The development of terminal-based EFT delivery systems in the eighties

Federal Home Loan Bank Board Journal, April, 1984 by Richard R. Dart

Editor's Note: The author is product manager of Trans Data Corporation of Cambridge, Maryland. As product manager, he is responsible for assessing the impact of various retail EFT technologies on the financial services industry. Also, he has overall responsibility for product development and industry relations within his firm's retail EFT program.

The views expressed in this article are those of the author, and do not necessarily reflect the views of the Federal Home Loan Bank Board.

Although the fundamental business of banking continues to revolve around deposits and loans, the manner in which banking services are being delivered is undergoing unparalleled change. The development of extensive brick and mortar branch networks throughout the Sixties and Seventies is now being augmented and, in some cases, displaced by another, more revolutionary concept: the development of terminal-based electronic funds transfer (EFT) networks through which a host of consumer financial products can be offered. Consequently, just as branching provided the vehicle for effectively reaching consumers and facilitating banking transactions, one of the primary factors that will determine an institution's competitive stature in the technology-oriented Eighties will be the ability to offer a wide distribution of conveniently accessed terminal services. Savings and loans must rethink their business in light of this changing technology and the opportunities inherent in the age of electronic banking.

Even though numerous opportunities exist, the S&L industry is faced with one of its more critical challenges in recent years. Along this line, deregulation of the financial services industry has created a highly competitive environment in which both the number of players and services offered has increased substantially. Banking is no longer a closed profession in which chartered members are confined by geographic boundaries and insulated by regulation. Deregulation has effectively redefined the products financial institutions can offer, how they can package and promote their services, and against whom they must compete. At the same time, changing social conditions and consumer preferences have created a demand for convenient services. Evidence of this demand can be seen in the striking trend toward self-service in everything from pumping gasoline to executing financial transactions. The combination of these conditions has forced financial institutions to invest in electronic banking services and delivery systems in an attempt to defend their market position and compete in an increasingly volatile business.

To meet these challenges, S&Ls must develop cohesive EFT strategies that will position them to compete successfully in a rapidly changing financial services environment. Although EFT has had an impact on a number of areas of banking, its most substantial growth within the past five years has been in the retail sector. Within this sector, S&Ls are essentially faced with four service options from which to develop EFT strategies: automated teller machines, point-of-sale (POS), telephone bill payment (TBP), and videotex/home banking services. Automated Teller Machines

The demand for convenient banking facilities that are accessible on a 24-hour basis has made automated teller machines (ATMs) the major focal point of EFT develpment. The response from consumers has generally been overwhelming, particularly in areas where conventional banking facilities cannot always be accessed, such as hospitals or work areas. Despite the importance of ATMs, however, some segments of the financial industry continue to lag substantially in terms of development, and the competitive gap that now exists can be expected to grow even wider. Along these lines, Trans Data Corporation's (TDC's) latest ATM survey of financial institutions, conducted in the second quarter of 1983, reveals that approximately 35 percent of the large S&Ls (deposits greater than $500 million) and 15 percent of the smaller S&Ls (deposits between $50 million and $500 million) currently support ATMs. An equal share of these institutions reported they were planning to offer these services, which suggests that close to 40 percent of the entire savings and loan industry with deposits greater than $50 million may be expected to have ATMs by the end of 1984.

Nevertheless, the growth of ATMs is far more prevalent among commercial banks. TDC survey results reveal that the vast majority of commercial banks (88 percent) with deposits greater than $500 million have installed ATMs, while 60 percent with deposits betweer $50 million and $500 million have done so. Taking into consideration those commercial banks that plan to offer these services, over three-quarters (78 percent) of this industry segment are expected to support ATMs by the end of 1984. In short, while commercial banks are quickly approaching saturation levels with regard to ATM development, the S&L industry generally lags far behind in terms of the overall number of current offerers.