time in some countries, but in some markets, the ATM is much younger, and the financial services needs it can fulfill vary by country.

As the ATM hits its milestone in the United States, it is certainly at midlife — but not necessarily having a midlife crisis. Things look good both here and abroad for the industry. If 40 is the new 30, ATMs have bought themselves another decade to penetrate markets, improve security, add functionality where it makes sense, and to prove that they will remain an integral part of banks' channel development.

Marc DeCastro is the research manager for consumer banking and credit at Financial Insights, an IDC company.

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