The latest wrinkle in ATM siting — placement of more full-service remote machines capable of replacing branch transaction services — holds promise for banks and credit unions working to get more out of physical networks.
Most organizations don’t fully understand the important role a good remote ATM/ITM site can play in creating a convenient account-access network for their customers. Here is some of what these branch-independent ATM sites can accomplish:
- Remote ATM sites can be a cost-effective customer touchpoint, but the configuration and setting are critically important.
- Remote ATM sites can increase brand exposure locally and support local branch sales volumes.
- When institutions are planning branch consolidations, remote ATM sites should be considered as a backfill replacement to minimize customer disruption.
ATMs’ Role In Banking Has Morphed Over The Years
This strategy represents an evolution of the role of branches versus ATMs. The total number of retail bank and credit union branches have been declining for years as consumers adopted self-service channels. When ATMs rolled out in large quantities 40+ years ago, people began choosing to use these machines for cash withdrawals instead of waiting in teller lines.
Over the years, both financial institutions and independent third parties started placing offsite or remote ATMs. The appeal for financial institutions was that these sites could be established relatively cheaply and provide their customers extra convenience, closer to where customers live, shop and play. The appeal for third-party providers was the potential surcharge revenue stream. Thus, the 1990s saw a boom in ATM sites owned by non-banks.
These machines essentially remained cash dispensers, in the days before debit card transactions at point of sale grew so common.
The introduction of early deposit-accepting ATMs impacted teller transaction volumes further, but few financial institutions upgraded their remote ATM sites, still viewing them as revenue sources. These early deposit-taking machines had one other major drawback in that they were expensive to operate. Consumers had to make physical deposits with envelopes — and someone had to pick up those envelopes daily for processing. Using couriers or armored truck crews for this at remote ATMs added huge operational costs.
The Turning Point:
Then technology changed things up. In the mid-2000s, with the advent of remote image capture, cash recycling and elimination of envelopes, some financial institutions recognized the potential of deposit-taking remote ATM sites.
These locations could offload teller deposits at a much lower cost. The cost of building new branches can exceed $2 million in capital and cost nearly $1 million annually to operate. The cost to build out a deposit-taking remote ATM site at a high-traffic retail location is typically around $100,000 —$150,000 including the machine, and the cost to operate is less than 10% of branch operating costs.
There were over 430,000 ATMs in the U.S. in 2019, according to RBR’s “Global ATM Market and Forecasts to 2025 Report.” These numbers have been relatively flat the last few years. This suggests that the market as currently structured is saturated or that incremental income potential is unavailable: Third parties still own most of them and most remain just cash-dispensers.
The shift to digital payments is certainly taking its toll on cash transactions. This was already going on pre-COVID and the pandemic has driven further reductions in cash payment volumes.
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How BofA Benefited From Remote Deposit-Taking ATMs
How much can shifting to full-service remote ATMs from branches save? I can share my experience a few years back at Bank of America to explain how deployment type impacts transaction volumes.
At BofA, we recognized that a good remote network of deposit-taking machines could not only help migrate teller transactions to self-service, but also lower the average cost of touchpoints in a market. Extensive studies of branches and remote ATMs in different settings and configurations revealed some informative statistics.
- Branch ATMs tend to outperform remote ATMs. I attribute this to the greater draw of the branch sites (under normal conditions). Applying the laws of “retail gravity” to this situation, the branch sites offer more services and therefore have had a greater mass of gravitational attractiveness. Of course, this comes at a much greater price in that the ATM has a costly branch surrounding it.
- Deposit-taking ATMs outperform cash-only machines by a factor of two to three. The incremental customer value of being able to make deposits raised the attractiveness of the ATM, applying the same retail gravity laws.
- Deposit-taking remote ATMs outperform branch-sited cash dispensers. This observation is key as it indicates machine functionality may be more important than being branch sited.
- Remote ATMs configured for drive-up access outperform similar walk-up machines. The incremental ease of access or the perceived incremental security of transacting from your car had value.
- The most surprising finding at all: Deposit-taking remote ATMs used as infill touchpoints in a market with a strong branch network helped boost sales and penetration levels from the geographies covered by those remote trade areas. Today, the “hub-and-spoke” strategy is being implemented by many financial institutions as a retail distribution strategy, where the branch is the hub (core) and the remote ATM is the spoke (extended customer touchpoint).
Based on these studies BofA implemented new strategy, shifting away from mere cash dispensers to deposit-taking machines, thus converting a large remote ATM network of 3,000+ sites over the course of several years. BofA’s machine volumes continued to grow and when I left the bank a few years ago the average machine was doing five to ten times the national ATM average.
How Full-Service Remote ATMs Support ‘Thin’ Branch Strategies
With those facts as context, let’s examine the idea of “thin” branch networks. This idea, though talked about more and more today, has been around for a while as many financial institutions have tried to cover a market while minimizing their capital and operating costs.
“Our strategic goal at BofA was to establish one remote ATM for every branch.”
As I’ve written about, financial institutions having at least 6% branch share double the probability of above-market-average performance when compared to banks with less than 6% branch share. Could this success strategy be imitated at lower cost? That is, by adding in a network of remote deposit-enabled ATM sites to complement a thin branch network be the key to increasing your chances of outsized performance.
Our strategic goal at BofA was to establish one remote ATM for every branch. While we never quite made that level in every market before I left, we came close in some major markets, especially following our efforts to radically shrink the branch network during the Great Recession recovery period.
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Case Study: What Conversions to Remote Full-Service ATMs Could Produce Today
Let’s look at an example of what this model might look like in a mid-sized market.
In the Madison, Wis., MSA 46 banks operate 182 branches totaling just over $20 billion in deposits, according to FDIC’s mid-year 2020 deposits report. A 6% branch share equates to 11 branches and four banks operate that many locations in that market (U.S. Bank, State Bank of Cross Plains, Park Bank and Old National). Two banks (Associated Bank with 21 and BMO Harris Bank at 18) operate more branches locally.
“You can operate about 11 branded deposit-taking remote ATM sites for the cost of operating a single branch.”
There are few bank-owned remote ATMs in this market, but there are a fair number of third-party machines. Some of the banks belong to shared ATM networks, which increase touchpoints, but they are typically just cash-dispensing machine.
Based on my experience you can operate about 11 branded deposit-taking remote ATM sites for the cost of operating a single branch. If one of the four banks with 11 branches made that incremental investment (i.e., the cost of one more branch), they would double the number of branded customer touchpoints in greater, putting the bank on par or ahead of the two market leaders.
I wonder what that approach might do to separate that one bank from the pack.
The other big trend in retail banking right now that analysts are watching is increased branch closures. COVID-19 shutdowns have temporarily closed many branches but permanent closures haven’t yet spiked, according to the publicly available data.
Coming out of the COVID-19 restrictions certainly some banks will reduce the size of their branch footprints given an increase in digital usage, but they still need to provide convenient access for their customers.
Why It Matters:
In areas where institutions plan branch closures, adding in full-service remote ATM sites can be an effective replacement, especially if neighborhoods are left uncovered by remaining branches’ trade areas.
Remember customers are willing to be a little inconvenienced for transactions they do infrequently if the routine weekly transactions are easy to do.
Challenges Confronting the Switch to ATMs As Branch Substitute
Finally, while this strategy may provide a lower cost way to create a larger “network,” execution on the strategy can be difficult.
Finding good “small sites” at busy retail centers is challenging. The lease costs on such a small footprint is so low that finding real estate brokers who are willing to work with you may be difficult. Small sites = small commissions.
Developers may not want to bother with you for the same reason.
And pre-existing contracts may play a part as well. In many centers, there are already one or more banks or credit unions that might have a financial services exclusion clause in their lease to limit competition.
Jon Voorhees is Director of Distribution Strategy and Business Development at TerraStrat Group LLC. Previously Jon led retail distribution strategy teams at multiple large banks including Bank of America, where he also led the retail distribution execution team. Jon can be reached at [email protected]