banking habits. They have changed people's lives. Arguably one of the most significant new products of the post-World War II era, ATMs brought computer power to the masses. Each day they deliver banking services to more than 22 million people in the United States. Worldwide, consumers use ATMs over 25 billion times a year. These devices provide unexcelled time and place convenience and make that most precious of commodities, cash, as accessible as a cup of coffee. Consumers greatly value the time saved by ATMs. According to a recent study by AT&T Global Information Solutions, over two-thirds of users believe their lives would be more difficult without them. Against this backdrop of unprecedented success, however, are some aspects of the ATM business that many industry observers find troubling and difficult to understand. In the midst of the industry's headlong rush toward electronic banking in all its forms, what will be the long-term role of the ATM? Can the promise of the ATM-based, self-service retail branch be realized? Or are ATMs destined to be left behind, functioning mainly as limited-function vending machines for a cash-hungry population? These questions are especially pertinent as the banking industry seems poised to enter into a second generation of electronic banking that goes beyond the familiar level of credit cards, debit cards, ATM withdrawals, and primitive home banking. This next generation will see consumers conducting a significant portion, if not the majority, of their banking transactions through new or enhanced electronic-based channels. They will do this not only through improved ATM functionality, but also through a combination of touch-tone telephones and personal computers, supported by personal financial software and network access through the Internet. So where do ATMs fit? Bankers should view ATMs as the centerpiece of a strategy to move into the second generation of electronic banking. With the introduction of technology which is providing new ATM applications, they can finally offer consumers a bona fide alternative to branch banking. Consumers will do their banking at "electronic banking workstations" where they will cash checks to the exact penny, deposit their checks with on-screen imaging for verification, pick up a current statement, or even speak to a banking specialist face to face through full-motion video. Banks should move quickly to implement these advanced-function ATMs for use by their own retail customers. These proprietary initiatives will be one of the key points of distinction between banks in the future. And banks should not sit and wait for their electronic funds transfer networks or MasterCard and Visa to develop the functionality for them. It will be some time, if not forever, before ATM-delivered services will be available on an interbank network. The capability to deliver these services to a bank's own customers through ATMs is here today. Banks need to take advantage of it now. For some institutions, the development of an off-premises ATM network is also an attractive opportunity. The economics of the business are favorable, and there seems to be no shortage of locations that can support a profitable ATM. Unlike the full-service electronic banking workstations, these ATMs will retain their basic cash-dispensing functionality. If for no other reason than that they are located in high-traffic retail environments, they will continue to be to cash what vending machines are to soft drinks. The off-premises business will be dominated by a handful of scale players like Electronic Data Systems and Affiliated Computer Services. From a banker's perspective, ATMs should be the foundation of efforts to reduce costs and provide added convenience to the consumer. Thanks to the rapid advances of personal computer technology, ATMs now have the enhanced functionality that has been talked about for years. But are consumers ready for the new flowering of electronic banking? And if they are interested, will they take full advantage of it? The world of branchless banking has been predicted for quite some time. More than one banking executive would be embarrassed to listen to a speech that he gave years ago about the imminent automation of retail banking. Why should it be different this time? It should be different because the technology, consumers, and bankers have all changed. The technology not only does more - it works better. With better graphics, better navigational logic, and better reliability. Consumers have 20 years of experience with ATMs. They are ready, and in some cases eager, for the opportunity to do more at the ATM. For the one- third or more of the population now considered computer literate, ATMs seem almost charming in their simplicity. As for bankers, they are more willing than ever to offer new services for the consumer. Another reason to be confident that electronic banking is going to happen is the acceptance rates in many countries outside the United States. But perhaps the best reason to be confident is that it is already happening here. As reported elsewhere in this special report, bankers are innovating as never before, placing ATMs in the broader context of enhanced electronic distribution, and consumers are responding. But how will the more advanced ATMs stand up with the new "anytime, anyplace" electronic banking channels of the telephone and personal computer? Some say ATMs will be no match and slide into obsolescence. Well, the truth of the matter is that American consumers are a mobile lot, usually by car. We travel readily from the school to the supermarket to the ATM. As long as the ATM is fast, safe, and comfortable, most consumers will find it an attractive means for doing their banking. They have an advantage in that consumers are familiar with them and are already using them. There are no complex decisions to make about what software to purchase or to load on a computer. Insert the card and you're ready to play, essentially borrowing a simple computer for a few minutes to do your banking. The bottom line? If properly developed, meaning with user-friendly graphical interfaces and appealing visual designs, electronic banking by ATM can win handily over telephone and PC alternatives for all except a minority of active home PC users. Though most banks now believe that advanced-function ATMs are inevitable, they are less clear about the cost justification. The best thing one can say about the revenue opportunities is that they are unproven. Most banks do not charge for any of these services in their own ATMs. And the few that have charged for specific services have not fared well. The economic justification falls back, therefore, to cost reduction. High costs in retail banking continue to be a major strategic weakness. The retail operations that are supposed to be a cheap source of funds for most banks cost about 80% more than in other industries such as mutual funds. The banks' extra expense consists mainly of brick and mortar. Banks need to eliminate this cost differential one way or another. Mergers and acquisitions are one popular tactic. Electronic banking is another, and one that will ultimately have to occur, no matter how big the bank. But banks need to do a much better job of measuring the cost reductions that occur as volume shifts from labor-intensive transactions to electronic methods. Sloppy and inadequate functional cost analysis is perhaps one of the biggest culprits holding back development. Achieving the promise of the second generation will require coordination among various industry participants. Driving the process should be the manufacturers, which are as familiar as anyone with the needs of the consumers and are creating the technology to deliver it. Manufacturers need to take the same aggressive role as PC manufacturers and software providers. They need to lead the market, to create new functionality for the customer. Associations such as Visa and MasterCard and the shared electronic funds transfer networks need to look for opportunities to deliver advanced functionality in the interbank mode. This will allow the overall banking system to provide a higher level of service through more locations. Banks need to lead the charge by selectively implementing and piloting the new ATM services. Banks should be aggressive in offering the new services and giving consumers the chance to use them. If it saves time and is easy to do, they will use it. Banks need to listen carefully to the feedback they are receiving and modify the services accordingly. It will require cooperation among the many companies that make up the ATM industry to ensure that the services are positioned and marketed correctly. The industry needs to merchandise ATMs just as retail branches have been merchandised. Examples are the colorful, attractive designs that beckon customers to Comdata's machines in gaming establishments, and Keycorp's jukebox ATM at the Rock and Roll Hall of Fame in Cleveland. The industry needs to develop intelligently designed screens that are sensible and easy to use. Inviting and aesthetically pleasing screens that exploit the power of CD-ROM technology are also crucial. And don't forget the need to keep persuading customers about the convenience through advertising, direct mail, and personal selling in branches. In short, ATMs need to be marketed just like any other product or service. Rather than think of it as an extra selling effort, banks should consider it as part of their overall marketing and communications program. As the second generation of electronic banking takes hold, electronic banking will become synonymous with retail banking, or at least a big part of it. Any resources applied to the advancement and communication of new ATM services will be in support of the future of retail banking. Electronic banking will be the battleground on which banks and other financial institutions compete. The first to get to that battleground and establish a position will probably win the day. Mr. Shanahan is a partner with Business Dynamics Consulting Inc. in Nyack, N.Y.

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