ATM Features Planned for 2003

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1 Strategic Planning, B. Adrian Research Note 29 April 2003 Few U.S. Retail Banks Will Add ATM Features Soon Prevailing wisdom has assumed that U.S. retail banks would add features to their automated teller machines. A survey of banks shows that only simple features, such as funds transfer, will be added in the near future. Core Topic Financial Services: Financial Services Drivers, Strategies, Direction and Vision Key Issue How can FSPs evaluate, measure and implement technologies and processes to ensure competitiveness and efficiency? Strategic Planning Assumptions Ten percent or less of U.S. ATMs will be voice-enabled by year-end 2003, and 20 percent or less by year-end 2004 (0.9 probability). Through at least year-end 2004, investments in widespread ATM feature enhancements will provide little, if any, tangible return or competitive advantage (0.8 probability). Most U.S. retail bank customers primarily use automated teller machines (ATMs) to make cash withdrawals. Most U.S. ATMs support little more than cash-dispensing transactions. However, for many years, ATM manufacturers and application providers have pressured U.S. banks to add to their ATMs' capabilities and have forecast imminent widespread upgrades. In mid-2002, Gartner surveyed U.S. retail bank ATM managers to determine if such predictions were coming true. Bankers were asked about their ATMs' capabilities, including features available in mid-2002 and those they anticipate implementing by year-end The results counter the prevailing thoughts from ATM vendors and financial services providers about emerging ATM enhancements. ATM Features Planned for 2003 According to survey respondents, only four general types of enhancements will be undertaken by a significant number of retail banks by year-end 2003 (see Table 1). Table 1 Percentage of Banks Implementing ATM Features Feature By Mid By Year- End 2003 Bank Segment Anticipating Increase Funds transfer 58% 81% Small (deposits less than $1 billion) Statement summary 17% 32% All printing Voice-enabled 6% 21% All capability Check and cash imaging Source: Gartner Research (August 2002) 1% 9% Large (deposits more than $4 billion) Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Funds Transfer By year-end 2003, the percentage of U.S. retail banks with ATMs that provide funds transfers will grow from 58 percent to 81 percent. However, the increase will not be evenly distributed among all banks; those adding this capability primarily will be smaller institutions with deposits less than $1 billion. These smaller banks are focusing on adding funds transfer capabilities to gain greater competitive parity with larger institutions; most midsize and large banks' ATMs have this feature. Funds transfer functionality won't provide competitive advantage, but it will help put smaller banks on equal footing with larger institutions. Statement Summary Printing By year-end 2003, the percentage of U.S. retail banks with ATMs that provide account summary printing will increase from 17 percent to 32 percent. Banks of all sizes will contribute to the increase as they try to make a common customer request a selfservice function. These enhancements will not require drastic physical upgrades to ATMs because the summary statements are not full-size, detailed documents. In nearly all cases, ATMs will provide concise transaction histories printed on receipt-sized paper. In doing so, bankers hope to offload at least some customer requests for transaction histories from other, morecostly channels, while avoiding costly ATM hardware upgrades. Voice-Enabled Capability Banks of all sizes anticipate adding voice-enablement capability, also known as speech recognition. The prevalence of this capability will grow from 6 percent to 21 percent by year-end Many bankers assume that they need to add this ATM feature to their ATMs because they believe that the U.S. Americans With Disabilities Act (ADA) will soon require improved ATM access for those with disabilities, such as vision impairment. However, although it is possible that the ADA eventually will place increasing pressure on banks to upgrade their ATMs, no firm deadlines for compliance have been set. Upgrades will be driven by a combination of a desire for regulatory compliance and the public relations benefits that voice enablement could offer. Therefore, 10 percent or less of U.S. ATMs will be voice-enabled by year-end 2003, and 20 percent or less by year-end 2004 (0.9 probability). Check and Cash Imaging Some bankers believe that by year-end 2003, they will have cash and check imaging capabilities incorporated into their ATMs. Adding imaging or cash recycler technologies could greatly 29 April

3 reduce the costs of ATM management by decreasing the frequency of courier visits to pick up and deliver cash, or to pick up checks. Not surprisingly, primarily large banks will add this functionality because only the largest banks have the check volumes and delivery route sizes large enough to justify the cost. ATM Features Not Planned for 2003 Just as important as the types of enhancements that bankers are planning are the enhancements that they are specifically not planning (see Table 2). Table 2 ATM Features With Unchanging Prevalence ATM Feature Percentage of Banks That Offer Feature Paper currency deposits 66% Stamps 18 Web enablement 7 Coin deposits 5 Phone bill payments (mobile or landline) 4 Loan information/application 4 Internet access (for example, , stock 4 prices) Investment information (for example, CD rates) 3 Event tickets 3 Foreign currency dispensing 1 Prepaid phone card sales 1 Source: Gartner Research (August 2002) Some of these features are esoteric, such as foreign currency dispensing. However, some have been highly touted as "the next big thing" for ATMs. The ability to purchase stamps or event tickets via ATMs and Web enablement will see no progress through year-end 2003 and possibly through Almost none of the features that would allow customers to perform new kinds of transactions or interactions will soon be added to a significant number of ATMs. Trends in ATM technologies strategies suggest several reasons that ATM feature enhancement is moving so slowly: Adding a feature that doesn't require hardware modifications, such as the ability to view investment product information, can cost hundreds of dollars per ATM. Adding a feature that requires hardware changes is even more costly or could require replacing the ATM. There is little clear evidence that consumers want many of the new types of ATM features, such as the ability to buy event tickets or pay bills. 29 April

4 Some features, such as Web enablement, depend on connectivity speeds and information processing capabilities that many banks still do not have. The tangible benefits and competitive advantage for banks from enhanced ATM functionality are uncertain. The aging OS/2 operating system that controls the majority of ATMs cannot support some types of enhancements. With the anticipated termination of IBM's support for OS/2, many banks are focusing on upgrading their operating systems before considering other enhancements. The survey results highlight that there are opportunities and pitfalls to ATM enhancements and upgrades. The greatest opportunities include serving customers who would otherwise be unable to use an ATM and the potential to speed and reduce the cost of cash management and check processing. The pitfalls can be significant, too. In such a difficult economy, the last thing a retail bank can afford to do is spend money for capabilities that customers do not want or that ATMs are ill-equipped to support. Through at least year-end 2004, investments in widespread ATM feature enhancements will provide little, if any, tangible return or competitive advantage (0.8 probability). When to Add ATM Features Through at least mid-2004, U.S. retail banks should add ATM features only in these circumstances: The features are needed to maintain parity with the majority of banks within a bank's size segment or market. For example, all but the smallest banks have the transaction scale to justify basic funds transfers between accounts via the ATM; therefore, they should incorporate this feature. The features are governmentally mandated or can be made accessible to large segments of customers. For example, banks that identify a need for enhanced features for customers with disabilities might justify the cost based on increased customer attraction or community service. The added capabilities can be shown to drive down the costs associated with ATM operation. For example, banks with many widely distributed ATMs may significantly reduce the frequency of paper check and cash pickup or delivery by adding imaging or cash recycler technologies. The upgrades directly support delivery channel architecture reusability and connectivity by creating a more-standardized infrastructure. By moving as many touchpoints as possible to similar technologies and applications, support costs can be 29 April

5 reduced and payments can be incorporated into a centralized strategy. Bottom Line: It is important for U.S. retail banks to ensure that their automated teller machines provide easy, effective means for customer transactions. However, in the near term, competitive advantage will not be lost if ATM feature upgrades are not implemented. When determining if feature upgrades are worthwhile, banks must consider the age of their ATMs, support contract termination dates, prevailing market parity and the likelihood of net cost savings or revenue growth. 29 April