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12 McKinsey on Payments November 2008

ATMs: Complex weapons in the

war on cash
At the very moment when cash payment volumes have started a gradual decline,
many countries face an unexpected rise in the absolute cost of cash processing.
In 2006, European banks spent a total of €28.2 billion on cash operations, eight
percent more than in 2002. In the same period, cash payment volumes declined
by six percent. This article examines the dynamics driving these divergent trends
in four distinct European “theaters” and recommends strategies for reducing
banks’ costs in the “war on cash.”

Olivier Denecker As we have argued previously, continued re- lows will vary according to the maturity of
Florent Istace duction in cash payment volumes will re- electronic payments networks and con-
quire better alignment among various sumer payments behaviors in the markets
Mieke Van Oostende
stakeholders in the payments business. Ear- the bank serves. To identify a winning strat-
lier articles have examined the high cost of egy, banks must understand both their
cash to merchants (“Mission impossible? branch and ATM costs, as well as the fac-
The cashless payments proposition for tors influencing their customers’ payment
‘small-ticket’ merchants,” McKinsey on preferences. If they act aggressively, banks
Payments, February 2008) and suggested in Europe stand to reap €11.5 billion in re-
that banks, merchants, consumer groups duced costs.
and governments should work together to
1 Our analysis in this article includes the improve electronic networks (“Fighting Cash is expensive
EU 27 excluding Luxembourg, the
Baltics, Malta and Cyprus and including
Cash not SEPA,” Payments: Charting a Reducing cash volumes is essential to lower-
Norway and Switzerland. Course to Profits, December 2005). ing the economic burden of cash to society.
2 Based on total costs of cash to all
ATMs contribute significantly to the cost of Europe1 spends an estimated €60 billion to
stakeholders, i.e., merchants, consumers,
banks, government. These costs include cash, and we urge banks to target these €100 billion each year processing 237 bil-
fully loaded direct costs, such as
costs side-by-side with cash volumes. Out- lion cash payments out of a total volume of
processing, theft/fraud, security,
transport, time, cost of producing notes lined below are the ATM strategies cur- 313 billion payments transactions. This
and coins, etc. They do not include
rently available to banks for this dual amounts to 0.5 percent to 0.8 percent of Eu-
secondary effects, such as lost income for
the government due to the grey economy. attack. The precise strategy any bank fol- rope’s gross national product (GDP).2
ATMs: Complex weapons in the war on cash 13

Exhibit 1 Percent
Network costs,
7 Other branch related costs
namely ATM and
Back office 6 Float in branches
branch costs, costs
represent over
90% of the total 9
cost of cash

44 Cash processing costs


24 Administrative costs

Network costs
(ATM and branches)
10 Transport to/from branches
Source: McKinsey Payments Practice

For merchants in Europe, the cost of cash Cost of cash is increasing

equals, on average, 1.3 percent of the value The reduction in cash volumes raises logical
of each cash transaction. Levels of cash expectations of lower absolute cash costs,
usage vary from country to country, as does but, perversely, the total cost of cash has ac-
the absolute cost of cash to merchants. In tually risen. As shown in Exhibit 1, branch
France, for example, where consumers use and ATM costs represent the lion’s share of
cash less frequently, the average “small- banks’ cash costs. Allowing a customer to
ticket” merchant with annual sales of access cash through branches is expensive,
€400,000 pays cash processing costs of and banks can substantially reduce their
€2,900 each year. A similar merchant in branch costs by making ATMs the primary
Germany pays €4,100. channel for cash distribution.
Banks in Europe pay €28.2 billion annu- But ATMs are complex weapons in the war
ally for cash-related operations, which on cash. Consumers in many countries pre-
amounts to 30 percent to 50 percent of so- fer to access cash at the branch, despite the
ciety’s total cash costs and represents 0.23 widespread availability of ATMs. Conse-
percent of GDP. This expense comprises quently, the expense of building and main-
the fully loaded direct costs of cash opera- taining ATM networks, added to already
tions, including the processing of cash at high branch costs, drives the total cost of
the front office and back office, teller time, cash upward. Even in some of the countries
installing and maintaining the ATM net- that have sharply reduced cash transactions
work, security, fraud and theft, transport, in the branch, the cost of cash has still
etc. The impact to banks is a 3 percent to risen, primarily due to the expansion of
5 percent charge against their cost-to-in- ATM networks at a faster pace than growth
come ratio (Exhibit 1). in ATM usage.
14 McKinsey on Payments November 2008

Exhibit 2
Despite decreasing Total Cash Transactions Europe* Total cost of cash for banks in Europe*
€ billions € billions
cash usage, the
cost of cash keeps +2%
rising -1%
251 26.1
243 237

Branch 57%

45% 45%
ATM 43%

* EU27 excluding Luxembourg,

the Baltics, Malta and Cyprus
and including Norway and
Switzerland 2002 2004 2006 2002 2004 2006
Source: McKinsey European Payments
Profit Pools

Another trend pushing cash costs higher is costs have risen by over 3 percent annually,
the gradual increase in the number of with- for the period 2002-2006.
drawals. We have found that in many Euro-
pean countries the number of cash deposits Best practices point the way to cost
To be sure, some countries (The Nether-
It is a perverse phenomenon: Gradual decreases lands, Switzerland, Scandinavia, Belgium
in cash payments in Europe are generally and France) have managed to reduce their
overall cost of cash at an annual rate of 1.5
accompanied by rising costs to banks. percent for the same period.4 These coun-
tries, which together account for around 20
and withdrawals is increasing and the aver- percent of European banks’ cash costs, paid
age transaction value (relative to the cost of €5.6 billion for cash processing in 2006. By
living) is decreasing. Consumers are with- following the best practices of these “cost
drawing cash more frequently to spend rap- busters,” banks in other countries can re-
idly.3 Absent incentives (and penalties), duce their total cost of cash by at least
The Average Transaction Value (ATV) has
€11.5 billion, cutting the total cash cost for

risen nominally, but when corrected for

simply increasing the availability of ATMs
inflation and GDP growth, ATV has decreased can actually enable the “cash habit.” European banks from €28.2 billion to €16.7
in real terms relative to the cost of living.
It is a perverse phenomenon: Gradual de- billion (0.14 percent of GDP).5
4 Weighted average of 2002-2006 CAGR for
all countries except France for which we take creases in cash payments in Europe are gen- If they have not already done so, banks need
the 2004-2006 CAGR.
erally accompanied by rising costs to banks first to attack cash costs by implementing
5 In most of Europe, the cost of cash to banks
ranges from 0.16% to 0.43% of GDP. By
(Exhibit 2). These increases are eroding lean structures in branches, streamlining the
reducing cash costs to 0.14% of GDP (the bank profit margins across Europe, and in flow of cash through the branch network
amount paid by banks in the “cost buster”
countries), European banks can eliminate
some countries, including Spain, Ireland and shifting the balance of cash transactions
€11.5 billion in costs. and most of Eastern Europe, banks’ cash from branches to ATMs. These measures
ATMs: Complex weapons in the war on cash 15

Exhibit 3
Share of branch transactions Cost of cash to banks
Four theaters in Percentage, 2006
Europe: countries 70 2002-2006
grouped according to 45 RO “Infrastructure 0.43% 6.2%
ATM growth and “Cash addicts” “Infrastructure builders” BG builders”
40 PL “Cash
reliance on branches addicts” 0.28% 1.8%
for cash transactions 35
IT “Cost
HU 0.14% –1.5%*
30 ES busters”
“Convenience 0.16% 1.5%
25 seekers”
20 PT
10 Countries
NL FR “Convenience seekers” AT Austria ES Spain NO Norway
5 “Cost busters” BE Belgium FI Finland PL Poland
* Weighted average of 2002-2006 FR France PT Portugal
BG Bulgaria
CAGR for all countries except
0 CH Switzerland HU Hungary RO Romania
France for which we take the
2004-2006 CAGR -6 -4 -2 0 2 4 6 8 10 12 14 16 18 20 25 45 CZ Czech Republic IE Ireland SE Sweden
Source: Retail Banking Research (RBR); DE Germany IT Italy UK United Kingdom
McKinsey European Payments
Growth in number of ATM
DK Denmark NL Netherlands
Profit Pools CAGR 2002-2006, Percent

typically result in a 15 percent to 25 percent ATM network and the share of cash transac-
reduction in banks’ cost of cash. To reap the tions in branches (a reflection of how suc-
biggest cost reductions, however, each bank cessful banks have been in pushing cash out
needs to rethink its ATM strategy and align of branches to ATMs). While our analysis
it with an overall offering of value-added focuses on Europe, countries in other re-
payment services. gions will likely find themselves in one of the
Whether the goal is to reverse an upward following four groups: “infrastructure
trend in cash costs or ensure the continuation builders,” “cash addicts,” “cost busters,” or
of a decline in cash transactions, the strategic “convenience seekers” (Exhibit 3).
options available to banks in the ATM busi- What follows is a description of the pay-
ness are determined largely by the payments ments infrastructure of each group and the
environment within which the bank operates. propensity of consumers in each group to
use cash, or electronic payments.
Four theaters in the war on cash
Payments systems differ greatly by country,
Group 1: Infrastructure builders
but our observations suggest that the funda- Greece and most Central and Eastern Eu-
mental dynamics driving the cost of cash to ropean (CEE) countries are beginning to
banks are consistent: develop robust, multi-channel payments in-
frastructures. However, consumers and
• ATM penetration and growth
merchants in these countries prefer cash,
• Share of cash transactions in branches and total electronic payment volumes re-
compared to ATMs main low.6 ATM distribution is sparse, and
• Share of cash in total payments volume. branches are the main channel for cash
6 However, at 30% CAGR, growth rates
for electronic payments volumes in group
European countries fall into one of four cat- withdrawals. Consequently, the cost of
one are high. egories, based on the growth rate of the cash for banks is exceptionally high (over
16 McKinsey on Payments November 2008

0.4 percent of GDP) and rising rapidly well developed, and banks have taken im-
(often over 5 percent CAGR), as banks portant steps to optimize their ATM net-
incur both high branch costs and the ex- works, sometimes (as in Norway) in
pense of building the ATM network. coordination with independent ATM deploy-
Group 2: Cash addicts ers (IADs).7 ATM growth is slow and out-
paces transaction growth only slightly. In
Well-established ATM networks and strong
Finland, the ATM network is even shrinking
consumer preference for cash over electronic
relatively quickly (-6 percent CAGR between
instruments distinguish this group, which in-
2002 and 2006).
cludes Germany, Austria, Italy and Spain.
These countries have adequate — and, in Convincing consumers to withdraw cash
some cases, highly developed — electronic from ATMs instead of the branch increases
payments systems, but consumers and mer- the likelihood that they will use cards for
chants persist in their “cash addiction.” point-of-sale (POS) purchases. Further-
ATM networks are strong but underlever- more, banks in “cost busting”countries
aged compared to branches, as most con- consistently promote the use of the most
sumers go more frequently to branches for efficient instruments (ATMs, cards and
cash transactions than other Europeans. electronic transfers) with low or no fees for
Consumers in these countries also tend to electronic payments and light pricing for
withdraw higher amounts of cash for their cash withdrawals and paper-based transac-
routine expenditures. The heavy use of tions (Exhibit 4 ).
branches, combined with the expense of Additionally, the cost of cards to merchants
maintaining robust ATM networks, is the in these countries is among the lowest in Eu-
main factor in the steady rise in banks’ cash- rope, and both consumers and merchants
related expenses (increasing by nearly 2 per- view cards favorably. Finally, thanks in part
cent CAGR). The overall cost of cash relative to flat fees, cash-back at the POS is very
to GDP among “cash addicts” (0.28 percent popular, which opens the door to further
of GDP) is double that in other Western Eu- optimization of ATM networks.
ropean countries (0.14 percent of GDP).
Thus, “cost busting” countries buck the typ-
ical trend of rising cash expense. The cost of
Banks in “cost busting” countries can cash to banks in these countries is signifi-
cantly lower (0.14 percent of GDP) and still
push their cost of cash even lower by shrinking in most countries (-1.5 percent
CAGR). They can, however, do more. Banks
tailoring payments services, including in “cost busting” countries can push their
optimized ATM functionality. cost of cash even lower by tailoring pay-
ments services, including optimized ATM
functionality, to serve the needs of distinct
Group 3: Cost busters consumer segments.
Countries that are reducing costs in Eu- Group 4: Convenience seekers
rope’s war on cash include The Netherlands, “Convenience seeking” countries (Ireland
Belgium, Scandinavia, Switzerland and and the U.K.) have several features in com-
France. For most “cost busting” countries, mon with the “cost busters.” They have ma-
the downward trend in banks’ cash costs ture ATM and electronic payment networks,
began in 2002; in France, it started in 2004. the balance of cash transactions has shifted
7 IADs, as non-bank operators offering “Cost busters” demonstrate best practices from branches to ATMs, and both con-
payments services, are similar to third-party
processors and independent sales
for banks in other markets to follow. Both sumers and merchants show a high level of
organizations (ISOs) in the U.S. ATM and electronic payments networks are comfort with electronic payments.
ATMs: Complex weapons in the war on cash 17

Exhibit 4 Share of ATM in cash withdrawals and deposits

Using cards to Percentage, 2006

withdraw cash leads 95

NL Countries
to higher card usage 90 FR AT Austria

at point-of-sale IE BE BE Belgium
85 CH SE BG Bulgaria
DK NO CH Switzerland

80 CZ Czech Republic
DE Germany
“Cost busters” & DK Denmark
SK “Convenience seekers”
AT ES Spain

CZ DE FI Finland
FR France
HU Hungary
65 IT IE Ireland
IT Italy
60 PL NL Netherlands
NO Norway
55 “Cash addicts” & PL Poland
“Infrastructure builders”
PT Portugal
50 RO Romania
0 4 8 12 16 20 24 28 32 36
SE Sweden
Source: Retail Banking Research (RBR);
McKinsey European Payments
Share of card payments in retail payments UK United Kingdom
Profit Pools Percentage, 2006

“Convenience seekers,” however, differ sig- estimated profit margin of 20 percent to 25

nificantly from “cost busters” in the detri- percent on annual revenue of €600 million.
mental role played by IADs in the British Despite the sharp growth in ATMs, banks
and Irish theaters of the war on cash. Now in “convenience seeker” markets have not
controlling 40 percent of ATMs in the U.K. been able to leverage IADs to optimize their
and Ireland, IADs have increased the total own networks. In the U.K., withdrawals at
number of ATMs rapidly, not only encour- bank-owned ATMs are free or priced very
aging consumers’ “cash habit,” but also rais- low, and IADs charge for cash withdrawals
ing the cost of cash to society. at “convenience locations.” This forces
banks to maintain their own networks in
order to serve their customers. In Ireland,
In the U.K. and Ireland, IADs have increased the the pricing at IAD machines, which are
total number of ATMs rapidly, not only owned by banks but operated under a dif-
ferent brand, is comparable to pricing at
encouraging consumers’ “cash habit,” bank-branded ATMs. However, Irish banks
have not leveraged their IADs to optimize
but raising the cost of cash to society as well. their networks, as they have in Norway. If
banks in the U.K. and Ireland do not opti-
IADs have a highly profitable business mize their networks, the wide availability of
model in the U.K.: Making a “convenience ATMs will continue to feed the “cash habit.”
play,” they install cheaper, cash withdrawal- Remarkably, the cost of cash to banks in “con-
only ATMs in high-traffic locations or wher- venience seeking” countries is comparable to
ever the need is immediate and the customer that in “cost busting” countries (0.16 percent
less sensitive to high fees (e.g., in restaurants of GDP versus 0.14 percent of GDP), but this
and pubs). IADs in the U.K. enjoy an cost is rising steadily (1.5 percent CAGR).
18 McKinsey on Payments November 2008

While IADs also operate in some “cost bust- willingness to accept card payments (e.g.,
ing” markets, their business model has con- the delay of payment makes merchants in
tributed to the optimization of ATM Germany hesitant to accept cards).
networks, particularly in the Nordic coun- • Avoid the “commodity trap,” where
tries. Caution, however, is in order. Low fees withdrawals and deposits are free at both
(to consumers or between banks) for trans- branches and ATMs. Poland and Bul-
actions at bank-owned ATMs may lead garia have successfully avoided this trap
IADs in some “cost busting” countries to by charging for cash transactions at the
branch, and they rank among the highest
Position electronic payments instruments in profitability of cash, even when com-
pared to Western European countries.
as value-added services affording Pricing cash transactions at branches is
not an isolated measure, but should be
consumers control over expenses, security one of several features in payments pack-
against fraud or theft, and availability of ages differentiated according to con-
sumer needs.
resources whenever desired. • Position electronic payments instruments
as value-added services affording con-
charge significantly higher fees than banks sumers control over expenses, security
do (as with the “convenience play” in the against fraud or theft, and availability of
U.K.). As a consequence, banks would not resources whenever desired. Boost the ap-
be able to push customers to IAD machines peal of cards and electronic payments
as a substitute for their own ATMs. Banks with innovative technology (e.g., RFID
in “cost busting” environments, therefore, and biometrics) and sophisticated fea-
need to be careful in their ATM strategy so tures like optimizing return, receiving re-
as not to join the “convenience seekers.” wards or even displaying status (as with
Position payments as value-added gold or platinum cards).
services • Expand ATM functionality according to
While the “infrastructure builders” and a hierarchy of consumer needs in differ-
“cash addicts” vary in level of infrastructure ent locations: (a) First-level machines of-
development, consumers in both groups are fering cash withdrawal only, (b)
similar in their preference for cash. If the Second-level ATMs adding bank-teller
“infrastructure builders” increase consumer transactions (e.g., credit transfers/direct
use of cards and electronic payments, while debit, balance inquiry, etc.), and (c)
also leveraging ATM growth to reduce Third-level ATMs including value-added
branch costs, they may leapfrog the “cash services (e.g., lottery tickets, as in Portu-
addicts” and join the “cost busters.” We gal, or loading mobile phones).
offer banks in both groups the following Rethink ATM strategy
recommendations for joining the “cost In the “convenience seeking” U.K. and Ire-
busters” in the war on cash: land, IADs have increased the availability
• Expand and improve electronic payment of cash through strong expansion of ATM
systems as needed. Increase the number of networks, and this expansion has occurred
card-holders in the consumer market and without coordination with bank networks.
offer incentives to increase consumer usage By contrast, IADs operating in some “cost
of cards for POS payments. Work with busting” countries have enabled banks to
merchants to increase their ability and reduce their networks, resulting in low
ATMs: Complex weapons in the war on cash 19

growth or a decrease in the total number of • Following the example of banks in Ire-
ATMs. We observe four ATM strategies in land, join the “convenience game” by
these markets, and banks should weigh the building a network of ATMs with cash-
advantages and disadvantages of each strat- only functionality (operated under a sec-
egy carefully as they rethink their game ond brand). Charge a fee for cash
plan for ATMs: withdrawals to control consumers’ “cash
• Rationalize the network and optimize habit” and sustain a steady decline in
the usage of each ATM. Retire under-uti- cash volumes.
lized ATMs to reduce costs (44 percent ***
of ATM expense is fixed cost) and pro- Reducing the volume of cash payments does
mote alternative ways to access cash not, in and of itself, reduce the cost of cash
(e.g., cash-back at POS). for banks. Defining their ATM strategies
• Position ATMs against the “convenience carefully, banks need to leverage their ATM
game” of IADs. Optimize the network networks to reduce the number of deposits
not simply through capacity manage- and withdrawals in branches, while also
ment, but primarily by increasing the promoting electronic payments alternatives
payment services available at ATMs. that beat cash on security, convenience, so-
Value-added features (e.g., lottery tickets phistication and cost.
as in Portugal and mobile phone uploads)
in bank-owned ATMs make it more diffi- Olivier Denecker is a Payments Practice senior
cult for IADs to enter the market. knowledge expert, Florent Istace is a Payments Practice
knowledge specialist, and Mieke Van Oostende is an
• Make room for IADs to play the conven-
associate principal, all in the Brussels office.
ience game. Take advantage of IADs, as
banks in Norway have done, to optimize
the bank-owned network, with full
awareness that some fees will leak out of
the bank’s network.