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Wednesday, October 26, 2005


The Problem With ATM's

Banks provide convenient ATMs to their customers who open an account and regularly pay for the bank’s services. To offer these convenient ATMs, a bank must purchase the machines and the infrastructure necessary to integrate all of them. From the bank’s standpoint, both the ATMs and the overall infrastructure represent large indivisible fixed costs. On the other hand, each time a customer uses one of the bank’s ATMs, the bank incurs only a nominal variable cost for each transaction. Likewise, the cost of serving bank customers through a network of ATMs is less expensive then building more branches of the bank. As the bank serves more paying customers with its existing ATMs, the bank’s average cost declines because the fixed cost of the ATMs and infrastructure are spread across more customer transactions.
However, the prime locations where a bank can install an ATM are limited. By establishing a greater presence of ATMs in these prime locations, the bank can secure a slight competitive advantage over its competitors by improving the benefits (lowering transaction costs) to its customers. The strength of a bank’s competitive advantage is reflected by the premium the bank can extract from non-bank customers who use the bank’s ATM machines. Therefore, when two banks consolidate, they are likely to achieve greater economies of scale and a competitive advantage by attracting more customers through a larger network of ATMs. If two banks agreed to allow reciprocal use of their machines (that is, bank A and bank B allow each other’s customers to use their machines at no charge) the outcome would not be the same as is achieved through a merger. If the two banks were separate, each bank’s investment in a new ATM location would provide a benefit not just to the bank making the investment, but also to the bank which has reciprocal rights to the machine. As a result, two separate banks would invest in fewer ATM locations than would the consolidated bank—therefore, the consolidated bank would attract more customers.

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