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Tied to Cash: The Future of ATMs

Tied to Cash: The Future of ATMs

Source: BAI Banking Strategies

ATMs will continue to survive as long as cash remains a part of the payments mix - which means a long time. Deployment and revenue models, however, will change.

By David Dove

The rapid growth of debit and prepaid cards has influenced the way people pay for goods and services, manage to a budget (particularly in the last few years) and rely on and/or carry cash. Add some of the newer/alternative payment mechanisms to the mix and the threat to traditional form factors such as checks and cash increases significantly.

So where does that leave ATMs – devices that continue to deliver a value proposition based largely on cash access? The answer to that question hinges on your view of the future of cash.

Cash Hangs Around

For years, industry pundits have been forecasting the death of cash and characterizing it as a form factor that has outlived its useful life. If they are right, which I don’t for a minute believe, you have to question some relevant facts. For example, according to the latest Federal Reserve payments study, U.S. consumers conducted six billion cash withdrawal transactions at ATMs in 2009 (an increase of 0.9% from 2008) with a total value of $647 billion (up 3.8% from 2008). That amounts to about 31 visits and $3,329 for every U.S. resident over the age of 17 during 2009.

Based on prior work and other data, I believe that the Fed has underestimated cash withdrawal transaction volume in the U.S. and the real number, including the use of prepaid cards at ATMs, is more like nine or 10 billion. Just by way of contrast, in Canada, where the use of ATMs has been falling, average cash withdrawals amount to about 38 per year for every person over the age of 17, more than 20% higher than the U.S. if the Fed figure is correct, which I believe it is not. Whether you believe the Fed’s number or not, growing transaction volume and value doesn’t give credence to the idea of a death knell for cash.

Also, consider that deploying and maintaining the estimated 400,000 ATMs in the U.S. was and remains a significant financial commitment. If the average capital to fully deploy an ATM is around $30,000 and average monthly cost to operate is around $1,450, as noted in the 2006 ATM Deployer Study by Dove Consulting, we’re looking at a total capital investment of around $12 billion and annual operating expenses of another $7 billion on a U.S. industry-wide basis. Financial institutions and independent deployers continue to make this investment because they see a consumer need and have the ability to generate revenues based on use (surcharges, interchange, etc.). Again, not a strong vote supporting the death knell of cash.

Finally, consumers continue to support ATMs, both in terms of increased visits and the importance they attach to this channel as they make decisions regarding which financial institution to join and stay with as a customer, according to a recent study on ATM usage conducted for Cardtronics by Dieringer Research Group. In the Dieringer survey, for example, 74% of respondents cited convenient ATM locations as important in their decision to choose a bank.

Clearly, despite many predictions to the contrary, cash is not going away and neither are ATMs. So the question, particularly with new fees being introduced in the wake of the Durbin Amendment, is: just what do consumers think about ATM fees and how do they influence their use and choice ATMs?

The Surcharge Issue

The presence and amount of a surcharge is by far and away the largest influencer of consumer usage and choice of an ATM. Based on the Dieringer work conducted earlier this year, surcharges influence 60% of the consumer’s decision to use an ATM; other factors such as location/access, security and bank brand all pale by comparison (below 15%). The amount of the surcharge is just as important – the higher the fee, the more resistant consumers are to using the ATM. Interestingly, even a surcharge as low as 50 cents drops likelihood to use by a third.

While the bank brand on an ATM is less important a factor in usage than the presence of a surcharge, it is still meaningful (30% likelihood to use), when compared to using an ATM branded by another bank or one branded by a retailer. And those numbers include a $2 surcharge imposed by each of the three options, according to Dieringer.

Finally, while revenue derived from surcharges is undeniably strong for ATM deployers, raising these fees too far or too fast will generate negative impacts. Certainly, consumers do not like increased surcharges, but the problem goes deeper. At least in the current market, the revenue potential of ATMs – the product of price per use and number of users – maxes out at $3. Ten years ago, this would probably have been $1 or less. Who knows what it will be a decade hence, particularly now that at least one of the larger financial institutions with a very strong ATM network is testing $5 surcharge levels. People get acclimated. They also get turned off.

So, what does this foretell for ATMs? First, they are here to stay for the foreseeable future. Second, my guess is that more banks will be looking at how they can reduce channel costs, and ATMs will be one part of this solution. Third, I believe that smaller financial institutions will explore how they can broaden their channel (ATM) footprint as a way to offset ATM advantages enjoyed by the largest banks. Branding third-party ATMs, joining surcharge-free alliances and participating in fee-free (no surcharge or foreign fees) programs that effectively magnify the financial institution’s on-us network will become very popular and cost-effective steps.

Finally, and most interesting to me, ATMs located in retail locations will become revenue drivers for retailers. As consumers start using these ATMs more, retailers will move away from their legacy revenue-sharing thinking to a new model where the ATM helps drive store traffic and sales. We are a long way from this, but we will get there.

Writing for BAI Banking Strategies, Mr. Dove is managing general partner with Beaver Creek, Colo.-based Dove Capital Partners LLC, a venture capital and consulting firm focused on two sectors within financial services – payments and alternative channels. He will be speaking in more depth on the topic of reinventing the ATM channel strategy at this year’s BAI Retail Delivery in Chicago on Oct. 12. He can be reached at

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