A Snarketing post by Ron Shevlin, Director of Research at Cornerstone Advisors
Branch transaction volume is declining. As a result, banks and credit unions that are committed to having branches that positively contribute to the customer experience and to bottom-line performance must address teller productivity issues.
Many bank and credit union execs see interactive teller machines (ITMs, or video tellers) as an answer to those productivity challenges. Based on an in-depth study of 11 ITM deployments, Cornerstone Advisors found:
- The hype debunked. Despite some vendor claims, there’s nothing transformational about standing in front of a video teller that makes the customer experience any better than standing in front of a live teller. None of the execs we interviewed said that was their goal, anyway.
- Unrealized sales claims. Claims of superior sales performance resulting from the deployment of ITMs are hard to substantiate, based on the interviews conducted and the data analyzed regarding the performance of financial institutions with ITMs versus those without them
- Unfounded fears of customer backlash. Fears of consumer backlash to using technology to interact with remote tellers are unfounded. None of the financial institutions we studied experienced attrition or negative impact on customer/member satisfaction as a result of deploying ITMs. That was true for the financial institutions who have gone completely tellerless in branches, as it was for those who adopted a hybrid approach.
- Proof of productivity gains. When we got past the hype and inflated sales claims, we found solid proof that financial institutions can improve branch productivity and realize a positive ROI from ITMs — if they make a commitment to making them work.
Do ITMs Really Increase Sales?
Among banks and credit unions, there are mixed feelings regarding the extent to which ITMs have contributed to sales growth. On one hand, some attributed increased sales to ITMs, like this exec did:
“Our ITM locations do a better job of onboarding, drive more products per customer, and have higher new loan balances than our other branches.”
On the other hand, however, other financial institutions were represented by this comment:
“Honestly, we’d have a hard time attributing our increase in sales to the deployment of ITMs.”
Cornerstone’s Take: Many financial institutions have seen an increase in lending and deposit volume over the past few years. Would the banks and credit unions with ITMs have seen lower rates of growth if they hadn’t deployed the units? Would those who don’t have ITMs have seen higher rates of growth if they had deployed ITMs? It’s hard to definitively answer “yes” to these questions.
Data from the Cornerstone Performance Report sends mixed signals. Banks and credit unions with ITMs demonstrate a higher return on assets (ROA) ratio than other financial institutions, and generated 1.84% of assets in non-interest income, versus 1.50% among financial institutions that have not deployed ITMs. In addition, among those with ITMs, net interest income as a percentage of assets was greater than it was for the group without ITMs, 2.60% versus 2.51%.
However, banks and credit unions with ITMs had a higher non-interest expense % of assets, and trailed other financial institutions on retail products per household, 2.22 versus 2.42 (challenging the increased sales from ITMs argument).
|Return on assets||0.94%||0.74%|
|Non-interest income % of assets||1.84%||1.50%|
|Net interest income % of assets||2.60%||2.51%|
|Non-interest expense % of assets||3.50%||3.28%|
|Retail products per household||2.22||2.42|
Tellerless or Hybrid Approach?
The important question isn’t “ITMs or no ITMs?” but “go completely tellerless or go hybrid?”
Financial institutions who have more aggressively moved to eliminate traditional teller transactions in the branches have achieved superior results. Three of the institutions in the study conduct 40% or more of their total teller transactions through ITMs. The range for the other institutions are from 18% down to just 2%. Comparing the “Top 3” financial institutions to the “Next 8,” the Top 3 have:
- Greater ITM capacity. The leaders in ITM deployment among our study participants have installed ITMs in 80% of their branches; other financial institutions in the study have ITMs in half as many branches. In addition, the top three institutions have, on average, more ITMs per branch (of those with ITMs). Staffing levels are roughly equivalent across the two segments.
- Lower transaction costs. Although the two segments spend roughly the same per ITM unit for annual maintenance costs, the additional transaction volume that the top three are driving through those machines result in a per transaction cost nearly 50% lower than the cost incurred by the rest of the pack.
- Higher transaction utilization. On average, the Top 3 conducted 61% of their teller transactions through ITMs in 2015. As a result, their transaction volume per unit was more than twice the level of the other financial institutions. Compared to the other banks and credit unions, transaction volume per ITM FTE was 35% higher for the top three. In addition, the leaders averaged more than four ITM transactions per customer (or member) versus less than one transaction per customer among the other eight financial institutions.
|Capacity||ITM branch penetration
ITMs per branch (all)
ITMs per branch (with ITMs)
ITM FTEs per ITM
|Cost||ITM $ per transaction
ITM $ per ITM
ITM $ per ITM FTE
|Transactions||ITM % of teller transactions
ITM transactions per ITM
ITM transactions per ITM FTE
ITM transactions per customer
Cornerstone’s Take: The results achieved by the firms included in the study suggest that productivity improvements can be optimized by committing to the tellerless option. But we recognize that qualitative factors like executives’ perspectives and philosophies on the role of branches, and the need for the “human touch” will mitigate the economic evidence.
Optimizing productivity gains from ITMs requires time, but getting there requires less management oversight and involvement than what’s required to manage and optimize the traditional teller environment. In effect, the ITM teller center of tomorrow will be much like the call center of today. Transaction spikes and valleys will be managed more effectively; as a result, the floater will become a thing of the past.
The ROI of ITMs
A number of executives in the study alluded to a chicken-and-egg challenge regarding the development of a pro-forma ROI for ITMs. To build solid ROI estimates, they needed a clear strategy for how and where the units would be used, and the timeline on which they would be deployed. But with no experience with the technology—and little guidance from the vendors—developing a solid ROI analysis was difficult.
Cornerstone recommends that financial institutions considering an investment in ITMs develop an ROI estimate and:
- Identify and model different strategic scenarios. The choice of ITM business model should guide the ROI estimates. The choice of strategy—e.g., hybrid versus tellerless approach—will determine differences in operating assumptions including ITM staff displacement, location (e.g., deploy in urban branches, drive-through only, or through the entire branch network), and hours (e.g., regular versus extended hours).
- Determine decision parameters ahead of time. Will your financial institution only invest in ITMs if there is a positive ROI? If you break even within three years? If you cut teller staff by at least 30%? Align the strategy with decision parameters and have an idea of go/no go criteria before finalizing the model.
- Get an accurate estimate of hardware and software costs. Take the time to get bids from vendors and work with them to understand the cost structure of the investment and break even machine volumes for different pricing structures (e.g., pricing structure x and y produce the same machine costs at 10 machines).