Driven by the need to increase fee income, community banks have been raising out-of-network ATM fees which are now at record highs. While helping with fee income, this could be a long-run strategic mistake for community banks and may serve to decrease profitability instead of helping it. The larger banks, such as Bank of America and Wells Fargo, have a customer base that is comparatively less fee sensitive. Their customers will pay for the convenience of their ATM network. In this article, we make an argument over why it is to the community bank’s advantage to reduce ATMs charges for customers.
Helping with Acquisition And Satisfaction
In focus group after focus group and survey after survey, access to ATMs ranks in the top three spots on factors when selecting a bank. The data from a recent survey (below) shows that it is not only the largest single factor but the largest factor by 64%. ATM and branch usage is also the single largest factor that both business and retail customers choose a national bank over a community bank, it is the second largest factor for Millennials when choosing a bank behind mobile capabilities, and for those 35 years old and older, the desire for ATM access is correlated with balances. Those with greater net worth, income and balances are more apt to choose a bank based on ATM and branch availability than those with lower or moderate income, net worth and balances.
ATMs are considered a “bridge channel” to a more robust mobile platform, so if your mobile capabilities are only average, an upgraded ATM network and access to out-of-network ATMs are the next best thing and are important channel delivery decisions for community banks to continue to grow their future customer base. Anything you can do to make customer acquisition and customer satisfaction better is strategical to your advantage.
We are all for generating fees, but fees should be associated with strategic value. Offering a service that bank customers can’t get anywhere else is the way to generate both fees and value. Charging for a service that a customer can walk across the street and get at a Bank of America for free means your value proposition in other areas just has to be that much stronger. If your bank doesn’t have a substantially better value proposition that can be easily articulated, charging fees for any ATM usage will just work against you know, and even more so in the future.
From A Channel Cost Standpoint
The reality is that, from a cost standpoint, community banks would rather have customers use any ATM than walk into a branch. If it is an in-network ATM a community bank’s cost is, on average, between $0.12 and $0.80 per transaction depending on overall transaction volume of the bank. This expense compares to about $2.20 to $4.80 of direct, incremental cost that a community bank incurs with an in-person transaction. Even if the community bank absorbs all the out-of-network ATM charges without passing them on to the customer, they are most likely still better off from a cost standpoint than if that customer came into a branch.
It is true that community bankers incur some of these direct, incremental cost anyway, regardless of if a customer uses an ATM or not, but this is our point. In the long-run, community banks must reduce the number of branches per customer and their staff per customer as the expense is just too great to be competitive.
A bank like JP Morgan, Wells Fargo or Bank of America has almost 50% of their customers using their mobile or online platforms compared to about 11% for the average community bank. That gap is only going to get wider and as it does, the operating cost difference will continue to increase so larger banks will be able to be even more competitive in the future. Shifting your customers to mobile, online and ATM channels (in that order) at least allows a community bank to have to build or acquire fewer branches in the future.
Putting This Data Into Action
Fees from the ATM operator hit a record high last quarter of $2.90 per transaction. Fees from the customer’s own bank also hit a record high of $1.67. Combined, this equates to $4.57 of fees per transaction which means an 11% charge on the average $40 cash withdrawal. It is no wonder that according to Mercator Advisory Group, more than 66% of bank customers will change their behavior so they don’t have to pay these charges. It is also no surprise that ATM usage on a per capital basis is down.
Now, if you are trying to drive customers to your mobile and online platforms, great. That is exactly what you should be doing from a long-run strategic standpoint. However, if you are just trying to pass costs on to your customer or trying to drive more customers back into the branch then, our opinion, you are making a strategic mistake. What you are doing is driving more customers (and likely your more profitable customers at that) than you realize to larger banks or to other non-bank channels such as PayPal, Venmo, and others.
At a minimum, community banks should at least create an account package where all ATM charges are waived. You should also have marketing and educational programs around your mobile capabilities in order to increase their usage. In addition, education and reminders are also effective for getting customers to increase use of their debit card for purchases instead of using ATM-derived cash. Banks that do that will find that they will not only lower their incremental channel costs but will be in a better position to reduce or limit branch growth.
Submitted by Chris Nichols on October 25, 2016