Cash is a capital-intensive business and nowhere more so than with ATMs. With cash usage generally declining and the fixed and unit costs of providing cash access rising, banks are looking for better, faster and cheaper ways to manage their ATM estates.
It’s an inconvenient truth, but cash is not dead yet. On the contrary, it’s in surprisingly rude health. Despite various digital ways to pay, the average European carried €65 in their wallet in 2016. Moreover around 80 percent of all payments in the Eurozone are still made in cash, according to a recent European Central Bank (ECB) study.
One of the major challenges to a cashless society is overturning decades of habit and deeply ingrained behaviour around how people use and access cash. Cash meets people’s needs and fits their beliefs. It is familiar, tangible, simple and irrevocable. There are no transaction fees or concepts of a chargeback. It cannot be hacked or run out of battery.
When it comes to cash access, 60 percent of cash by value in the Eurozone is obtained from ATMs, the ECB says. There may be a mid-term trend of declining ATM numbers across Europe. However, as with the move towards cashless-ness generally, the ATM picture is not consistent country to country.
ATM numbers are declining fastest in the Nordics: Norway (-13 percent), Sweden (-13 percent), Denmark (-9 percent) and Finland (-5 percent). They are growing fastest in Serbia (10 percent), Poland (5 percent) and the Czech Republic (3 percent), according to figures from the PCM European Payment Cards
Cash and ATMs will continue to play important, if declining, roles in society for the foreseeable future. So, the challenge becomes providing the infrastructure to meet the expectation, if not the need, for cash as efficiently and cost-effectively as possible.
NO SMALL CHANGE
With around 70,000 mostly free-to-use (FTU) machines and 2.7 billion withdrawals in 2016, the UK is a mature ATM market. Interoperability is good via the LINK ATM network. However, the market dynamics are changing. Around 60 bank and building society branches are closing in the UK each month, according to the consumer association Which? This has resulted in a ten percent drop in bank-deployed ATMs in the last four years.
At the same time, the number of ATMs placed by independent ATM deployers (IADs) is rising steadily. The 39,390 ATMs placed by IADs accounted for 57 percent of the UK’s cash machines as at the end of 2016, according to figures from UK Finance.
So, while bank and on-us ATM transactions are decreasing, interchange paid away by issuers to IADs is increasing. This has contributed towards the natural tensions within the LINK association. In January 2018, it announced a phased 20 percent reduction in interchange fees over the next four years. The first five percent cut became effective on 1 July 2018.
“It’s a really fine balance between the issuing and acquiring communities. The proposal that was made by LINK is seeking to create a balance where it is almost impossible to create one,” says Duncan Faithfull, commercial and corporate affairs director, Cardtronics.
“A 20 percent reduction in revenue pretty much flows all the way down to the bottom line. It almost becomes impossible to operate a free-to-use estate at any scale in the UK,” he says. Indeed Cardtronics has removed around 2,000 ATMs since LINK made their proposals public. And has not installed a further 1,300 machines originally planned for this year.
STRIKING THE RIGHT BALANCE
In a market where cash usage is falling, it seems counterintuitive that the number of FTU ATMs has been rising steadily since 2006. The majority of these ATMs have been deployed in high footfall, city centre locations. This begs the question: are UK ATM interchange rates correctly calibrated?
There is no political will in the UK to move towards a pay-to-use ATM model. Indeed in a statement the UK Payment Systems Regulator (PSR) confirmed that it had required LINK “do whatever it takes to protect the current broad geographical spread of FTU ATMs.” Moreover that it must put “greater focus on the financial inclusion programme to continue to fill the gaps in the FTU network.”
LINK and its members are investigating geographic or zonal pricing to incentivise ATM deployment in less densely populated areas to maintain financial inclusion. Yet disincentivise deployment in high footfall areas, where there are arguably too many machines. Industry experts are predicting a 20-25 percent drop in UK ATM numbers over the next few years.
The interchange cuts apply to banks and IADs alike, so organisations must consider whether they wish to remain in the ATM business. “IADs have an opportunity to become the highly cost-efficient providers of cash, providing they put in place all the appropriate investments to enable them to achieve that,” says Peter McNamara, CEO and founder, NoteMachine.
“Since the LINK announcement we’ve signed deals with three major financial institutions to run their ATMs and cash network,” he says. “We are seeing 3-4 percent of our total revenues now taking place in bank branches, where we are operating ATMs, counter services or some other activity for a bank. A year to 18 months ago, we had none,” he adds.
When cash usage is low and falling, banks have to cut and share costs. These include the day-to-day costs of running their ATM networks, expanding functionality, maintaining coverage and complying with a raft of regulatory requirements (e.g. EMV, PCI DSS, Microsoft updates and polymer notes). They must also invest in the future.
For digital-only, challenger or neo banks, this is just not tenable. Even larger banks are small players in a scale network and face headwinds to control costs. A number of banks worldwide have outsourced management of their ATM estates to IADs or are considering doing so. Similarly, a number of markets have ATM sharing or pooling arrangements in place, facilitated by IADs or shared service companies. This includes Austria, Brazil, Finland, Indonesia, Portugal and Sweden
Speaking the RBR Self-Service Banking Europe 2018 conference in May, Rowan Berridge, associate at RBR, defined ATM pooling as interbank co-operation in the ATM channel which typically emerges at market inception or market maturity. This often focuses on operational areas, yet the deepest forms of co-operation can involve giving up individual control of strategic areas, such as purchasing, functionality, branding and site selection.
Banks are more likely to accept the trade-offs required by pooling when they believe cash delivery is not an area of competition. Pooling is also well-suited to low-functionality markets or those where functionality is uniform, thinks Berridge. It is challenging for banks to reach a shared vision on strategic considerations and risks. This is most likely to emerge when supported by regulators.
THE SWEDISH MODEL
Sweden is often held up as the poster child of a cashless or less cash society. Cash in circulation has declined 50 percent in the last decade. Only 20 percent of purchases are now made in cash, according to Riksbank, the Swedish central bank. The majority of bank branches have stopped handling cash; some do not even have ATMs.
While Sweden is advanced in its cashless journey, it is not there yet. Indeed the emergency preparedness leaflet issued to 4.8 million Swedish households by the government in May 2018 recommends holding cash in small denominations. “Cash will have a part in Swedish society for the foreseeable future,” says Johan Alvinger, product director, Bankomat. The requirement is “to provide the infrastructure to meet the expectation, if not the need, for cash.”
In 2010, the five largest Swedish banks formed an ATM pooling company (Bankomat). They ceded all control for running the ATM network to Bankomat, which handles everything from vendor and site selection to operations and cash management. Giving up control goes against the core of a bank, but this is easier in a small market used to co-operation. Moreover one in which it costs too much for each small bank to do everything in the ATM value chain itself, concedes Alvinger.
When Bankomat took over the ATM network, it streamlined the software and hardware infrastructure. Connections to banks and out to the card schemes are now managed centrally by Bankomat. It also removed, replaced and re-sited ATMs to ‘right-size’ the estate to reflect changes in customer behaviour. More machines were located in malls and fewer at bank branches. Cash withdrawals became a destination rather than an ad hoc activity, with fewer, higher value transactions.
Future opportunities for Bankomat and its members include investigating new ATM functionality (e.g.contactless and card-less withdrawals) and expanding economies of scale across geographies. Swedish banks are present in different Nordic countries to a greater or lesser extent, and it makes little sense to run four different ATM infrastructures.
NEW COLLABORATIVE MODELS
Back in the UK, the majority of UK banks have already outsourced or sold their remote and/or branch ATM estates to IADs. However the future of ATM outsourcing in the UK is more about the technology that drives bank ATMs. “At the moment, all of the banks have their own operating systems and transaction processing arrangements, and that adds cost and complexity into the ATM estates they run. The likely outcome over the next few years is that a lot will [operate]on a utility basis,” says Faithfull at Cardtronics.
If a utility is the answer, the difficult questions are determining what that might look like and how the industry gets there. Indeed there is still money to be made from cash. However organisations will have to explore new business models. They will have to collaborate and partner differently and more widely to do so.
Cardtronics is already positioning itself as a utility provider to the banks. It is working with a number of high street banks on a utility banking hub set to go live later this year.
NoteMachine has moved into the parallel activity of foreign exchange by establishing 170 branches in the UK at high footfall locations. “We see that as an opportunity to dispense sterling and foreign currencies and provide a wider range of financial services, hence our move into brokered mortgages. We think that is a logical development from being an infrastructure provider,” says McNamara.
Countries are moving towards cashless or less cash societies at different rates. Despite the rise in digital payments, cash is providing surprisingly resilient; stubborn even.
In the UK, debit card payments may have overtaken cash payments as the most frequently used payment method in 2017, according to UK Finance. However, with 13.1 billion payments, cash still accounted for 34 percent of all payments. It is predicted to remain the second most frequently used way to pay in 2027.
Meanwhile in Sweden, half the respondents to a Swedish central bank survey were positive or very positive to the decline in the use of cash. 27 per cent were negative or very negative. Yet a similar number (25 percent) had neither positive nor negative feelings towards, meaning the country is quite evenly split in its attitude towards the decline in cash.
As cash volumes and ATM withdrawals decrease over time and fixed costs hold steady, unit costs will increase. The cash conundrum is how to make money — or not lose money at the very least — from physical money. It will involve new business and collaborative models over the medium to long-term. Cash may be down, but it is not out.