Driving ATM Banking Profits Using Game Theory
Since the 1980’s, ATMs have become a huge part of how consumers interact with banks on a regular basis. Not only did automated tellers dramatically reduce wait times for customers, but they also helped banks significantly cut distribution costs. Over the years, ATMs have become increasingly common, now often found at every street corner of major cities; however, many banks don’t realize how game theory, the study of strategic decision making, combined with ATM placement can increase revenues.
According to research conducted by A.T. Kearny, a leading global management consulting firm, a U.K. bank with 2,500 ATMs was able to generate the equivalent of 45 extra withdrawals per day, creating $19 million more in revenue per year, by improving the location of the bank’s lowest performing ATMs. At first glance, $19 million more in annual revenue may seem like a lot, but there are many hidden revenue streams ATMs can provide. The most obvious way ATMs generate profit is by charging foreign transaction fees when a customer uses a different bank’s ATM. However, ATMs, when designed and placed properly, can also increase customer satisfaction and retention, which in turn generates more revenue for the bank.
Currently, few banks have applied detailed scientific analysis on ATM placement; rather, firms have relied on tradition wisdom based off of geographic and demographic data. With this said, where does game theory come in? Consider this scenario from A.T. Kearny:
There are two banks, Alpha Bank and Beta Bank, who are currently deciding if they should place their ATM on the high-traffic High Street or on the adjacent, lower-traffic Center Road. Looking at Figure 2, if the banks were to make a decision without considering the other’s decision, they would both choose High Street or to open ATMs on both streets.
However, one can get a more detailed look at how net revenues are affected by the firms’ decisions through the matrix in Figure 3. If Alpha Bank decides to just open an ATM on High Street and Beta Bank is predicts this, Beta Bank will choose to open ATMs at both locations, lowering Alpha Bank’s revenues to 4 and increasing Beta Bank’s revenues to 42. Another possible strategy for this scenario is for the two banks to cooperate and share ATM resources. For example, Alpha Bank could choose to open an ATM on Center Road, and Beta Bank could choose to open an ATM on High Street (C). This would yield a total net revenue of $60,000, which higher than that of any other outcome, and then the two firms could split the revenue.
A.T. Kearny’s report ultimately provides some interesting insight on a seemingly mundane topic like ATM placement. Although personally I would have liked more detail as to how the research was conducted, one can clearly see that strategic decision making and predicting a competitor’s move can enhance a bank’s profit. This same kind of logic and gaming can apply to other business decisions too, such as chain store placement, location of public transportation stops, and more.