New Horizons in Money and Finance series
Edited by Luisa Anderloni, David T. Llewellyn and Reinhard H. Schmidt
Chapter 4: Technological Innovation in Banking: The Shift to ATMs and Implicit Pricing of Network Convenience
Santiago Carbó Valverde and David B. Humphrey 1 INTRODUCTION Automated teller machines (ATMs) and electronic payments have been two of the most important innovations in the banking industry over the last 20 years. Together, these two changes are strongly associated with the over 30 per cent reduction in the ratio of bank operating costs to asset value across 11 European countries from 1987 to 2004. Branch oﬃces in many countries have declined absolutely and been replaced with ATMs while electronic payments have replaced more costly paper-based transactions. Overall, some €25 billion may have been saved, accounting for over 0.35 per cent of these countries’ GDP (updated from Humphrey et al., 2006). Convenient access to ATM and branch networks is an important aspect of non-price competition for loan and deposit market shares. It is especially important for depositors since the majority of point-of-sale payments in Europe are in cash (Snellman et al., 2001) and ATMs are a cheaper way to deliver it to depositors than continued reliance on branch oﬃces. Banks recoup part of their payment and other expenses using ﬁxed fees, paying below market deposit rates, and (sometimes) per transaction prices. Institutions that provide greater convenience by maintaining relatively larger ATM and/or branch oﬃce networks in their market area may seek additional compensation by adjusting further their fees on priced services. Alternatively, banks with larger branch and ATM networks are more ‘productive’ since they generally have higher deposit/branch ratios. This generates greater loan/security output and revenues per...
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