Four years into the era of surcharging, bankers are changing their tactics for deploying automated teller machines.
They are being much more careful with site selection, having realized that not all locations get enough traffic to be profitable even with the ability to tack on a fee to the cardholder. To continue to succeed, some industry experts predict, ATMs will have to evolve beyond banking and cash dispensing to selling postage stamps, for example, and screen advertising.
"I'm not going to say there is saturation, but everybody is picking and choosing their sites more than they were," said George L. Albright, chairman of Speer & Associates, a consulting firm Speer & Associates.
The Nilson Report newsletter said the number of ATMs in the United States grew by 16% in 1998, to 215,000. That was down from 21% the year before.
Atlanta-based Speer concluded, based on a recent survey of the top 250 ATM-deploying banks and nonbanks in the United States and Canada, that the current growth lags the 25% to 30% clip experienced in prior years.
Mr. Albright, who estimates there are 225,000 ATMs nationally, predicted that growth in 1999 would drop to 10% or less, falling further to an average of 7% for the next three years. Mr. Albright said the ATM base will likely plateau at 275,000, with growth of only 4% or 5% beyond 2002.
David Robertson, president of The Nilson Report in Oxnard, Calif., attributed a 3% decline in new ATM shipments last year to preoccupation with year-2000 conversion issues. He anticipates a recovery after they are "out of the way."
Bank One Corp. is a prime example of a deployer that learned the hard way that the off-premises market was not as easy as it seemed.
"Not every location is going to provide the kind of transaction volume that will make this a viable program," said John S. Skubik, president of electronic delivery for Bank One's retail group, which, he said, "paid for its education."
Bank One embarked on an aggressive off-premises ATM initiative in 1997, making the bold prediction that it would increase its network 10-fold in three to five years, to 20,000 machines. The bank announced deals to install thousands of machines in chains like Rite-Aid, Sears, and Mail Boxes Etc.
The machines, dubbed Rapid Cash, were intended to deliver just that - and to earn fees of $1.50 from most non-Bank One customers. Its own customers typically pay $1 at Rapid Cash machines.
"It was a commercial venture," said Mr. Skubik, a former First Chicago NBD Corp. executive who was placed in charge of the ATM business after his bank merged with Bank One.
By mid-1998, Bank One had "someplace north of 6,000" Rapid Cash machines in all 50 states, Mr. Skubik said. Now there are about 3,200 in 34 states.
"Starting about a year ago, we took a real close look at that and have reduced the number of machines," Mr. Skubik said.
"We're not in all of the retailers that we were in a year ago," said Mr. Skubik, declining to specify which ones were cut out. "We're going to keep on looking at our network and making sure we have the right number of machines in the right locations delivering the right number of transactions."
Meanwhile, transaction growth is slowing nationally and may even be backsliding. Comparing annual averages reported by deployers, Speer suggested that ATM transactions grew by about 7% in 1998, down from 12% to 15% in previous years.
A survey by Chicago-based Bank Network News in March indicated that ATM transactions in regional networks shrank by 2.4%, to 907.4 million, in the nine months through March - though seasonal factors and a change in survey format may have contributed to that.
Declining transactions and the recent boom in machines at locations of all sorts adds up to fewer monthly transactions per terminal: 3,997 in March, versus 4,973 in June 1998, according to Bank Network News.
Some observers say the rapid growth and consumer acceptance of debit cards at the point of sale may be limiting ATM use.
Bank Network News said that as of June 1998, ATM transactions represented 86% of all transactions on electronic funds transfer networks, with point-of-sale accounting for the remaining 14% POS transactions. In March, the mix was 82%-18%.
"There are very few new locations left in the off-premises market for ATM deployment," said William G. Raymond, manager of ATM management and development for Bank of America Corp. "Of course, there are locations where we want to be, so there is a take-away market to explore."
In the aftermath of the merger of BankAmerica Corp. with NationsBank Corp., their combined ATM total held fairly constant, at about 14,400, for the last six months. This makes Bank of America Corp., the largest bank deployer by far, with about twice as many as No. 2 Bank One.
Alvin T. Sale, president and chief executive officer of First Union ATM Solutions Inc., a subsidiary of Charlotte, N.C.-based First Union Corp., predicts a "coming shakeout." Not only will survival be based on those who manage costs and risks most efficiently, he said, but it will also require more-sophisticated uses for ATMs.
It is no longer uncommon to be able to purchase stamps or prepaid phone cards at an ATM. Banks are also beginning to explore a variety of advertising opportunities, including full-motion video advertisements on screens and coupons on the backs of transaction receipts.
Major banks are even staking out tourist attractions and touting the unusual locations of their ATMs. Fleet Financial Group of Boston says its ATM atop the World Trade Center in New York City is the highest in the world, at 107 stories. (Of course, any ATM in Denver is a few thousand feet farther above sea level, but this is marketing.) KeyCorp has an ATM jukebox at the Rock and Roll Hall of Fame in Cleveland.
First Union, which Mr. Sale said grew by "approximately 1,000" ATMs last year, to 4,000, recently started selling stamps and prepaid phone card vouchers at certain locations.
Mr. Sale said he saw endless ATM possibilities for when "you need something tangible." Theater tickets, lottery tickets, or money orders could be just the beginning of what the bank likes to think of as an "electronic vending machine." Check cashing and electronic bill paying are also part of the vision.
Wells Fargo & Co. touts itself as the first major bank to sell stamps and ski-package vouchers, and says it is one of the pioneers of on-screen advertising. It is doing a joint promotion, for example, with Amazon.com, offering customers who enroll in Wells Fargo Online Banking a $10 discount on books.
Pittsburgh-based PNC Bank Corp. has added about 250 ATMs in the last year and is currently at about 2,800. "Our No. 1 goal is to provide locations that are very convenient to our customers," said James S. Walker, manager of self-service banking. "The second part of the strategy is to add more features and functions to those ATMs. It's really good business for us in terms of trying to attract folks who want to bank with us."
Not all of the leaders plan to use ATMs to reap ad revenue or distribute noncash items, however. U.S. Bancorp says it has not determined that expanding beyond bank services makes good business sense. With phone cards, for example, it is expensive to buy the inventory, deliver it, and keep track of it, said Marge Utke-Christianson, vice president of network services. Often, phone cards can be bought just steps away from an ATM at a store counter anyway.
Instead, U.S. Bancorp concentrates on providing comprehensive banking services like mini-statements and access and transfer capabilities among numerous accounts.
"We always are on the lookout for ways to add," she said. But "so far, cash is really the bread and butter of a location."
The Minneapolis bank has about 3,600 ATMs and expects to end the year with 4,000, a 20% increase over yearend 1998.
Besides its own Ubank ATMs, both on and away from bank premises, U.S. Bank offers merchants the option of a generically branded ATM, which typically impose a surcharge for the convenience.
U.S. Bancorp has also made a big investment in computer infrastructure and not only processes for all of its own ATMs, but also supports 7,000 others, including those from its acquisition of Mellon Network Services. The additional processing business makes a big difference in offsetting the bank's ATM costs, said Ms. Utke-Christianson.
Liam Carmody, president of Carmody & Bloom Inc., a Ridgewood, N.J., consulting firm, says there are two schools of thought about expanding ATMs' functions. Adding more options can attract users, but it can also lead to long lines.
Mr. Skubik of Bank One said he was mindful of customers' interest in speed. "I'm not sure what our customers would think if we started showing movie previews while they are standing there trying to get cash," he said.
KeyCorp, which has been testing full-motion video advertising, will soon invite customers to submit family profiles that can be useful in "offering financial solutions to our time-starved customers," said a spokesman. During an ATM visit, a customer may, for example, be reminded that his wife's anniversary is coming up and be offered a 10% discount with a flower company.
American Express Co. has jumped into the remote ATM fray. Until recently owner of a modest 165 machines intended as a convenience in its travel-and-entertainment card program, the company purchased nearly 2,800 ATMs from other deployers in late 1998. They are in K-Mart and Target stores, Shell Oil and Circle K convenience stores, and Giant Foods supermarkets, among other locations.
According to a recent survey by the consumer watchdog U.S. Public Interest Research Group, 93% of financial institutions levy surcharges on noncustomers, against 71% in 1998. The larger banks responding to the Speer survey charge an average of $1.50 per transaction.
Though some observers say consumers have come to accept surcharging as a fact of life, others say the fees have contributed to the decline in transactions.
Volume and income changes have turned many institutions' attention to profitability management, said Steven Karp, senior consultant of First Annapolis Consulting in Linthicum, Md. Banks are concentrating more on managing current assets and increasing revenues on a per-terminal basis.
After its merger with Norwest Corp. last year, Wells Fargo has about 1,700 of its 6,300 ATMs at nonbank sites. Now "the focus is more on on- premises, the focus is on overall customer service," said Robert Chlebowski, executive vice president of distribution strategies.
"ATM revenue continues to grow," he said. But "when we look at the profit of the business, we look at it in the context of the total servicing equation for the customer."
KeyCorp looks to its off-premises ATMs to make a profit, but it concurrently aims to add convenience and promote brand awareness in new markets. In 1998, the bank deployed 700 ATMs in Arco gas station Minimarts in five states, three of which - California, Nevada, and Arizona - were new to Key.
Overall, says KeyCorp, ATMs do not make the bank money, but profit from the off-premises market helps balance the costs of ATMs in branches.
"The ATM channel as it is traditionally looked at is a cost of doing business, not a profit center," said Jack J. Kucler, executive vice president of Key Electronic Services. On the other hand, "we don't do off- premises unless we make money." n
In Their Own Words
Excerpts from recent American Banker interviews with top card executives
A. Sami Siddiqui
"We are focused on getting wallet share of our current customers. Citi is calling its current customers to invite them to apply for other cards with us. We have done a lot of behavioral studies, and consumers feel secure having multiple cards. As an institution, we want to understand how they use those multiple cards - one might be used for emergencies. We are going to say to them, 'You don't need to have so many cards with different banks.' (For example), 25% percent of our AT&T customers already had a Citi card."
Richard Vague
"What we will be doing this year is continuing to increase our emphasis on the Internet. We have continued to be very aggressive in signing deals with major Internet companies to market our credit cards, and we believe that will continue to bear fruit for us. We have also launched WingspanBank.com, and that will be a source of credit card business . . . As relates to our existing customers, we are continuing to offer our Internet service to them. We are signing up 80,000 customers a month for our First USA.com service."
Richard Fairbank
"The card business is getting more and more competitive. At this point, there are only three or four issuers that are actually growing by indigenous growth - organic, internal growth: Capital One, Providian, MBNA, and First USA. . . That is such a radical change over how we have known the card industry. In the old days, the industry was growing rapidly. Margins were high, and the cost to acquire an account was lower than it is now. The chargeoff levels have gone up, at the same time the receivables growth has gone down. Many issuers have found that originating their own accounts is a very difficult, expensive business."
Michael Urkowitz
"Expectations are there will be an even smaller number of remaining issuers in five years, and we intend to be one of them. The course we're on is consistent with that, but it's very particular. . . For the rest of the year you'll start to see us growing again. We have increased marketing spend, and as we build our plans for the next year, we will be increasing marketing spend again. We see the base of growth accelerating next year, and we understand the trajectory we have set.
"What drives growth? Part of it is new segments, including the corporate and commercial segment. . . . and ethnic markets."
Shailesh J. Mehta
"We need to reach households in a way that each household feels that doing business with Providian is a convenience. Whether I reach them through the Internet, direct mail, or telephone - that is something I want to let customers decide. . . I want to establish a primary lender strategy. Once I establish the relationship, I want to be the key banker, and I want to make sure I have the largest share of business. That has been working very well for us. . . Another place to grow is to minimize the declines due to inflexible products and pricing. I want to have a flexible product design, so that I can say yes to more people."
