THE AUTOMATED teller machine has become an indispensable part of consumer banking since its introduction a little more than two decades ago. It's a success story that provides an excellent model for financial institutions seeking to understand how customers react to new technologies and the potential those technologies hold. From its infancy as a branch add-on to today's incarnation as a strategic source for fee income, ATMs are a critical component in any institution's strategy for success and growth.

By contrasting the ATM's recent history with that of the teller, who has been a banking fixture for several hundred years, one might be prompted to question why the teller hasn't become as rare as the thousand dollar bill. As Mark Twain once said, "the reports of my death are greatly exaggerated," and so too are the predictions forecasting the end of branch tellers.

Twenty years ago the ATM was solely a proprietary product, used primarily as an adjunct to regular banking services. It was born in an age when payment was by check and direct deposit was far from commonplace. In this climate, bank marketing campaigns were aimed at educating customers about the convenience of ATMs as a source for conducting transactions after normal business hours.

The ATM was also proprietary because shared networks did not yet exist, and more importantly, because the legal system defined ATM as a branch and therefore subject to state laws limiting number, location, and capability. With the advent of shared networks, those state laws that restricted ATM growth were rewritten to reflect the extended and practical use of transferring and withdrawing money across legal boundaries. The laws that limit transactions by geographic location also were questioned.

Today, state laws governing branching and holding companies have changed to the point where in most states some form of statewide branching is now legal. States such as California, Florida, and Texas were so saturated with the traditional brick and mortar branch networks that today many of those branches and locations sit empty, a testament to the 1980s and early 1990s when consolidation, mergers, and the S&L catastrophe forever changed the face of the financial industry. Where once a branch stood, now only an ATM remains.

Banks initially viewed ATMs as a technology in need of a marketplace. This attitude led to initial installations being little more than attachments to traditional full service branches, marketing after hours service and convenience. Not long after, ATM vendors began selling banks on the idea of using the ATMs as a replacement for tellers, increasing ATM sales and worrying more than a few tellers in the process. Financial institutions embraced this idea and started adding machines with this goal in mind.

However, the lesson many banks learned in pursuing a replacement strategy is that the associated costs of ATM transactions and teller transactions are, in many cases, equivalent.

Labor is really the only cost reduction realized for a full-service branch with an ATM. Facility and other support costs of a branch are more or less fixed (short of closing the branch). A teller can handle 30 to 35 transactions per hour during normal banking hours at a labor cost of around 30-35 cents per transaction. The per-transaction cost of a branch's ATM is around 33-35 cents. With equivalent costs, the decision on an ATM versus a teller becomes one dependent on the type of customer served.

An older consumer base more comfortable with traditional services with usually require a branch or physical presence for delivery of banking transactions. A younger or more remote customer base with tend to depend on ATMs and other electronic delivery systems such as telephone banking and home banking services.

Some banks are taking the "hub and spoke" approach for delivering branch services, using a combination of the full-service branch, ATM, and telebanking services. With this approach, the full-service branch is strategically located in the highest density areas, offering the full complement of teller, lending, and investment services in one location. The branch acts as a "hub" connecting its "spokes."

One of the "spokes" is the ATM network, a network of freestanding machines serving the hub branch's area. The network consists of fullservice ATMs that dispense cash, accept deposits, and perform other electronic transactions, and ATMs that act as cash dispensers only, located in high-traffic areas such as shopping centers, college campuses, and grocery stores. The cash dispenser machines should be strategically located in order to generate fee income from other banks' cards. The importance of this stems not only for the profit they derive for the bank but for the ability to support the costs associated with maintaining a network for the hub branch. From a customer service and marketing standpoint, the ATM network underscores the importance of convenience as a deciding factor for customers to consider when choosing a bank. Strategically located ATMs reinforce customer satisfaction for those depositors with an ATM card corresponding with the machine. At the same, strategically located ATMs give bank card holders from other institutions reason to reassess the qualities and services that keep them with their respective banks.

Another spoke connecting the hub is the bank's telebanking system. Most banks view the branch delivery system as an order taker and transaction processor instead of a sales opportunity for marketing products and services. The same attitude has spined into the design of many banks' home banking systems. Traditionally, telephone services have been implemented on a department-by-department basis, acting as little more than an automated operator directing calls and inquiries to proper departments.

The result is a telephone customer service that functions primarily as an order taker. A large midwestern bank took an innovative approach to its telebanking services, creating an important spoke in the hub-and-spoke network. By converting its branches' telephone customer service operations into a retail electronic branch responsible for supporting afl products and services, the bank was able to increase sales and process additional transactions.

The electronic or telebranch can be supplemented with technology such as voice response systems and autodialing systems. The audio response system handles the routine calls such as balance inquiries, leaving the live staff to handle services such as loan by phone and new account openings. The autodialer also allows the same branch staff members to become telemarketers by selling products and services to qualifying customers. The ATM is again a key component in delivering information such as an on-line statement.

The electronic branch telemarketing spoke is driven by information gathered from reports such as ATM usage and voice response usage. These services are being used by individuals who do not normally use traditional bank services.

Yet for all consumers who use the convenience services such as the ATM and voice response systems, there will always remain bank customers who still demand traditional bank services. The same reports that are used to produce demographic information about these users can also target traditional bank customers. By capturing this information, the bank is in the position to generate profiles used to market to the traditional bank customer.

In addition, the demographic information can be used to determine the viability of existing branches as wen as the potential for future branch locations. This information can be used to modify existing branches in order to support and deliver products and services for changing markets. For example, a branch in a retirement-age market will need to shift its focus to products such as trust and investment services.

There is another spoke - often overlooked when developing the hub approach, yet essential to the success of a bank's delivery system. The ability to support these various delivery products relies on the customer information file, which must be continually expanded to accommodate more information about the customer and branch markets - including financial statements, types of products, and services currently used.

A developing spoke that will eventually provide an additional dimension in banking services is interactive video communications. The interactive video service will combine the features of the ATM, voice response, telephone customer service, and person-to-person contact functions into a new delivery system. Though still far from being an everyday reality, the technology for a telecommunications infrastructure will enable customers to enjoy virtually unlimited access to their institution's services.

The ATM has enjoyed a successful and colorful history, as has its human forerunner, the teller. With a focus on using the best aspects of both, a bank can set up a branch system that capitalizes on serving diverse consumer markets. While an ATM will probably never replace the teller, it can certainly be more than a cash machine. And in some cases, it can be profitably just that.

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