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Back To The Future

With the ATM surcharge boom over, banks are once again turning their attention to customer service.

Now that the decade-long, surcharge-fed wave in ATM expansion has abated, banks are being forced to rethink their ATM deployment strategies, as the game shifts from installing new machines toward getting more out of those in place.

Indeed, although thousands of new ATMs are installed throughout the United States each year, the rise in the number of machines has been accompanied by a decline in utilization. Average monthly transactions per ATM are projected to fall from 3,125 this year to 2,310 by 2005, according to Celent Communications. Likewise, average annual transaction fees per ATM will fall from $6,173 to $4,947 during that time period.

Part of the reason for the decline is the use of debit cards at the point-of-sale. With 25 percent of all debit transactions at supermarkets involving cash back, people don't need to visit the ATM as often.

But part of the reason has also been the inability of banks to turn ATMs into more than cash dispensers-to use them to sell products as mundane as stamps and as sophisticated as auto loans, or to cash checks. Some 77 percent of ATM transactions are still cash withdrawals, with the rest basic banking functions (balance inquiries, transfers and deposits), according to Dove Consulting.

"Over 80 percent of our customers use ATMs," said Michele Mullee, senior vice president of ATM services at Cleveland-based KeyCorp. "What a great vehicle for communicating with them, and we don't." ATM manufacturers are partly to blame, she said. "No one has developed a strong enough program that's cost effective that would incent a bank to do it."

"The needle hasn't moved," said Tony Hayes, research director at Dove Consulting. "Partly it's a question of adoption. Partly it's technology. And partly it's a question of the functions themselves."

Take stamps, for example. "A good deployer sells 100 sheets of stamps a month," Hayes said. "So for an extra $25 in profits, you've got to buy stamps, stock the machines, and use up one more cassette."

Small wonder, then, that banks are being selective about introducing new features. "The new frontier has been mini-statements," said Hayes. About 32 percent of all banks offer them. At $1 a pop, that's considered a safe investment.

Still, few would have anticipated a glut in ATMs when they were introduced in the 1970s. Then, and for many years after, their raison d'etre was efficiency-to lower a bank's distribution costs by moving people off the teller lines. But in the 1980s, banks noticed that people continued to visit branches, albeit not as frequently, so that with the added costs of ATMs, overall distribution costs were actually rising. Then, in the mid-1990s, came surcharges, which fueled the proliferation of off-premises ATMs, which led in turn to the current overcapacity.

"After the surcharge boom years, the industry experienced a period of transition with declining volumes per ATM, increased competition, and declining profitability," according to Hayes. "Now we are seeing the industry come full circle, from customer service-based to profit center back to customer service-based."

Today, as in the early years, banks are viewing ATMs in the context of their other distribution channels, which now include the Internet and call centers. "Our ATM strategy is part of a larger distribution management strategy," said Mullee. "We're looking at identifying gaps in distribution strategy."

Of the 324,000 ATMs deployed in the United States, according to a Dove Consulting study, 169,000 are bank-owned, located either in a branch location (131,000) or a non-branch location (38,000) such as airports, malls, hotels, etc. The remaining 155,000 are owned by independent service organizations (ISOs), and are deployed in retail locations, chiefly convenience stores, gas stations and supermarkets. Thus,193,000 machines are located outside of a bank branch (155,000 ISO-owned plus 38,000 bank-owned), or about 60 percent of the total.

The ratio of off-premises to on-premises ATMs (60 percent to 40 percent) has remained constant for the past several years, following a period of surcharge-fed growth in the off-premises market.

Location is the most important determinant of a particular ATM's usage. Last year, according to Dove Consulting, on-premises ATMs generated 4,479 transactions per month, on average, compared to 1,918 transactions per month for off-premises ATMs owned by a financial institution. ISO terminals generated an average of 600 transactions per month.

Retailers are becoming more selective in their choice of ATM locations, experts say. "Initially, their thought was just have an ATM everywhere, that it would make money," said Key's Mullee. "They've realized that's not the case. Good volumes and good locations are what counts."

As existing contracts expire, merchants are going to be shopping, she said. "The merchants are a lot smarter now. It won't just be the money they can get. It will be the services they can get from their deployer."

ISOs typically work through leasing companies, much as auto dealers do. "An ISO will buy a machine off an OEM and have salespeople that will work with two or three leasing companies," said Mike Tharp, senior marketing manager at Diebold, a North Canton, Ohio-based ATM manufacturer. The lease includes capital cost plus second-line servicing, parts and disposables. The ISO typically splits the surcharges with the retailer, with the retailer getting the lion's share, according to Tharp. "The business model is sensitive to both capital and ongoing labor costs, which is built into lease price."

Yet rising costs have made the business case for off-premises ATMs-once so clear cut-problematic. The average monthly cost to own and operate an off-premises ATM increased by $282 between 1998 and 2001, to $1,298 per month, according to Dove Consulting. Large credit unions have the highest cost structure ($1,624 per month), while ISOs with fewer than 1,000 machines have the lowest ($732 per month).

Large ISOs incur expenses similar to those of large financial institutions. "Scale is not a panacea for containing ATM expenses," according to Hayes. "The areas for leverage are merchant contracts and retooled cash management and replenishment strategies."

No retailer has been more ambitious or successful with ATMs than 7-Eleven. Last year, the Dallas-based convenience store chain began operating its Vcom kiosks in 94 stores in Texas and Florida, and plans to install them in 1,000 stores by the end of the year. The Web-enabled kiosks, built and maintained by NCR, merge ATM capabilities with Internet-based applications and 24-hour, touch-screen convenience. Capabilities include ATM transactions, Western Union money orders and money transfers and check cashing through Certegy Check Services.

The service is aimed at taking a bite out of the check cashing industry. According to recent industry statistics, 30 million people cash 180 million checks valued in excess of $55 billion at check-cashing establishments. During the pilot, 7-Eleven is offering free check cashing membership enrollment and promoting the new service through advertising, in-store signs and special events, all aimed at consumers who use a check cashing service.

To use the Vcom check cashing service, a customer inserts a specially-issued card and the check into the Vcom kiosk, then enters a PIN and pertinent information about the check via the touch screen. After the check is verified, authorized and approved, the customer receives the cash, minus a transaction fee. The transaction fee is comparable to that charged by other check cashing establishments, but the typical Vcom self-service transaction takes less than two minutes.

7-Eleven has fared better with check cashing than did Innoventry, a defunct San Francisco-based company that had installed some 700 Web-enabled, check cashing kiosks in retail outlets in supermarkets, convenience and mass-merchandise stores.

But the Innoventry solution, which employed face-recognition technology, ultimately proved too expensive. "Innoventry was using a Cadillac solution," said Dove's Hayes. "You need to have a cost structure that's appropriate."

Check cashing is one of two advanced functions that are getting the most attention from financial institutions. The other is check imaging. "Check cashing and imaging are the big ones," said Key's Mullee. "We're seeing a rush of development from the manufacturers and processors to support those functions."

The Check Truncation Act (CTA) has breathed new life into check imaging, which like check cashing has been on the back burner for most institutions. The CTA, now before Congress, would allow a bank to transmit an image of a check and truncate, or destroy, the original. "Right now, a deployer has to visit an ATM every day to pick up deposits," said Hayes. "With CTA, you can image the check and provide an image statement back to the consumer. The image becomes the legal equivalent of a check."

Check imaging would allow machines in remote locations to accept deposits, he added. "A lot of locations that don't take deposits, especially off-premises locations, now can become viable."

Many banks are preparing for CTA. "Banks are in a pre-CTA strategy," said Diebold's Tharp. "That could include adding imaging. Once CTA passes, they can truncate checks at the ATM, providing additional savings from reduced courier costs."

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