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Locating ATMs for Strategic Effect
BY LAURI GIESEN
Customer retention rather than per-unit volume is increasingly seen as the key to effective ATM deployment.
|SYNOPSIS | As ATM surcharges increase, per-unit volume has been in decline, encouraging banks to take another look at the ATM business model. A growing number of banks and outside experts are touting customer segmentation rather than per-unit volume as the key to ATM deployment. The objective, they say, should be to place ATMs in areas frequented by a bank's most profitable customers to facilitate the retention of those customers.
Where to deploy ATMs outside of bank lobbies has always been a challenge to financial institutions. Now the analytics that banks use in deciding where to deploy, retain or pull ATMs are changing.
Gone are the days when banks merely added up the costs of purchasing and maintaining an ATM and compared those costs to the revenue the machine generated through fees paid by non-customers. And no longer do transaction volumes alone determine the value of an off-premise machine—a shift that has important implications in an era when per-unit transaction volumes are declining.
Instead, banks today are coming around to the view that what kind of customer uses a machine is more important than how many times a machine is used in a given week. According to this view, ATMs should be positioned so that they can service a bank’s “best” customers, even if volume is on the decline.
“It used to be that a bank’s CFO would look at an ATM and say, “This machine’s use is declining so it is unprofitable and should be moved,” says Tony Hayes, director with Boston-based Oliver Wyman Group. “Now, the head of the retail bank says, “Wait a minute. That machine is critical to our ability to compete and provide access."
Full Circle
This change in attitude regarding ATM deployment illustrates how bankers have come full circle with their thoughts about the machines.
The initial purpose of ATMs in the 1970s was to serve existing customers at a lower cost than providing the service in branches. By the mid-1990s, banks were looking at ATMs as cash cows as they realized they could get non-customers to use their ATMs and generate $3 to $4 per transaction between the surcharge fees charged directly to customers and the interchange revenue paid by the cardholder’s own bank to the ATM owner.
But as the cost of paying those ATM fees rose, customers looked for alternatives. Some simply changed their access habits and limited their ATM use to their own banks’ ATMs, where they would not be charged. Others began taking more money out each time so that they could use ATMs less. And others began getting cash back at the point of sale each time they used a debit card secured by a personal identification number.
Through a combination of these tactics, and a growing number of terminals in the market, the volumes per ATM have declined in recent years. According to research from Needham, Mass.-based TowerGroup Inc., which is owned by MasterCard, the number of monthly transactions per unit on U.S. bank-owned machines fell to 5,953 in 2007, down from 8,846 in 2001 (see chart, “ATM Volumes on Downswing”). TowerGroup expects this trend to continue, albeit declining at a slower pace, with monthly transactions hitting 5,644 by 2011.
Hayes also notes that last fall, Charlotte-based Bank of America Corp. raised its ATM surcharge to $3 from $2.50 and other banks often follow this trendsetter, which could put additional pressure on consumers to avoid using ATMs that are not owned by their bank.
Meanwhile, the few machines that are deemed profitable based on revenue alone are typically owned by a handful of non-bank companies, known as independent sales organizations (ISOs), that have been able to deploy cheaper cash dispensing machines and rely on scale to lower their operating costs. The success of the ISOs, however, poses some issues for banks.
When Boston-based Dove Consulting, a division of Hitachi Consulting Corp., conducted a study of ATM usage for one of its bank clients, it found that the bank’s customers who regularly used ATMs owned by other banks and ISOs had attrition rates that were significantly higher than that of other customers. Joe Stanton, Dove’s manager of financial services, says this finding shows that banks need to consider customer retention when deciding on their proprietary ATM locations. Customers who don’t have easy access to their bank’s branded ATM (which doesn’t levy a surcharge on them) could be lured away by another more convenient institution, he says.
For that reason, some banks are beginning to focus their ATM business models more on customer retention than per-unit volume. “We’ve always challenged the traditional model for ATM profitability,” says Jonathan Velline, senior vice president of ATM banking for San Francisco-based Wells Fargo & Co. “About 87% of the transactions at Wells Fargo ATMs are conducted by our customers. If we based our deployment decisions solely on surcharge revenue, as most banks have, we’d be making decisions based on what is best for 13% of the users of the machines, not the 87% who are our good customers.”
So rather than trim their ATM networks, banks such as Wells Fargo and Memphis-based First Horizon National Corp. are utilizing the machines to advance customer retention goals. Wells Fargo, for example, assigns a value to each transaction associated with serving an existing customer.
“Each one of the 6,900 ATMs owned by Wells Fargo has its own profit and loss (P&L) statement,” Velline says. “But unlike most other banks, we’ve built a P&L statement that does not overweight the impact of 13% of the transactions, but rather gives greater weight to the value of 87% of our transactions.”
Customer Segmentation
Hayes argues that assigning value to customers’ use of an ATM is not enough. He says banks also need to look closely at which customers are using each machine. After all, an ATM that has a lot of transactions but mostly with the bank’s less-profitable customers is less valuable to the institution than an ATM with fewer transactions but with transactions initiated by the bank’s most profitable customers.
“The better banks today have some good data warehouses that they can use to look at not just how many customers are using their ATMs, but who is using them. They should be able to track which ones are serving their most profitable customers and also which ones are serving their most potentially profitable ones,” Hayes says.
Banks that have already done the required segmentation exercise will have an edge, Hayes adds. Once a bank has identified its most profitable customers, it can match up their names with the ATMs they use and determine which ATMs are best serving those customers and also if there are market regions where the bank needs to increase its ATM presence. First Horizon, for example, analyzes the zip codes of its most profitable customers and tries to find locations where those customers are not being served by its existing ATMs, according to Mike Marzec, manager of electronic banking.
Dove’s Stanton recommends that a bank concerned about customer retention also identify those markets with a high percentage of customers that regularly use ATMs not owned by the bank. Then it needs to closely examine those regions to determine if there are gaps in its ATM coverage, he says.
For most banks, this type of analysis will result in more, rather than fewer, off-premise ATMs, according to Jerry Silva, research director of delivery channels for TowerGroup. “In the face of dropping transaction volumes at ATMs, we still expect to see the number of ATMs owned by banks to grow,” Silva says. “Banks still need to expand their ATM coverage to make up for a lack of presence in certain regions.”
Wells Fargo has been growing the number of ATMs it has deployed by about 3% to 4% per year and expects to continue to grow at a similar level in the next few years, Velline says. “Nationally, ATM volumes are declining, but that is not the case at Wells Fargo. We’ll be adding more terminals that are on the fringe of our existing markets or in new markets. Basically, our ATM deployment strategy will mirror our store expansions,” he says.
First Horizon expects to keep the size of its ATM fleet at a stable level, Marzec says, as it removes some ATMs in areas of low customer usage and deploys additional machines in areas where more high-profit customers reside.
Recent research from Troy, N.Y.-based Pitney Bowes MapInfo, a provider of location intelligence to businesses and government, shows that in some locations, the sales lift from providing better service to a bank’s best customers, combined with the potential to attract new customers, will cover the cost of the added ATMs. “The cost of an ATM can easily pay for itself if a bank is able to find that sweet spot— that prime location that will lift the bank’s sales by providing an additional service point to its customers,” says Brian Diepold, Pitney Bowes MapInfo client services manager.
Additionally, Marzec believes more banks will increasingly take advantage of branding agreements with ISOs to serve areas where there is modest customer demand. These ISOs own and maintain the ATMs, but many will put a bank’s brand on some of their machines and not charge that bank’s customers to use those terminals. In exchange, the bank pays the ISO a monthly fee for each ATM that bares its brand.
Such arrangements can be lucrative in regions where banks don’t have enough customers to justify the purchase and maintenance of ATMs, Marzec adds. Such agreements also get around the problem of dealing with large multi-regional retail chains. Many such chains require a bank to put ATMs in all of their stores or none. Such agreements have been problematic for regional banks that wanted ATMs in some stores within the chain but not others where the bank had no or a limited presence. By contrast, the branding agreements with the ISOs typically allow a bank to limit the agreement to those machines located in market areas where it has a presence.
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