ATM breakeven

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.

  1. Jayant says:

    Good argument. This is typical of any service/utility. When the cost comes down, people use the service more frequently. Banks never make money on ATM. They are used for customer stickiness. In fact, retail customers keep accounts which has highest ATM density. Now that ATMs can take deposit, interesting will be to see %age of money kept by bank in ATMs and received by ATMs as deposits vs branches. Then answer what is the right mix of cash to be kept and at what frequency ATMs need to be cleared? My suspicion is banks will make money on float is ATMs are cleared more often

  2. Arun says:

    Interesting analysis. Another thing that interests me is these inter-bank ATM tieups. HDFC does not charge ATM charges for salary account holders if they withdraw from other bank ATMs (if they use the visa debit card, that is). Normally, if you withdraw from a different bank’s ATM, the charge is Rs. 50. When I was in Meerut, HDFC’s ATM was in some godforsaken place, and I used to withdraw at least once a week from a different ATM. And I wasn’t being charged either. I must be the most loss making ATM customer for HDFC 🙂

  3. Madhu says:

    Also in some sense the money kept in the ATM is locking of capital for the bank on which it could earn some amount of interest. How is that taken in to account in the cost?

  4. Madhu says:

    Just a thought, how is the cost variable (per transaction)? would that also not be a fixed cost, say salary of a teller or something like that?

  5. Jayant says:

    Madhu, if I am not mistaken, it is the largely rent (in a mall, etc) for the ATM (assuming bank owns the ATM; electricity, etc should be small). Anand, correct me if wrong.

  6. Madhu says:

    That is for the ATM, I meant for the bank branch. Also there will be a particular variable cost in accessing info from an ATM as well.

  7. S Anand says:

    Arun, the inter-ATM withdrawal is usually not a problem. Some banks enter into agreements not to charge each other. Others charge Rs 10 or so. Given the low frequency of such usage, and especially only by high profit customers, banks usually don’t mind the small charge here.

  8. S Anand says:

    Madhu, the money in ATMs is like money in a bank branch. It stays on the banks accounts, and can be “lent” overnight, notionally. The bank doesn’t lose the interest.

  9. S Anand says:

    Regarding the branch cost, over 85% of the cost is manpower-driven (i.e. salary and rent). But that’s not to say it’s a fixed cost. Thanks to an ATM, a branch can move some of tellers out, So an ATM can save real money, even for apparantly fixed costs.

  10. Arun says:

    Ah, ok. Yeah, I guess the frequency of inter-bank transfers isn’t really that much. And if they don’t charge each other, then it’s not an issue at all. Not everyone’s as lazy as me! 😉

  11. S Anand says:

    If Bank X’s customer withdraws from Bank Y’s ATM, Bank X typically pays Bank Y Rs 10. But Bank X has (notionally) saved Rs 10 because an ATM transaction anyway saves the bank Rs 10. So banks that don’t charge customers for inter-bank ATM withdrawals aren’t doing their customers that much of a favour, actually.

  12. Arun says:

    But they do charge Rs. 50 normally, which is quite high, really. It’s only in some salary accounts (depends on the company, i guess) that they don’t charge. So, i would think they are either paying the other bank more than Rs. 10/- or they are making money off the customer for not using their own ATM.

  13. Arun says:

    In other words, I think they are actually doing a favour to salary account holders (probably because salary account holders keep more of their money lying with the bank and are more profitable in other ways)

  14. S Anand says:

    The banks I worked with were paying only Rs 10, so guess the banks are skimming their non-salaried customers. Or creating an artificial feature for the account.

  15. Arun says:

    Ah, Ok. Then methinks it’s a bit of both.

  16. Kakul says:

    Did you consider the money the bank will make on float? due to less amount being withdrawn

  17. S Anand says:

    Yes, we did look at increased float. But it was negligible. In fact, I was finding float to be marginal in several instances. See my post on demand drafts on 23rd March, for instance.

  18. Rahul says:

    Hi Anand,
    Great Work! Can you tell when does a typical bank branch break even? What are costs associated with setting up of a branch? Building, Salary of employees, etc
    How many years does a branch take to reach its peak of acquiring business (deposits+loans)?
    How does it reach profitability?
    Thanks

  19. Prasanna Bontha says:

    The costs of setting up an ATM can reach its break even if the up time of the ATM is maintained at its highest. The location of the ATM can also fetch interchange charges as well.