A 2nd Act for ATMs

BY KAREN EPPER HOFFMAN

ATMs and financial kiosks are back in vogue as banks look to strengthen self-service options in the branch.

| SYNOPSIS | Banks are taking a closer look at their self-service options, particularly new-generation ATMs and high-end financial kiosks that offer the consumer greatly enhanced functionality. Several banks are experimenting with ATMs that allow customers to preset their preferences for cash withdrawal or receipts, while others are testing automated options for bill payment, prepaid card loading or loan applications. But the new technology is expensive, so most banks are deploying it at a measured pace.

The ATM, that humble cash dispenser, is getting a new lease on life as retail bankers experiment with new forms of self-service technology. The ATM and its upscale cousin, the ?financial kiosk,? are being loaded with functionality that enables consumers to make deposits more easily, buy stamps, pay bills or even top-up prepaid cards.

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To some degree, these enhancements reflect the natural maturation of the ATM market itself as financial institutions gradually replace their older machines with newer, more modern units.

But the industry is also responding to consumer demand. In an October 2006 online survey of 2,000-plus U.S. consumers by market research firm Harris Interactive and commissioned by Diebold Inc., respondents expressed positive interest in using an ATM to get receipts with check images, reorder checks, pay bills or make address changes. (See chart, ?Customers Receptive to Advanced Banking Features,?) More than one-third said they wanted to use ATMs to get information about various accounts and transfer money between accounts at different financial institutions.

The push toward greater self-service is also part of a broader industry move to remake the branch into a channel that is not only more cost-efficient, but into a better sales and service tool as well. A handful of technology leaders—including San Francisco-based Wells Fargo & Co., Fifth Third Bancorp, Cincinnati, Ohio, and Quorum Federal Credit Union of Purchase, N.Y—have embarked on ambitious strategies that incorporate a wider breadth of ATM-based capabilities and the use of online terminals or full-fledged banking kiosks in their branches.

Once viewed as a low-cost alternative to tellers for simple transactions like cash withdrawals, a new generation of ATMs and kiosks are beginning to be viewed as tools that will help banks do better at cross-selling, retaining and acquiring customers. “Our ATMs are a component of a much larger plan to gain wallet share with our customers,” says Bruce Hobbs, vice president of alternative delivery for Fifth Third, which has begun offering personalization through most of its ATMs.

Back to the Future
For banks, the adoption of branch-based self-service is in many ways picking up from where the industry left off a decade ago.

In the mid-1990s, banks were just beginning to dabble in the use of voice-activated financial kiosks. The term “financial kiosk” indeed came to encompass the plethora of new self-service machines that were emerging, which offered capabilities that went beyond the typical cash withdrawal, account inquiry or deposit features available at ATMs in those days. And ATMs, which had already been in the market for 20 years, were widely accepted and seemed ready to move to the next level.

But then something diverted bankers’ attention from this burgeoning self-service channel: the Internet. Suddenly, bank executives found a way to offer an even wider breadth of services to customers in their own homes, negating—or so some thought at the time—the need for branches. Brian J. Bailey, vice president of global marketing for the financial solutions division of ATM manufacturer NCR Corp. of Dayton, Ohio, recalls how “the Internet began stealing dollars as the ATMs lost capital funding and the focus of bankers.”

There’s no question that simple transactions such as deposits, withdrawals, payments and check re-orders aremuch more cost-efficient for the bank in a self-serve mode. According to NCR’s research, Bailey says, about 60% of teller transactions worldwide are either deposits or payments that “are low value and high cost to a bank” and could easily be conducted at a machine. Bailey says that at least one of NCR’s bank customers (which he would not name) recently was able to migrate 60% of all teller transactions to its ATMs within three months by adding envelope-free deposit.

The drive to provide more functionality occurs as many banks are in the midst of updating their basic ATM technology by moving from the IBM Corp.’s long-standing OS/2 operating system and System Network Architecture (SNA) to the more flexible Windows operating system and Internet protocol. The changeover will enable banks to run updates more frequently and distribute software remotely, making it easier for them to use these channels for marketing and personalized messaging. With the old systems in place, “when you wanted to make a change [to an ATM] you needed to physically send someone to the machine,” says Madhavi Mantha, senior analyst with Celent LLC in Boston. “The economics would not have made sense before.”

Cash is King
Thirty years after the introduction of the ATM, about 80% of all ATM transactions conducted in the United States are still cash withdrawals. And that might explain why the average monthly transaction volume at bank-owned ATMs and merchant machines (which typically handle fewer transactions) has been falling for a decade, from 6,399 in 1996 to about 2,131 per machine in 2006, according to the ATM & Debit News Data Book.

“ATMs were initiated for cash dispensing and that’s still their primary function,” says Bob Blacketer, director of consulting for the cash and logistics division of Dallas-based Carreker Corp., which makes software for ATMs.

But older machines with limited functionality have been getting competition from the growing legion of off-premise machines, including 7-Eleven Inc.’s Vcom terminals. The convenience chain boasts more than 1,000 such machines, which enable users to cash checks, get cash, pay bills and buy money orders. Exxon Mobil installed 130 of its own bill-paying terminals in its convenience stores in 2006, and announced plans to roll out nearly 1,000 more by yearend 2007. Banks recognize the need to compete with such retailers and other would-be rivals on the self-service front, and one counter-attack strategy is to offer new ATMs with greater functionality.

However, some skeptics counter that if a substantial percentage of the population will not make deposits at an ATM—a capability that’s been available at most on-premise ATMs for years—getting mainstream customers to use such machines for more advanced services might prove challenging.

Banks will also have to be careful not to push their branch customers too hard to choose an automated option over a live person. Randi Purchia, senior analyst with Boston, Mass.-based Aite Group, says research she did in 1998 revealed that about four in 10 people who go into a branch see that as part of their “social activity” for the day. The implication: they might be loath to trade chatting with a friendly teller for interacting with a piece of hardware. “It’s a difficult kind of thing to change customer behavior,” Purchia says.

Can-Do Customers
Despite the potential challenges, banks do see positive signs that customers are ready to start using automated channels more often, and for more than just withdrawing cash. While the Internet has not negated the need for brick and mortar, it has changed the demands upon the physical channel and the way consumers interact.

Shaped by years of exposure to interactive voice response, automated teller systems and, of course, the Internet, today’s tech-savvy banking customers are willing to do more for themselves than ever before. Many banks are finding that consumers can be encouraged to use in-store self-service channels when given the right combination of setting and incentive. (See chart “Six Tips for Building Customer Acceptance,” ) Purchia cites growing consumer acceptance of airline ticketing terminals as just one example of how customers will choose to use an automated alternative to a live person for the sake of convenience.

As banks provide greater functionality in their new ATMs, some institutions are beginning to allow their customers to establish personal preferences for fast cash amounts, language and receipt settings either online or at the ATM.

Long a leader in self-service advances online and off, Wells Fargo has upgraded all 6,600 of its ATMs, which now run Windows and use Internet protocol network-ing and triple DES security. “Wells is a good example of a bank that never gave up on ATMs,” says Mantha in reference to the bank’s continued improvement of the channel. The San Francisco bank’s customers can customize their fast cash, language and receipt preferences at any Wells Fargo ATM.

Jonathan Velline, senior vice president for ATM and store strategy at Wells, says the bank’s focus is “not to use self-service to drive customers away from the store, but to try and make it better by building a better community of channels that serve each other.” He underscores the importance of integration and consistency across channels as a key ingredient to providing a positive customer experience. Every Wells Fargo ATM offers the same capabilities, and provides the same balances as a teller would. They also use the same Web-based technology so that the look and feel is similar to the bank’s Web site.

Customers can access 21 different types of bank accounts from the ATM and also print statements. Wells customers perform as many transactions at the ATM as they do through the bank’s tellers, Velline says. And some 40% of those transactions are something other than cash withdrawals—twice the industry average of 20%.

Wells Fargo is also piloting envelope-free deposits at 400 of its ATMs in California. These units can scan multiple checks at once, which appeals to the 10% or so of the bank’s customers who come in with more than one check to deposit at a time. Velline says the response has been very positive, which was not the case with other ATM-based services the bank piloted in the 1990s, including selling amusement park or ski lift tickets and providing a bill payment option. “Bill payment [at the ATM] was not a very well-utilized product,” he says. “Most customers tend to want to pay bills from their kitchen table at home, or even by phone.”

“We’ve always viewed the ATM as an extension of the bank, not just a glorified point-of-sale device,” Velline adds. “We see it as a place to do banking.” 

As part of its effort to better integrate all its retail channels, Wells Fargo is one of a handful of financial service providers that has also added online stations to its branches, so that customers can access their accounts, pay bills, check balances, order copies of their checks or check their debit or credit card charges over the Internet while at the bank branch. Wells Fargo began installing these online stations in 2001, and they are now located in all 3,000 branches.

Supporting the Branch
For a few financial providers, a more aggressive use of self-service technology is part of a broader revamping of their physical channels, including their branch locations.

Quorum Federal Credit Union of Purchase, N.Y., is a prime example. The $560 million-asset credit union began to experiment with the use of financial kiosks about seven years ago, according to Bruno Sementilli, the credit union’s president and chief executive officer. Members can use the kiosks to make withdrawals or deposits, access all their accounts, make transfers or apply for loans.

Since the credit union serves employees of Kraft Foods and its parent company, Altria Group Inc. of New York City, around the country, Quorum chose to use these financial kiosks as a way to service locations where there were too few members to set up a full-fledged branch. Sementilli says Quorum has been able to establish service in far-flung areas where there may be as few as 300 members.

Quorum’s financial kiosks are typically accompanied by a PC kiosk, where customers can linger and access online accounts without tying up the transactions at the financial kiosk. The credit union has “rebuilt all its branches around the kiosks,” which are located at all of Quorum’s locations and now handle close to 90% of the transactions, Sementilli says. Credit union members still need to see a live representative to open an account or withdraw more than $1,000. And Sementilli underscores the continued importance of having live staff in some locations to walk people through how to use these machines, at least initially. “A machine by itself will be very lonely,” he says. “You need people to introduce it to them.”

Glen Fossella, senior vice president of marketing for Source Technologies, which began providing kiosks to Quorum earlier this year, says that as financial services providers are becoming more interested in installing these self-service kiosks, the vendor market is moving from higher-priced custom solutions to more modular, off-the-shelf machines, which are more scaleable. Source Technologies, which has built MICR printers for banks and credit unions for about 20 years, began developing kiosks for financial services clients in 1998.

Fossella says one of his company’s basic kiosks, which could be used to do withdrawals or access basic checking or credit accounts, costs about $5,000. A more sophisticated machine, like the kind used by Quorum, costs about $25,000, around the same price as a more advanced ATM, by most accounts. (There’s also an annual maintenance fee that’s about 20% of the cost of the kiosk, Fossella adds.) Fossella says the financial industry’s growing interest in kiosks in general in recent years has as much to do with their customers’ growing appetite for self-service options as with a desire to cut costs.

Personalization Promise
If the ultimate goal in branch-based self-service is to give customers the ability to do everything they would be able to do with a teller, then most banks are just getting started.

In November 2006, Fifth Third introduced the preference-setting option—which allows customers to establish their preferences for fast cash amounts, language and receipt settings either online or through the ATM—at more than 2,000 of its 2,200 ATMs, according to Bruce Hobbs, the bank’s vice president of alternative delivery. The new personalization is just the first of the improvements the bank has made since it began upgrading its ATMs from IBM’s OS/2 operating system to a Windows-based system. In 2007, Hobbs says, the bank will start piloting targeted market-ing offers and customized alerts—to remind a customer if a mortgage payment was due, for example.

But Hobbs says that while his bank is looking to expand the available range of self-service capabilities, Fifth Third does not want to force customers to change how they use ATMs. “We still see 80% of those transactions being cash withdrawals for a long time to come,” he says. Hobbs adds that while loan applications theoretically could be placed on ATMs, such capabilities may well cause frustration for the other customers who simply want to withdraw money.

Keith Lewis, director of services and software marketing for Diebold Inc. in North Canton, Ohio, believes the closest thing to “a killer app” right now is imaged deposits, a feature that could finally get customers to make more use of ATMs for depositing checks, a challenge that has flummoxed banks for decades. But Carreker’s Blacketer expects that banks will still proceed with caution given the cost and the effort necessary to upgrade their machines and support them. He estimates that the average image-enabled ATM costs about $30,000 to $35,000, about twice what a standard bank ATM normally costs.

“Every bank I’ve worked with has decided it will not jump off that cliff,” Blacketer says. Instead, he believes that his bank-clients are more likely to run a limited pilot to prove the concept and then gradually replace older machines with more sophisticated ones.

Bailey of NCR agrees that “the business case is not there for [a big bank] in a one-shot-go to replace 20,000 ATMs.” Instead, most of NCR’s bank clients are opting to gradually roll out new capabilities such as personalization and envelope-free deposit.

But even if the banking industry is taking a measured approach to the deployment of new self-service technology, there’s little doubt that the venerable ATM has been given a new lease on life.