Banks install ATMs to lower their branch costs, and to attract new customers. When working out the economics of ATMs, we found that lowering branch costs alone could not be a viable reason to install an ATM.

The bank argued as follows:

“Every time someone withdraws money from an ATM, they avoid going to the branch. With enough people going to the ATM, I can afford not to increase my branch size, and that saves me money. Since it costs me Rs 20 every time a person withdraws cash (in terms of salary, rent, etc.) and an ATM costs about Rs 2,200 a day, I’ll break even if there are 110 cash withdrawals from the ATM.”

The argument misses a crucial point: every ATM transaction does not replace a branch transaction. People visit ATMs more frequently than branches, thanks to them having smaller queues and being open 24 hours. As a rule of thumb, people visit ATMs twice as often as a branch to withdraw cash.

A teammate didn’t believe me. We argued.

“When I used the branch, I would withdraw money for the entire month at the beginning of the month. I continue the same with an ATM.”

“But I withdraw cash whenever I need money. And in smaller chunks. Sometimes, I just withdraw Rs 200. That way, I get to carry less cash too.”

“Ah, you may be the exception, as always. Very well, I will find out.”

He went to a fairly representative branch, and asked them how much money would people withdraw before their ATM was installed. Since ATMs impose a limit of Rs 15,000, he discarded transactions above Rs 15,000. The answer was: people used to withdraw about Rs 3,600 every time they came to the branch. Then he asked, what’s the average ATM withdrawal. Answer: Rs 1,900. In other words, people seemed to withdraw only half as much from an ATM as from a branch. (And therefore, on average would withdraw twice as often every month.) My teammate was finally convinced.

So, in order to break even, the ATM must be used about 220 times a day, not 110 times. This is nearly impossible. ATMs are used mostly in peak hours: morning while travelling to work, during lunch, and evening when travelling back to work. Apart from these hours, the ATM is practically unused. This gives roughly a 4-hour window. The time between two ATM transactions is at least a minute. So a very busy ATM might be able to make the 220 transactions in that time. Most ATMs will not.

In fact, we found that only 4 ATMs managed to break even, among their 250. The cost-saving argument alone is difficult to justify an ATM.