Branching out

ATMs are the most frequently used channel for customers to obtain cash today, according to the 2005/2006 Study of Consumer Payment Preferences (authored by Dove Consulting and published by the American Bankers Association). It is unsurprisingly therefore that ATMs are primarily considered as cash dispense devices. Dove Consulting’s 2004 ATM Deployer Study found that withdrawals accounted for 78 percent of ATM transactions in the US in 2003, and there has been little change in ATM transaction mix over the past five years. This despite efforts by ATM deployers to introduce new functions such as stamps and statements, which today account for only one percent of transactions.

FST asked Dove Consulting’s Senior Manager, Chris Gill, to give us the lowdown on the evolving functionality of the ATM and the extent to which financial institutions and their customers are currently realizing the considerable benefits of those developments.

The proliferation of ISO cash dispensers and the removal of depository functions from bank off-premise machines have reinforced the perception that ATMs are primarily cash dispensers.

Most ATMs offer the same basic functionality – cash withdrawals, balance inquiries, transfers to other accounts within the same institution, PIN changes, and deposits (primarily at on-premise ATMs). However, a number of new functions have been successfully introduced, both in the US and abroad. For instance, in the US, personalization provides cardholders with the ability to customize their ATM preferences related to ‘fast cash’ amount, language and receipt (offered by Bank of America and US Bank, among others). Some institutions, such as US Bank, even allow non-customers to establish ATM preferences. Personalization is likely to be offered by more institutions in the future. Other functions being offered include mini and full statements, loan payments (within the same financial institution, not to others), and postage stamps (offered by Wells Fargo and Wachovia, among others).

Outside the US, mobile phone top-ups are now possible from some ATMs, popular in Europe, Latin America and South Africa where there is more widespread usage of prepaid cell phones. This is less of a phenomenon in the US, where the only large bank offering it on a widespread basis is US Bank (‘Wireless Wallet’ service)
Other functions available overseas include prepaid card dispensing and reloading, offered in Europe and Australia, third party bill payment in Canada and Latin America and biometric identification, in Latin America (implemented to improve security for ATM users).

In the US, some deployers have experimented with other new functions (tickets, movies, ski lift passes, bill payment, and gift certificates, for example) in the past, but discovering that consumer demand was less than expected, they then discontinued offering these functions.

Future changes in ATM functionality and the user experience
A significant percentage of customers conduct all or most of their transactions using ATMs and other self-service channels. These customers are not getting exposure to marketing messages for the bank’s products and services being displayed in bank branches. Therefore, in the future, financial institutions need to increase the value of the ATM channel to both their customers and the bank by implementing strategies to leverage the ATM as a sales channel and strengthen the user experience provided at the ATM. Four primary opportunities exist to achieve these objectives:

•Check imaging
•1:1 marketing at the ATM
•Tailoring messaging to specific customer segments
•Tailoring functions based on the type of location

Check imaging
With check imaging (envelope-free deposits) the check is fed into the ATM, and the image of the check is displayed on the screen and also printed onto a receipt. The estimated cost of this function is an additional US$10,000-$15,000 per ATM, however there are a range of customer benefits of check imaging. For example, the service means better and immediate availability for check deposits (later cut-off time) and instant proof that the item(s) has been successfully deposited. For most transactions, it is also faster than using an envelope.

Financial institutions can also realize considerable benefits from offering check imaging as it eliminates empty envelope fraud – which currently accounts for a sizeable percentage of ATM fraud – and reduces the cost of processing ATM deposits, particularly for ATMs serviced by a third party. Check imaging also provides financial institutions with the ability to extend deposit functionality to off-premise ATMs, given the reduced cost of processing these deposits.

A couple of institutions have offered this service for a number of years – PNC Bank do so in 300 locations, accounting for eight percent of their network, and Fidelity Investments, with approximately 100 units located in their Investor Centers. Several large banks (Bank of America, Wachovia) have been piloting check imaging at a limited number of locations. Wells Fargo is the first bank to announce a large rollout of the technology – it will deploy the technology at 400 ATMs in California by the end of 2006. We can expect momentum for check imaging to build over the next several years, with a significant increase in the number of ATMs offering this capability

Banks could generate significant benefits if check imaging contributes to migrating transactions from branch tellers to the ATM, since teller deposits are significantly more expensive than ATM deposits. Envelope-free deposits cost an estimated 40 cents per transaction (according to the Tower Group), compared to US$1.50-$2.00 for an envelope deposit and US$1.40 for a teller deposit. A significant percentage of people who use ATMs for withdrawing cash still go into the branch to make deposits so there is clear potential to reduce branch headcount if a significant number of deposits move to the ATM.

The impact of check imaging will be smaller if most users of envelope-free deposits are already using the ATM for depositing, as opposed to attracting people who are currently depositing in a branch).

One-to-one marketing
Through one-to-one marketing, financial institutions are able to target offers for specific products and services to certain customer segments aiming to leverage the ATM as a sales channel, since many customers visit ATMs as often as they use branches. A significant percentage of customers – at least 25 percent at some institutions – rarely or never visit a branch so marketing messages need to be sent to these customers through other delivery channels such as the ATM. While some institutions have already been using the ATM to display messaging about their products and services, the next generation of ATM functionality will target product offers to specific customers based upon their profile or product holdings with the bank. For example, some banks, including Bank of America and US Bank, have been extending credit card offers to pre-approved customers at a limited number of ATMs. Customers simply have to click a button on the ATM to have the card mailed to them. These banks expect to roll out these programs to a larger number of ATMs in the future.

Many large financial institutions have developed robust data warehouses with information on customer channel and product usage and this data can be leveraged to predict the ‘next best sell’ for a specific customer and tailor a product offer to that customer.

Tailoring the user experience to specific customer segments
As some customers are worth significantly more to a financial institution than others, banks need to develop and implement programs to retain these customers and provide a high level of customer service and a superior customer experience. Banks should therefore tailor the ATM user experience based upon the customer’s value to the bank.

Messaging or functions tailored to specific types of locations
For the most part, ATMs have been a ‘one size fits all’ channel, with the same functions offered at all ATMs. In the future, banks need to tailor the ATM functionality and user experience based on the type of location. For example, the user experience could vary by the environment in which the ATM is located. Off-premise ATMs located in grocery stores or sporting arenas could offer a different experience than those located at branches.

The pace of implementing new functions and changes to the ATM user experience will be heavily contingent on the timing of ATM technology and software upgrades. Deployers may only be able to offer advanced functions on part of their networks initially until all of their ATMs are upgraded to next-generation software

Drivers in ATM functionality
Technology upgrades have been key in driving changes in ATM functionality. Many financial institutions are in the process of upgrading their ATMs to Windows, with the upgrades being forced by OS/2 obsolescence and the need to meet Triple DES or EMV requirements. Some existing ATMs can be upgraded, but many others will need to be replaced.

The pace of Windows upgrades will vary by institution; some are moving quickly or have already upgraded all of their units (e.g., Wells Fargo) while others will try to hold on to their OS/2 units as long as possible given the costs to upgrade and the increased complexity of managing a Windows-based network.

Furthermore, software with open architecture (e.g., NCR’s APTRA Edge, Diebold’s Agilis, etc.) will provide ATM deployers with greater flexibility to add new functions and features and standardizing the software platform will enable ATM deployers to provide a common user experience across their networks. Next-generation software will support ability to provide a standardized ‘look and feel’ and transaction set across all ATMs, and support enhanced ATM graphics, including full-motion video.

An important driver of ATM functionality is customer needs. The most important criteria for ATM users are currently reliability and speed of transaction so new functions and capabilities should not compromise meeting these customer expectations. Consumers value their time and are increasingly looking for ways to save time conducting routine activities. Banks could therefore look to create value by providing functions at the ATM that could help customers save time (e.g., purchasing stamps, thereby eliminating need to go to the post office).

Bank ATM and channel strategies
Future investments in advanced ATM functionality and an enhanced ATM user experience will be dependent upon the role of the ATM channel in a financial institution’s retail strategy. Banks currently fall into one of two groups related to their ATM channel strategies:

Group 1: For most small and mid-sized banks, the ATM is primarily a cash dispenser that plays a key role in servicing existing customers. For these banks, the key objectives are to provide broad ATM access at the most reasonable cost. In the future, these institutions will seek to broaden ATM access through partnerships/alliances while seeking to reduce the cost of operating their ATM networks. Investments in advanced functionality will be made to support these objectives.

Group 2: For some of the larger banks, the ATM is a strategic channel and a basis for competitive differentiation. These institutions will seek to provide a compelling user experience at their ATMs and attempt to differentiate their ATMs from their competition. We expect these banks to make major investments in their ATM networks in order to provide greater value to their customers and leverage ATMs as a sales channel.

Channel integration will also drive investment in ATM functionality at some institutions. For some banks, providing a consistent customer experience across delivery channels is considered to be a high priority. Customers of these institutions can typically access the same set of accounts through all distribution channels and perform a similar set of transactions. Wells Fargo is one example of an institution for which channel consistency is a primary objective.

Focus on reducing customer servicing costs
The degree to which a bank is focused on the costs of servicing its customers could have an impact on investments in advanced ATM functionality. Some new functions could reduce the costs of servicing customers. For example, envelope-free deposits can reduce deposit processing and fraud costs, migrating customer transactions from the teller line to the ATM.

Importance of the ATM channel in the future
For the foreseeable future, ATMs will continue to be an important channel for servicing customers and providing access to cash. The convenience of the ATM will likewise continue to be an important factor in the customer’s choice of a new financial institution and its ability to retain existing clients. It is however likely that we will see a reduction in the need for cash in the future, with the continued growth in electronic payments. Debit transactions (signature and PIN) are projected to grow at 20-25 percent per year and there will be a further increase in the number of locations accepting debit that have been primarily cash-oriented, e.g., taxis, quick service restaurants, vending machines, etc. We will see more adoption of mobile phones for payments – not yet the case in the US, but widely accepted in some countries (e.g., Japan and South Korea), and increased usage of cash back at POS. There will also be greater adoption of wireless payment devices by ‘mobile’ businesses such as plumbers, cleaning people, etc. However, it will take many years for these businesses to upgrade or adopt technology that will enable them to accept electronic payments; in the interim, will continue to accept cash.

Online banking will continue to grow in popularity, assuming banks and billers continue to address issues with online security. Nevertheless, branch banking will still be important for the foreseeable future, particularly for new account opening and handling of more complex service transactions (e.g., problem resolution). A significant percentage of consumers and small businesses will continue to favor branches for in-person contact.

How can ATM deployers ensure the success of new ATM functions?
•Aggressively promote new functions to customers. This is critical since some cardholders are not fully aware of ATM capabilities already offered at a bank’s ATMs.
•Signage at the ATM.
•Greeters showing customers how to use the new functions.
•On-screen messages.
•In branch flyers or statement stuffers.
•Communications with branch staff related to new functions.

What will future ATMs look like?
•The ATM of the future will be a more sophisticated channel than it is today. It will be able to support a wider range of transactions and provide greater value to the customer relationship.
•We expect to see two primary types of ATMs in the future: the first will provide a basic set of transactions (cash withdrawals, inquiries, etc.), while others will be more full-service ATMs (offering advanced functions such as stamps), often located alongside more basic cash dispense units (e.g., at locations where the bank has more than one ATM).
•ATM user experience will differ by the type of ATM location and by the type of cardholder.
•Ultimately, all ATMs will be running Windows, so the ‘look and feel’ will consist of better graphics and a more consistent appearance with other channels.
•We also expect to see significant growth of financial self-service kiosks that are similar in function to ATMs but provide a different set of transactions. These units typically do not dispense cash, but are used to perform financial transactions not available at most ATMs. Financial kiosks currently offer functions such as bill payment (typically to utilities and cell phone providers), prepaid card dispensing/reloading, and check cashing. These kiosks are typically located in convenience stores and other retail sites. In the future, banks may enter the kiosk business as a way to offload certain types of transactions out of their branches to a lower-cost channel.