Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Delivering Deposit Services: ATMs versus Branches

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

Delivering Deposit Services: ATMs versus Branches

Article excerpt

Over the past 20 years (1973-1992), the total number of banking offices has grown from 40,600 to 63,900, an expansion of 57 percent. This exceeded the 21 percent growth in the adult (age 18 and older) population. The number of automated teller machines (ATMs) has grown even more rapidly, from fewer than 2,000 to more than 90,000 over the same period. As a total, there was one banking office or ATM for 3,700 people in 1973. In 1992, there were three banking offices or ATMs for the same number of people. This increase effectively tripled the accessibility and convenience of bank-provided deposit services. In addition, ATMs are typically "open" 24 hours a day, providing even more convenience than a traditional banking office.

Ever since ATMs were first introduced in 1971, they have been touted as a potentially lower-cost alternative to the traditional branch banking office. The presumption of cost savings from expanded ATM use has in the past focused on scale economies. Substantial scale economies were indeed estimated for ATMs using special FDIC survey data for 1975 (Walker 1978, 1980). This early analysis is augmented here with a new estimate of ATM scale economies using survey data for 1984. The two scale estimates are similar but suggest that ATM technology has improved over time, leading to greater scale economies.

While ATM scale economies appear to be substantial, they may not translate into reductions in bank costs or increases in bank profits. This can occur if, for the same set of "free" or below-cost deposit services, consumers use ATMs more intensively than they had previously used a traditional banking office. Similarly, the scale economy benefits of ATMs can be dissipated if ATMs are "oversupplied" to consumers primarily to enhance or maintain deposit market shares. Thus the existence of ATM scale economies may or may not lead to lower bank costs or increases in profits.

The primary purpose of this article is to determine the impact of an increase in ATM use on bank costs and profits. This is obtained by estimating separate multi-output banking cost and profit functions using cross-section data for 161 banks during 1991 and 1992. In brief, there appears o be no significant reduction in costs when ATMs are substituted for banking offices in the delivery of deposit services. On balance, while consumers have clearly benefited from the increased availability and convenience of an expansion of banking offices and ATMs over the last 20 years, banks today realize no net cost savings from these developments. Indeed, deposit delivery costs are higher, not lower. However, because of revenue effects, net income (profit) is marginally higher and represents a small net benefit to banks.

1. ATM USE, SCALE ECONOMIES, AND TRANSACTION COST

The Structure of U.S. Payments Table 1 shows the percentage volume and values of the various methods of making payments in the U.S. economy. (Table 1 omitted) As in most countries, cash is the most frequently used payment instrument. Cash is estimated to account for 83 percent of all U.S. payment transactions.(1) The next most important instrument in terms of transaction volume is the check at 14 percent. Thus cash and checks account for over 97 percent of transaction volume. All other payment instruments--credit cards, automated clearing house (ACH) "electronic checks," traveler's checks, money orders, point of sale (POS) debit cards, and wire transfers--account for less than 3 percent of total transactions. The ordering for transaction value is a different story. Wire transfers, which average $3.3 million per transaction, account for 82 percent of total payment value, while checks comprise 16 percent. Thus over 98 percent of payment values are shouldered by wire transfers and checks. The value of cash transactions is less than one-half of 1 percent of the total.

While surveys show that cash is the most frequently used payment method, the overall value of cash transactions is small because cash is used primarily for small-value transactions. …

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