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Bankers and the cashless society
Bankers and the Cashless Societ Y Electronic funds transfer systems can bring problems as well as greater service and efficiency. Careful attention must be paid to system costs and customer needs before instituting EFTS.
ROGER C. BENNETT AND ROGER A. STRANG
Roger C. Bennett teaches marketing at McGill University; Roger A. Strang is on the business faculty at the University o f Southern California.
38
At the present time, banking and thrift institutions are involved in the most farreaching technological changes in their history. There have been major changes in the past, including the introduction of computers and magnetically encoded checks, but the complex range of new equipment, organizations, and services, which goes under the banner heading of electronic funds transfer systems (EFTS), can literally be called a technological revolution. In many quarters EFTS have been hailed as revolutionary, with promises of cost savings and increased business. Some bankers have heard these calls and rushed into systems with little or no consideration of the costs or benefits, or their acceptability to present and potential customers. Thus, problems associated with these systems have predictably begun to arise, and thoughtful executives are beginning to question the wisdom of hasty investment in this area. Despite this trend, our recent discussions with executives in banks and thrift institutions of all sizes and~ from m a n y parts of the United States indicate that m a n y are eager to
repeat the mistakes of their predecessors. 1 Others are considering EFT systems but are confused about the most appropriate elements for their institutions. The pressures on banks to introduce new systems have been formidable. Most banking literature has concentrated on the advantages of the developments and has failed to mention or has not dealt thoroughly with the problems associated with them. Only recently have articles appeared suggesting that the immediate future m a y not be as automated as had once been expected. These writings tend to concentrate on operational or legal difficulties rather than the likelihood that the system will be successful in the marketplace. 2 None of these articles has proposed ways of distinguishing between acceptable and unacceptable systems. This article reviews the major choices 1. Informally structured interviews were held with bankers in Boston, New York, Atlanta, Chicago, Philadelphia, and Los Angeles, and with rural banks in New England. Interviews were also conducted in Montreal and London. The unascribed quotes in this article come from respondents who were guaranteed anonymity. Interviews were also conducted with hardware manufacturers, software suppliers, and consultants. 2. See, for example, John B. Burton, "Electronic Funds Transfer: Pitfalls and Payoff," Harvard Business Review (July-August 1977).
BUSINESS HORIZONS
Bankers and the Cashless Society
p r e s e n t e d b y E F T S . It describes a n d a n a l y z e s s o m e o f t h e p r o b l e m s t h a t have b e s e t the i n n o v a t o r s a n d suggests c o n s u m e r - o r i e n t e d a p p r o a c h e s t h a t b a n k e r s can use in d e c i d i n g w h a t E F T s y s t e m , if any, is likely to p r o v e successful for t h e i r i n s t i t u t i o n . A l t h o u g h t h e discussion is l i m i t e d to b a n k s , it is r e l e v a n t to a n y i n d u s t r y t h a t is in the m i d s t o f massive t e c h n o l o g i c a l advances involving the public.
WHAT IS AN EFTS? Electronic funds transfer systems cover a wide range o f activities. T y p i c a l l y t h e y are divided into t w o m a i n t y p e s - w h o l e s a l e a n d consumer. Wholesale E F T S a p p l y to the large
a m o u n t s o f funds, or d a t a relating to t h e m , t h a t are t r a n s f e r r e d e l e c t r o n i c a l l y . This t y p e of e l e c t r o n i c b a n k i n g is n o t c o n s i d e r e d here. Consumer EFT systems cover the wide range o f services t h a t c a n b e u s e d d i r e c t l y b y b a n k c u s t o m e r s , w h e t h e r t h e y are c o r p o r a tions, the g o v e r n m e n t , or individual consumers. C o n s u m e r E F T s y s t e m s are also n o r m a l l y c o n s i d e r e d to b e o f t w o t y p e s , w h i c h are d i f f e r e n t i a t e d a c c o r d i n g to w h e t h e r or n o t t h e c o n s u m e r uses a plastic card. T h e first c a t e g o r y consists o f c h e c k guarantee a n d a u t h o r i z a t i o n schemes, a n d t h e use o f t e r m i n a l s - - i n retail stores o p e r a t e d b y either b a n k p e r s o n n e l or store p e r s o n n e l , or a t u n m a n n e d locations. T h e s e m a c h i n e s h a v e a v a r i e t y o f n a m e s , as listed in Figure 1.
FIGURE 1 Glossary of Frequently Used EFTS Terms and Acronyms 39
JUNE 1978
ACH
Automated Clearing House. A/lows the automatic transfer of funds among account holders of member banks.
ATM
Automated Teller Machine. These can be found away from financial institutions but are presently most often found inside or outside banks. They" permit deposits, withdrawals, and transfers between accounts.
CBCT
Customer Bank Communication Terminal. FuU ATM at a distance from a clearing bank.
Pay-by-Phone
Customers may make direct transfers to the accounts of merchants, utilities, and others who have joined the scheme. In some cases, customers with push-button phones may gain direct access to the computer witt~out going through an operator.
POS
Point-of-sale Terminal. A machine most often found in supermarkets that performs a variety of services. In the most simple cases it verifies checks. More complex machines provide full banking services, as well as direct transfers between customers' accounts and those of retail stores.
RSU
Remote Service Unit. This is the equivalent of a CBCT w h e n operated by a thrift institution.
Switch
The switching center operated by a bank or group of banks that receives instructions from remote terminals. In ten states the sharing of the facilities provided by a switch is mandatory.
R O G E R C. B E N N E T T AND R O G E R A. S T R A N G
Despite all this activity, the number of success stories is limited. Institutions have run into problems with EFT systems for two reasons: first, a serious underestimation of system costs, and second, a failure to consider the needs and wants of customers.
Justifying E FTS
Underestimating Costs
There are four main reasons normally given b y executives in banks and thrift institutions for their adoption of some form of EFTS.
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PROBLEMS WITHEFTS
Noncard services include preauthorized transfers, such as utility and insurance payments using an ACH (automated clearing house); preauthorized deposits, such as the automatic transfer of payroll and Social Security funds using an ACH; and payments made b y telephoning instructions to a financial institution.
- T h e system will lead to savings compared with the costs involved in traditional transactions. --The system will enable the institution adopting it to gain market share and even stimulate some primary demand. - T h e system is necessary because without it the financial institution will lose market share to its competitors. - " O u r institution has always been an innovator and we intend it to remain one." When one or more of these reasons apply, there is a great temptation to adopt some form of EFT system. In the nine years since the introduction of automated teller machines, an estimated 4,400 banks and thrift institutions have installed them. 3 We estimate that at this time five percent of savings banks and thirty percent of commercial banks offer some sort of machine to their customers. Both the Visa and Interbank (Mastercharge) organizations have made efforts to introduce national debit cards, and banks and savings associations have developed their own systems. Approximately half the commercial banks and a growing percentage of saving banks offer their customers no-passbook plans for savings and other accounts. Several banks have introduced pay-by-phone systems. 3. Linda Fenner Zimmer, PSI Annual Symposium. Chicago, 1976.
There are two major errors related to costs that we found among banks and savings institutions in their evaluation of new systems. First, some have tended to ignore costs completely or to calculate them only after a system is in place, assuming them to be minor. A revealing c o m m e n t from one respondent at a large New York savings bank highlighted the problem. We have t h e c o m p u t e r space. We have t h e p r o g r a m m i n g ability a n d p e r s o n n e l . T h e costs really c o m e d o w n to t h e cost of t h e m a c h i n e s a n d t h e s t a f f to r u n t h e s y s t e m w h e n it's in o p e r a t i o n .
Where costs have been calculated, the results are striking. The Bank of America, after a year's trial of sixty ATMs, found the average transaction cost to be $1.25 compared with $0.40 using a live teller. While Buckeye Federal Savings and Loan in Columbus, Ohio, a pioneer in implementing new EFT systems, has franchised its software to other institutions and appears to be thriving under the system, a vice-president recently noted the negative impact on profits and stated that his association may be forced to share its facilities "in order to lower its burdensome cost." The second mistake related to costs is a corollary of the first. Even if efforts are made to cost a proposed system, there is a tendency to gloss over expenses dire~ctly related to the introduction of the new system. Typical items often forgotten are --the cost of a "disaster plan." What happens if the computer goes down, its security is breached, or core records are lost?
BUSINESS HORIZONS
Bankers and the Cashless Society
--the m a r k e t i n g costs of the i n t r o d u c t i o n of the new system. --the cost of providing r e c o r d - k e e p i n g devices for consumers. --the cost of necessary changes to existing services. F o r e x a m p l e , the change f r o m passb o o k to s t a t e m e n t savings is o f t e n ignored w h e n a system is p r o p o s e d that c a n n o t operate in c o n j u n c t i o n with a passbook. --the cost o f dealing with c u s t o m e r complaints. A n d even w h e n these costs are considered, t h e y are o f t e n w r o n g l y calculated. F o r example, a p u b l i c a t i o n extolling the virtues o f s t a t e m e n t savings accounts m e n t i o n e d that the i n c r e m e n t a l costs of s t a t e m e n t savings conapared with p a s s b o o k a c c o u n t s varied f r o m $592 to $ 2 , 4 4 2 per t h o u s a n d a c c o u n t s per year. 4 But its calculations ignored the cost of maintaining a truly u p - t o - d a t e address list, a task n o t necessary in the case of p a s s b o o k a c c o u n t s . It also neglected o t h e r matters, such as the disturbing o f d o r m a n t accounts, which c o u l d have large, even incalculable, effects. When these costs are included, then, the cost-savings a r g u m e n t for E F T S n o r m a l l y disappears, at least for the foreseeable future. As Barry F. Sullivan, e x e c u t i v e vice-president of Chase M a n h a t t a n has c o m m e n t e d , " A t this p o i n t in time the e c o n o m i c s o f e l e c t r o n i c b a n k i n g range f r o m u n c e r t a i n to p o o r . " He is n o t the only b a n k e r w h o n o w expresses d o u b t s a b o u t the cost-saving p o t e n t i a l of E F T S . A r e c e n t survey f o u n d t h a t executives at a m a j o r i t y of federally c h a r t e r e d banks n o longer believe t h a t E F T systems actually save m o n e y , and o n l y 50 p e r c e n t believe t h e y will be cost justifiable in the future, s
Disregarding the Consumer Many institutions have i m p l e m e n t e d E F T systems with little t h o u g h t for the wants and 4. Statement Savings: Why and How? U.S. League of Savings Associations, 1975. 5. S. L. Mandell, PSI Annual Symposium. Chicago, 1976.
JUNE 1978
needs of the c o n s u m e r . C. H a r r y C o m m , vice-president o f Girard B a n k in Philadelphia and a f o r m e r p r e s i d e n t of the B a n k Marketing Association, c o n c l u d e d that E F T S have b e e n p r o m o t e d b y o p e r a t i o n s - o r i e n t e d people. There was a prevalent feeling that the public be d a m n e d . . , that this is what we want in banking and we're going to do it. The public will get used to it. But the public has n o t g o t t e n used to it, as n o t e d in a r e c e n t editorial o n E F T S in the American
Banker. 6
We have seen too many instances of projects undertaken and hardware purchased because it was shiny and new, only to find that the public did not want to use it and found nothing in the new equipment worth switching or paying more for. This failure can be very expensive. It is r e p o r t e d t h a t some ATMs handle as few as f o r t y transactions per m o n t h , which is h a r d l y p r o f i t a b l e for a $ 2 5 , 0 0 0 investment. Failures of this sort o f t e n result w h e n an attenapt is m a d e to switch c u s t o m e r s to n o - p a s s b o o k savings plans. T o one b a n k a d o p t i n g the new system, it was m u c h m o r e efficient, b u t it m e t strong resistance f r o m m a n y c o n s u m e r s , as the editorial in the A m e r i c a n B a n k e r makes clear. The result has been that many institutions have simply given up and continued to offer only the passbook savings form. And of those who have been able to talk the public into switching from passbook to no-passbook forms, the price paid has been high. For it has involved either more frequent calculation of interest, a higher rate paid than would be available on savings in passbook form, or both. In a d d i t i o n to the p r o b l e m s caused b y lack o f c o n s u m e r a c c e p t a n c e , consumerists have p o s e d six main objections to e l e c t r o n i c banking. - A lessening o f c o m p e t i t i o n could result, because banks will share facilities. - A c c o u n t i n f o r m a t i o n might be made available to u n a u t h o r i z e d people, t h e r e b y c o n s t i t u t i n g an invasion o f privacy. -Float would be reduced. - - T h e r e c o u l d be r e c o r d - k e e p i n g problems. - - T h e c o n s u m e r w o u l d be unable to stop payments. 6. American Banker, August 13, 1976.
4]
R O G E R C. BENNETT A N D R O G E R A. S T R A N G
--The fraudulent use of plastic cards could be difficult to prove. Many observers believe that with the possible exception of the third point, these criticisms have some validity. In any case, these complex issues are difficult to resolve. It is fair to say, however, that most bankers who have introduced systems have done little to address these complex problems, let alone eliminate them. Industry committees, though, tend to be more aware of the problems than individual bankers, and they are frequently discussed at conventions and other meetings. The problem of float is different. Although float will, in some cases, be reduced, the consumer's right to receive free use of money has not been asserted. Rather, the present use of float is viewed as a result of an inefficient system. If the system is improved, it is not clear that the consumer should necessarily continue to benefit from its former slowness. 42
EFTS WILL COME Despite these difficulties, it is likely that some EFT systems will survive and come into widespread use. While the outlook for success might seem gloomy, there are considerable potential benefits for both banking institutions and their customers. Traditional banking is becoming more expensive as labor costs increase; once an EFT system has operated b e y o n d the introductory stage and met with wide consumer acceptance, increased savings are likely. As for the customers, they will benefit from easier access to funds at all times of the day and the ability to transfer funds simply and cheaply. The expansion of EFTS, however, will be slower than anticipated, and more clearsighted management than has been shown to date will be needed. High costs are to be expected with the development of any new product or service, and they should be recognized and allowed for. It is probable that some of these costs
will eventually be reduced. For example, one observer believes that costs of POS terminals will decline in a similar fashion to those of desk calculators. Better locations for ATMs and increasing acceptance b y consumers will improve their usage rates. Institutions can also reduce costs if they share facilities. "Doing it alone" often means setting up a full network even if only part of it is to be used. Consumerist objections can be blunted by passing on any cost savings to customers, b y demonstrating competition in other areas, and by adapting procedures to meet other objections.
CONSUMER ACCEPTANCE The critical factor in the future success of any EFT system will be consumer acceptance. But how can the banker decide which system will be attractive to the consumer? His two main alternatives are to "wait and see," or to use marketing theory and research to evaluate consumer acceptance. The "wait and see" method has apparent advantages. It allows competitors to make and pay for mistakes and means that a financial institution need only move when the existence of a market has been p r o v e d . There is already considerable evidence available from the systems that have already gone into operation throughout the United States. Some systems, like pay-by-phone in Pittsburgh (see Figure 2), the check-guarantee scheme in Arizona, and the POS system in Lincoln, Nebraska, had great early successes. But as we have seen, there have been many more failures. It takes a long time for most new products or services to gain widespread consumer acceptance. In the United Kingdom, many EFT systems, including ATMs, are considered successful. But there, some elements of the system, such as preauthorized payroll deposit and preauthorized payments, have been in existence for many years. And the introduction of customer-operated machines started in the early 1960s.
BUSINESS HORIZONS
Bankers and the Cashless Society
FIGURE 2 Pay-by-Phone: Example of the Use of Diffusion Theory In Pittsburgh, Dollar Savings Bank offers a service where customers can pay utility bills, charge accounts, and certain other local bills by direct transfer from their savings account to the account of the party to whom they owe money. By using a personal code number followed by code numbers for each party to w h o m they are making payments and the amount owed, customers make all these
transfers by phone instructions. Those with push button phones can make their transfers without talking to the human teller. The customer is charged ten cents for each transaction. The likelihood of the system's success can be judged according to the criteria suggested by diffusion theory.
RELATIVE ADVANTAGE Cost
It is cheap compared to the cost of a stamp and check charges. (But if there were no check charges, would it be perceived as cheap?)
Reliability
All conversations are recorded. (Would there still be doubt in the customer's mind about unauthorized use of her account?)
Ease of operation
Most people can use the telephone.
Other
It can be used at times when the bank is closed.
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COMPATIBILITY Individual values
Little problem here.
Practices
The use of the phone is common. But using it as a bill paying instrument is not. Using a push-button phone as a computer terminal is not yet accepted practice.
COMPLEXITY
The new system will certainly seem complex to older citizens b u t younger consumers should grasp it more quickly.
DIVISIBILITY
The first major step is acquiring a code number. The system can then be used as much or as little as required. Perhaps getting a code number is a smaller step than obtaining a card as required by an ATM or POS.
COMMUNICABILITY
The system is easy to describe but difficult to observe.
There seem to be no major objections to the system. The theory provides indications of where marketing effort should be concentrated. The promotional material should mention the security of the system, stress its simplicity and, in some cases, include visual aids that show the system in operation.
JUNE 1978
A financial institution that follows a course similar to what is described here will probably avoid making some of the mistakes of those competitors who have implemented a pay-by-phone system.
ROGER C. BENNETT AND ROGER A. STRANG
The disadvantages of the "wait and see" method of marketing lie in the fear that competitors will preempt the market. A typical c o m m e n t comes from Robert Long of the Bank Administration Institute. More and more businessmen are coming to realize that money and financial information will flow over the most convenient channels. If they do not have these "most convenient" links, they may be bypassed.
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Such a point of view seems reasonable. But it also requires a bank to recognize those channels the consumer regards as the " m o s t convenient." Investing in a system that is not used as expected is worse than having no system at all. Determining whether a proposal will gain consumer acceptance without waiting for evidence gained through the experience of others is a complex matter. Diffusion theory provides some guidelines which can be used as an aid in estimating likely success. Everett Rogers suggests that there are five characteristics that affect the rate of market adoption of a new productfl These have all been tested and f o u n d useful. 1. Relative Advantage. The greater the perceived relative advantage of the proposal compared to previous products, whether in terms of cost, reliability or ease of operations, the more quickly the innovation will be accepted. 2. Compatibility. The more closely the innovation is compatible with existing individual values and practices, the more quickly it will be a d o p t e d . 3. Complexity. The more difficult an innovation is to understand and to use, the more slowly it is likely to be adopted. 4. Divisibility. If it is possible to try the new product on a limited basis, it is more likely to be accepted quickly. 5. Communicability. If it is possible to describe or to observe the results of the innovation with relative ease, adoption is likely to occur more quickly. 7. Everett M. Rogers, Diffusion of Innovation (New York: Free Press, 1962).
This kind of evaluation not only predicts the rate of market adoption of EFTS; it can also identify problems that may call for changes in marketing strategy. These might include stressing consumer benefits to overcome reluctance, providing additional incentives for use, or modifying the system to make it easier for consumers to understand. An example of this last approach is the mobile ATM demonstrator used by the Mosler Corporation, which allows the institution's customers to practice working the machine in a no-risk situation. A further advantage to this m e t h o d of evaluating EFT systems has been noted by Leonard Berry, who points out that it is possible to construct a matrix to compare alternative EFT plans, s This makes it easier to select the plan most likely to be successful in the marketplace.
MEETING CONSUMER NEEDS The surest way to guarantee acceptance of EFTS is to develop a new system which meets consumer needs or improves upon present methods. Most EFT systems are aimed at cutting bank costs by reducing the flow of paper, by removing the need for longer hours and additional personnel, or by limiting the capital costs of new full-service branches. The approach of responding to consumers' needs involves some market research. It cannot, however, be done by conventional methods, which ask consumers what they would like in an electronic banking system or which system they prefer. Most people, after all, find it difficult to say what they would like when they do not know what technology can offer as an improvement. Unless they have used actual systems, consumers find it difficult to make reliable comparisons. There are, however, some techniques that can be used to help consumers verbalize their needs.
8. "Diffusion Theory and EDTS," address before the PSRPWorkshop,March 26, 1976, Philadelphia,Pa.
BUSINESS HORIZONS
Bankers and the Cashless Society
For example, focus group interviews can be used to formulate hypotheses about the public's reaction to present and proposed services. Thematic apperception testing can be employed in an attempt to understand likely consumer reaction to a proposed system. One other research approach that could be successful concentrates on major commercial customers who have large numbers of employees. Systems that were useful to them and their employees could prove beneficial in banking. The introduction of such systems could safeguard the bank from losing important customers, and the experience gained from this approach could be of great value in promoting the acceptance of other forms of EFTS. The approach most likely to be successful, though, is to focus on consumer problems within the present system. Consumers can readily talk about their objections to products or services they are already using. Similar research led to the development of dog food that smells good, and to "Have it your w a y " at Burger King. When the major problems have been identified, new systems can then be developed or current systems improved to provide real benefits for the consumer.
PROVIDING A NEEDED SERVICE An example of meeting an existing need is the check guarantee systems that are operating throughout the United States, particularly in California and Arizona. Many bankers say that they have given up on the check system. The editorial in The American Banker noted that leaders in EFTS in the banking industry are n o w pointing out that The check has ceased to be a negotiable instrument. And if the public wants to obtain money away from home, a magnetic stamped card can be a better source of identification than any driver's license, friendly teller, or relative in another town. This may be so, b u t the fact remains that
JUNE 1978
80 percent of the adult population have checking accounts; b y contrast, only 33 percent have a regular credit card, even after twenty years of promotion. The check guarantee system makes the check a negotiable instrument again b y allowing the consumer to use his or her c h e c k b o o k at tens of thousands of businesses throughout the country. Eventually this system may be supplanted by terminals and a card-based system, b u t in the meantime it presents a significant and growing market opportunity. The system involves no changes in consumer habits and has been developed to be acceptable to banking organizations.
Bll
till it .as been shown t.at ,here are
1]1 I1 problems associated with the introduction of new banking systems. Top management should, therefore, carefully examine all budgets submitted. Danger signals to watch for might be the use of variable costs instead of full costs and the failure to account for some related b u t necessary change. An important question to answer is, "What happens if something goes wrong?" If costs have been correctly calculated, market data should next be examined. H o w have the forecasts been determined? Are they based on hope, guesswork, marketing theory, advanced research techniques, or the experience of other institutions? It is likely that the forecasts will b e c o m e more reliable as the forecasting technique appears higher on this list. Finally, top management should be vitally concerned about the selection of marketing programs. These programs should be based on research techniques similar to those used in generating forecasts. The consumer will require a large amount of information to understand the system and to overcome doubts that might arise. Providing this information will be time consuming and expensive, b u t it will also pay off.
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ROGER C. BENNETT AND ROGER A. STRANG
Roger C. Bennett teaches marketing at McGill University; Roger A. Strang is on the business faculty at the University o f Southern California.
38
At the present time, banking and thrift institutions are involved in the most farreaching technological changes in their history. There have been major changes in the past, including the introduction of computers and magnetically encoded checks, but the complex range of new equipment, organizations, and services, which goes under the banner heading of electronic funds transfer systems (EFTS), can literally be called a technological revolution. In many quarters EFTS have been hailed as revolutionary, with promises of cost savings and increased business. Some bankers have heard these calls and rushed into systems with little or no consideration of the costs or benefits, or their acceptability to present and potential customers. Thus, problems associated with these systems have predictably begun to arise, and thoughtful executives are beginning to question the wisdom of hasty investment in this area. Despite this trend, our recent discussions with executives in banks and thrift institutions of all sizes and~ from m a n y parts of the United States indicate that m a n y are eager to
repeat the mistakes of their predecessors. 1 Others are considering EFT systems but are confused about the most appropriate elements for their institutions. The pressures on banks to introduce new systems have been formidable. Most banking literature has concentrated on the advantages of the developments and has failed to mention or has not dealt thoroughly with the problems associated with them. Only recently have articles appeared suggesting that the immediate future m a y not be as automated as had once been expected. These writings tend to concentrate on operational or legal difficulties rather than the likelihood that the system will be successful in the marketplace. 2 None of these articles has proposed ways of distinguishing between acceptable and unacceptable systems. This article reviews the major choices 1. Informally structured interviews were held with bankers in Boston, New York, Atlanta, Chicago, Philadelphia, and Los Angeles, and with rural banks in New England. Interviews were also conducted in Montreal and London. The unascribed quotes in this article come from respondents who were guaranteed anonymity. Interviews were also conducted with hardware manufacturers, software suppliers, and consultants. 2. See, for example, John B. Burton, "Electronic Funds Transfer: Pitfalls and Payoff," Harvard Business Review (July-August 1977).
BUSINESS HORIZONS
Bankers and the Cashless Society
p r e s e n t e d b y E F T S . It describes a n d a n a l y z e s s o m e o f t h e p r o b l e m s t h a t have b e s e t the i n n o v a t o r s a n d suggests c o n s u m e r - o r i e n t e d a p p r o a c h e s t h a t b a n k e r s can use in d e c i d i n g w h a t E F T s y s t e m , if any, is likely to p r o v e successful for t h e i r i n s t i t u t i o n . A l t h o u g h t h e discussion is l i m i t e d to b a n k s , it is r e l e v a n t to a n y i n d u s t r y t h a t is in the m i d s t o f massive t e c h n o l o g i c a l advances involving the public.
WHAT IS AN EFTS? Electronic funds transfer systems cover a wide range o f activities. T y p i c a l l y t h e y are divided into t w o m a i n t y p e s - w h o l e s a l e a n d consumer. Wholesale E F T S a p p l y to the large
a m o u n t s o f funds, or d a t a relating to t h e m , t h a t are t r a n s f e r r e d e l e c t r o n i c a l l y . This t y p e of e l e c t r o n i c b a n k i n g is n o t c o n s i d e r e d here. Consumer EFT systems cover the wide range o f services t h a t c a n b e u s e d d i r e c t l y b y b a n k c u s t o m e r s , w h e t h e r t h e y are c o r p o r a tions, the g o v e r n m e n t , or individual consumers. C o n s u m e r E F T s y s t e m s are also n o r m a l l y c o n s i d e r e d to b e o f t w o t y p e s , w h i c h are d i f f e r e n t i a t e d a c c o r d i n g to w h e t h e r or n o t t h e c o n s u m e r uses a plastic card. T h e first c a t e g o r y consists o f c h e c k guarantee a n d a u t h o r i z a t i o n schemes, a n d t h e use o f t e r m i n a l s - - i n retail stores o p e r a t e d b y either b a n k p e r s o n n e l or store p e r s o n n e l , or a t u n m a n n e d locations. T h e s e m a c h i n e s h a v e a v a r i e t y o f n a m e s , as listed in Figure 1.
FIGURE 1 Glossary of Frequently Used EFTS Terms and Acronyms 39
JUNE 1978
ACH
Automated Clearing House. A/lows the automatic transfer of funds among account holders of member banks.
ATM
Automated Teller Machine. These can be found away from financial institutions but are presently most often found inside or outside banks. They" permit deposits, withdrawals, and transfers between accounts.
CBCT
Customer Bank Communication Terminal. FuU ATM at a distance from a clearing bank.
Pay-by-Phone
Customers may make direct transfers to the accounts of merchants, utilities, and others who have joined the scheme. In some cases, customers with push-button phones may gain direct access to the computer witt~out going through an operator.
POS
Point-of-sale Terminal. A machine most often found in supermarkets that performs a variety of services. In the most simple cases it verifies checks. More complex machines provide full banking services, as well as direct transfers between customers' accounts and those of retail stores.
RSU
Remote Service Unit. This is the equivalent of a CBCT w h e n operated by a thrift institution.
Switch
The switching center operated by a bank or group of banks that receives instructions from remote terminals. In ten states the sharing of the facilities provided by a switch is mandatory.
R O G E R C. B E N N E T T AND R O G E R A. S T R A N G
Despite all this activity, the number of success stories is limited. Institutions have run into problems with EFT systems for two reasons: first, a serious underestimation of system costs, and second, a failure to consider the needs and wants of customers.
Justifying E FTS
Underestimating Costs
There are four main reasons normally given b y executives in banks and thrift institutions for their adoption of some form of EFTS.
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PROBLEMS WITHEFTS
Noncard services include preauthorized transfers, such as utility and insurance payments using an ACH (automated clearing house); preauthorized deposits, such as the automatic transfer of payroll and Social Security funds using an ACH; and payments made b y telephoning instructions to a financial institution.
- T h e system will lead to savings compared with the costs involved in traditional transactions. --The system will enable the institution adopting it to gain market share and even stimulate some primary demand. - T h e system is necessary because without it the financial institution will lose market share to its competitors. - " O u r institution has always been an innovator and we intend it to remain one." When one or more of these reasons apply, there is a great temptation to adopt some form of EFT system. In the nine years since the introduction of automated teller machines, an estimated 4,400 banks and thrift institutions have installed them. 3 We estimate that at this time five percent of savings banks and thirty percent of commercial banks offer some sort of machine to their customers. Both the Visa and Interbank (Mastercharge) organizations have made efforts to introduce national debit cards, and banks and savings associations have developed their own systems. Approximately half the commercial banks and a growing percentage of saving banks offer their customers no-passbook plans for savings and other accounts. Several banks have introduced pay-by-phone systems. 3. Linda Fenner Zimmer, PSI Annual Symposium. Chicago, 1976.
There are two major errors related to costs that we found among banks and savings institutions in their evaluation of new systems. First, some have tended to ignore costs completely or to calculate them only after a system is in place, assuming them to be minor. A revealing c o m m e n t from one respondent at a large New York savings bank highlighted the problem. We have t h e c o m p u t e r space. We have t h e p r o g r a m m i n g ability a n d p e r s o n n e l . T h e costs really c o m e d o w n to t h e cost of t h e m a c h i n e s a n d t h e s t a f f to r u n t h e s y s t e m w h e n it's in o p e r a t i o n .
Where costs have been calculated, the results are striking. The Bank of America, after a year's trial of sixty ATMs, found the average transaction cost to be $1.25 compared with $0.40 using a live teller. While Buckeye Federal Savings and Loan in Columbus, Ohio, a pioneer in implementing new EFT systems, has franchised its software to other institutions and appears to be thriving under the system, a vice-president recently noted the negative impact on profits and stated that his association may be forced to share its facilities "in order to lower its burdensome cost." The second mistake related to costs is a corollary of the first. Even if efforts are made to cost a proposed system, there is a tendency to gloss over expenses dire~ctly related to the introduction of the new system. Typical items often forgotten are --the cost of a "disaster plan." What happens if the computer goes down, its security is breached, or core records are lost?
BUSINESS HORIZONS
Bankers and the Cashless Society
--the m a r k e t i n g costs of the i n t r o d u c t i o n of the new system. --the cost of providing r e c o r d - k e e p i n g devices for consumers. --the cost of necessary changes to existing services. F o r e x a m p l e , the change f r o m passb o o k to s t a t e m e n t savings is o f t e n ignored w h e n a system is p r o p o s e d that c a n n o t operate in c o n j u n c t i o n with a passbook. --the cost o f dealing with c u s t o m e r complaints. A n d even w h e n these costs are considered, t h e y are o f t e n w r o n g l y calculated. F o r example, a p u b l i c a t i o n extolling the virtues o f s t a t e m e n t savings accounts m e n t i o n e d that the i n c r e m e n t a l costs of s t a t e m e n t savings conapared with p a s s b o o k a c c o u n t s varied f r o m $592 to $ 2 , 4 4 2 per t h o u s a n d a c c o u n t s per year. 4 But its calculations ignored the cost of maintaining a truly u p - t o - d a t e address list, a task n o t necessary in the case of p a s s b o o k a c c o u n t s . It also neglected o t h e r matters, such as the disturbing o f d o r m a n t accounts, which c o u l d have large, even incalculable, effects. When these costs are included, then, the cost-savings a r g u m e n t for E F T S n o r m a l l y disappears, at least for the foreseeable future. As Barry F. Sullivan, e x e c u t i v e vice-president of Chase M a n h a t t a n has c o m m e n t e d , " A t this p o i n t in time the e c o n o m i c s o f e l e c t r o n i c b a n k i n g range f r o m u n c e r t a i n to p o o r . " He is n o t the only b a n k e r w h o n o w expresses d o u b t s a b o u t the cost-saving p o t e n t i a l of E F T S . A r e c e n t survey f o u n d t h a t executives at a m a j o r i t y of federally c h a r t e r e d banks n o longer believe t h a t E F T systems actually save m o n e y , and o n l y 50 p e r c e n t believe t h e y will be cost justifiable in the future, s
Disregarding the Consumer Many institutions have i m p l e m e n t e d E F T systems with little t h o u g h t for the wants and 4. Statement Savings: Why and How? U.S. League of Savings Associations, 1975. 5. S. L. Mandell, PSI Annual Symposium. Chicago, 1976.
JUNE 1978
needs of the c o n s u m e r . C. H a r r y C o m m , vice-president o f Girard B a n k in Philadelphia and a f o r m e r p r e s i d e n t of the B a n k Marketing Association, c o n c l u d e d that E F T S have b e e n p r o m o t e d b y o p e r a t i o n s - o r i e n t e d people. There was a prevalent feeling that the public be d a m n e d . . , that this is what we want in banking and we're going to do it. The public will get used to it. But the public has n o t g o t t e n used to it, as n o t e d in a r e c e n t editorial o n E F T S in the American
Banker. 6
We have seen too many instances of projects undertaken and hardware purchased because it was shiny and new, only to find that the public did not want to use it and found nothing in the new equipment worth switching or paying more for. This failure can be very expensive. It is r e p o r t e d t h a t some ATMs handle as few as f o r t y transactions per m o n t h , which is h a r d l y p r o f i t a b l e for a $ 2 5 , 0 0 0 investment. Failures of this sort o f t e n result w h e n an attenapt is m a d e to switch c u s t o m e r s to n o - p a s s b o o k savings plans. T o one b a n k a d o p t i n g the new system, it was m u c h m o r e efficient, b u t it m e t strong resistance f r o m m a n y c o n s u m e r s , as the editorial in the A m e r i c a n B a n k e r makes clear. The result has been that many institutions have simply given up and continued to offer only the passbook savings form. And of those who have been able to talk the public into switching from passbook to no-passbook forms, the price paid has been high. For it has involved either more frequent calculation of interest, a higher rate paid than would be available on savings in passbook form, or both. In a d d i t i o n to the p r o b l e m s caused b y lack o f c o n s u m e r a c c e p t a n c e , consumerists have p o s e d six main objections to e l e c t r o n i c banking. - A lessening o f c o m p e t i t i o n could result, because banks will share facilities. - A c c o u n t i n f o r m a t i o n might be made available to u n a u t h o r i z e d people, t h e r e b y c o n s t i t u t i n g an invasion o f privacy. -Float would be reduced. - - T h e r e c o u l d be r e c o r d - k e e p i n g problems. - - T h e c o n s u m e r w o u l d be unable to stop payments. 6. American Banker, August 13, 1976.
4]
R O G E R C. BENNETT A N D R O G E R A. S T R A N G
--The fraudulent use of plastic cards could be difficult to prove. Many observers believe that with the possible exception of the third point, these criticisms have some validity. In any case, these complex issues are difficult to resolve. It is fair to say, however, that most bankers who have introduced systems have done little to address these complex problems, let alone eliminate them. Industry committees, though, tend to be more aware of the problems than individual bankers, and they are frequently discussed at conventions and other meetings. The problem of float is different. Although float will, in some cases, be reduced, the consumer's right to receive free use of money has not been asserted. Rather, the present use of float is viewed as a result of an inefficient system. If the system is improved, it is not clear that the consumer should necessarily continue to benefit from its former slowness. 42
EFTS WILL COME Despite these difficulties, it is likely that some EFT systems will survive and come into widespread use. While the outlook for success might seem gloomy, there are considerable potential benefits for both banking institutions and their customers. Traditional banking is becoming more expensive as labor costs increase; once an EFT system has operated b e y o n d the introductory stage and met with wide consumer acceptance, increased savings are likely. As for the customers, they will benefit from easier access to funds at all times of the day and the ability to transfer funds simply and cheaply. The expansion of EFTS, however, will be slower than anticipated, and more clearsighted management than has been shown to date will be needed. High costs are to be expected with the development of any new product or service, and they should be recognized and allowed for. It is probable that some of these costs
will eventually be reduced. For example, one observer believes that costs of POS terminals will decline in a similar fashion to those of desk calculators. Better locations for ATMs and increasing acceptance b y consumers will improve their usage rates. Institutions can also reduce costs if they share facilities. "Doing it alone" often means setting up a full network even if only part of it is to be used. Consumerist objections can be blunted by passing on any cost savings to customers, b y demonstrating competition in other areas, and by adapting procedures to meet other objections.
CONSUMER ACCEPTANCE The critical factor in the future success of any EFT system will be consumer acceptance. But how can the banker decide which system will be attractive to the consumer? His two main alternatives are to "wait and see," or to use marketing theory and research to evaluate consumer acceptance. The "wait and see" method has apparent advantages. It allows competitors to make and pay for mistakes and means that a financial institution need only move when the existence of a market has been p r o v e d . There is already considerable evidence available from the systems that have already gone into operation throughout the United States. Some systems, like pay-by-phone in Pittsburgh (see Figure 2), the check-guarantee scheme in Arizona, and the POS system in Lincoln, Nebraska, had great early successes. But as we have seen, there have been many more failures. It takes a long time for most new products or services to gain widespread consumer acceptance. In the United Kingdom, many EFT systems, including ATMs, are considered successful. But there, some elements of the system, such as preauthorized payroll deposit and preauthorized payments, have been in existence for many years. And the introduction of customer-operated machines started in the early 1960s.
BUSINESS HORIZONS
Bankers and the Cashless Society
FIGURE 2 Pay-by-Phone: Example of the Use of Diffusion Theory In Pittsburgh, Dollar Savings Bank offers a service where customers can pay utility bills, charge accounts, and certain other local bills by direct transfer from their savings account to the account of the party to whom they owe money. By using a personal code number followed by code numbers for each party to w h o m they are making payments and the amount owed, customers make all these
transfers by phone instructions. Those with push button phones can make their transfers without talking to the human teller. The customer is charged ten cents for each transaction. The likelihood of the system's success can be judged according to the criteria suggested by diffusion theory.
RELATIVE ADVANTAGE Cost
It is cheap compared to the cost of a stamp and check charges. (But if there were no check charges, would it be perceived as cheap?)
Reliability
All conversations are recorded. (Would there still be doubt in the customer's mind about unauthorized use of her account?)
Ease of operation
Most people can use the telephone.
Other
It can be used at times when the bank is closed.
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COMPATIBILITY Individual values
Little problem here.
Practices
The use of the phone is common. But using it as a bill paying instrument is not. Using a push-button phone as a computer terminal is not yet accepted practice.
COMPLEXITY
The new system will certainly seem complex to older citizens b u t younger consumers should grasp it more quickly.
DIVISIBILITY
The first major step is acquiring a code number. The system can then be used as much or as little as required. Perhaps getting a code number is a smaller step than obtaining a card as required by an ATM or POS.
COMMUNICABILITY
The system is easy to describe but difficult to observe.
There seem to be no major objections to the system. The theory provides indications of where marketing effort should be concentrated. The promotional material should mention the security of the system, stress its simplicity and, in some cases, include visual aids that show the system in operation.
JUNE 1978
A financial institution that follows a course similar to what is described here will probably avoid making some of the mistakes of those competitors who have implemented a pay-by-phone system.
ROGER C. BENNETT AND ROGER A. STRANG
The disadvantages of the "wait and see" method of marketing lie in the fear that competitors will preempt the market. A typical c o m m e n t comes from Robert Long of the Bank Administration Institute. More and more businessmen are coming to realize that money and financial information will flow over the most convenient channels. If they do not have these "most convenient" links, they may be bypassed.
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Such a point of view seems reasonable. But it also requires a bank to recognize those channels the consumer regards as the " m o s t convenient." Investing in a system that is not used as expected is worse than having no system at all. Determining whether a proposal will gain consumer acceptance without waiting for evidence gained through the experience of others is a complex matter. Diffusion theory provides some guidelines which can be used as an aid in estimating likely success. Everett Rogers suggests that there are five characteristics that affect the rate of market adoption of a new productfl These have all been tested and f o u n d useful. 1. Relative Advantage. The greater the perceived relative advantage of the proposal compared to previous products, whether in terms of cost, reliability or ease of operations, the more quickly the innovation will be accepted. 2. Compatibility. The more closely the innovation is compatible with existing individual values and practices, the more quickly it will be a d o p t e d . 3. Complexity. The more difficult an innovation is to understand and to use, the more slowly it is likely to be adopted. 4. Divisibility. If it is possible to try the new product on a limited basis, it is more likely to be accepted quickly. 5. Communicability. If it is possible to describe or to observe the results of the innovation with relative ease, adoption is likely to occur more quickly. 7. Everett M. Rogers, Diffusion of Innovation (New York: Free Press, 1962).
This kind of evaluation not only predicts the rate of market adoption of EFTS; it can also identify problems that may call for changes in marketing strategy. These might include stressing consumer benefits to overcome reluctance, providing additional incentives for use, or modifying the system to make it easier for consumers to understand. An example of this last approach is the mobile ATM demonstrator used by the Mosler Corporation, which allows the institution's customers to practice working the machine in a no-risk situation. A further advantage to this m e t h o d of evaluating EFT systems has been noted by Leonard Berry, who points out that it is possible to construct a matrix to compare alternative EFT plans, s This makes it easier to select the plan most likely to be successful in the marketplace.
MEETING CONSUMER NEEDS The surest way to guarantee acceptance of EFTS is to develop a new system which meets consumer needs or improves upon present methods. Most EFT systems are aimed at cutting bank costs by reducing the flow of paper, by removing the need for longer hours and additional personnel, or by limiting the capital costs of new full-service branches. The approach of responding to consumers' needs involves some market research. It cannot, however, be done by conventional methods, which ask consumers what they would like in an electronic banking system or which system they prefer. Most people, after all, find it difficult to say what they would like when they do not know what technology can offer as an improvement. Unless they have used actual systems, consumers find it difficult to make reliable comparisons. There are, however, some techniques that can be used to help consumers verbalize their needs.
8. "Diffusion Theory and EDTS," address before the PSRPWorkshop,March 26, 1976, Philadelphia,Pa.
BUSINESS HORIZONS
Bankers and the Cashless Society
For example, focus group interviews can be used to formulate hypotheses about the public's reaction to present and proposed services. Thematic apperception testing can be employed in an attempt to understand likely consumer reaction to a proposed system. One other research approach that could be successful concentrates on major commercial customers who have large numbers of employees. Systems that were useful to them and their employees could prove beneficial in banking. The introduction of such systems could safeguard the bank from losing important customers, and the experience gained from this approach could be of great value in promoting the acceptance of other forms of EFTS. The approach most likely to be successful, though, is to focus on consumer problems within the present system. Consumers can readily talk about their objections to products or services they are already using. Similar research led to the development of dog food that smells good, and to "Have it your w a y " at Burger King. When the major problems have been identified, new systems can then be developed or current systems improved to provide real benefits for the consumer.
PROVIDING A NEEDED SERVICE An example of meeting an existing need is the check guarantee systems that are operating throughout the United States, particularly in California and Arizona. Many bankers say that they have given up on the check system. The editorial in The American Banker noted that leaders in EFTS in the banking industry are n o w pointing out that The check has ceased to be a negotiable instrument. And if the public wants to obtain money away from home, a magnetic stamped card can be a better source of identification than any driver's license, friendly teller, or relative in another town. This may be so, b u t the fact remains that
JUNE 1978
80 percent of the adult population have checking accounts; b y contrast, only 33 percent have a regular credit card, even after twenty years of promotion. The check guarantee system makes the check a negotiable instrument again b y allowing the consumer to use his or her c h e c k b o o k at tens of thousands of businesses throughout the country. Eventually this system may be supplanted by terminals and a card-based system, b u t in the meantime it presents a significant and growing market opportunity. The system involves no changes in consumer habits and has been developed to be acceptable to banking organizations.
Bll
till it .as been shown t.at ,here are
1]1 I1 problems associated with the introduction of new banking systems. Top management should, therefore, carefully examine all budgets submitted. Danger signals to watch for might be the use of variable costs instead of full costs and the failure to account for some related b u t necessary change. An important question to answer is, "What happens if something goes wrong?" If costs have been correctly calculated, market data should next be examined. H o w have the forecasts been determined? Are they based on hope, guesswork, marketing theory, advanced research techniques, or the experience of other institutions? It is likely that the forecasts will b e c o m e more reliable as the forecasting technique appears higher on this list. Finally, top management should be vitally concerned about the selection of marketing programs. These programs should be based on research techniques similar to those used in generating forecasts. The consumer will require a large amount of information to understand the system and to overcome doubts that might arise. Providing this information will be time consuming and expensive, b u t it will also pay off.
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