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
Florent Istace
Mieke Van Oostende
1 Our analysis in this article includes the
EU 27 excluding Luxembourg, the
Baltics, Malta and Cyprus and including
Norway and Switzerland.
2 Based on total costs of cash to all
stakeholders, i.e., merchants, consumers,
banks, government. These costs include
fully loaded direct costs, such as
processing, theft/fraud, security,
transport, time, cost of producing notes
and coins, etc. They do not include
secondary effects, such as lost income for
the government due to the grey economy.
As we have argued previously, continued re-
duction in cash payment volumes will re-
quire better alignment among various
stakeholders in the payments business. Ear-
lier articles have examined the high cost of
cash to merchants (“Mission impossible?
The cashless payments proposition for
‘small-ticket’ merchants,” McKinsey on
Payments, February 2008) and suggested
that banks, merchants, consumer groups
and governments should work together to
improve electronic networks (“Fighting
Cash not SEPA,” Payments: Charting a
Course to Profits, December 2005).
ATMs contribute significantly to the cost of
cash, and we urge banks to target these
costs side-by-side with cash volumes. Out-
lined below are the ATM strategies cur-
rently available to banks for this dual
attack. The precise strategy any bank fol-
lows will vary according to the maturity of
electronic payments networks and con-
sumer payments behaviors in the markets
the bank serves. To identify a winning strat-
egy, banks must understand both their
branch and ATM costs, as well as the fac-
tors influencing their customers’ payment
preferences. If they act aggressively, banks
in Europe stand to reap €11.5 billion in re-
duced costs.
Cash is expensive
Reducing cash volumes is essential to lower-
ing the economic burden of cash to society.
Europe1 spends an estimated €60 billion to
€100 billion each year processing 237 bil-
lion cash payments out of a total volume of
313 billion payments transactions. This
amounts to 0.5 percent to 0.8 percent of Eu-
rope’s gross national product (GDP).2
 ATMs: Complex weapons in the war on cash
Exhibit 1 Percent
Network costs,
namely ATM and
Back office
branch costs, costs
represent over
90% of the total 9
cost of cash
91
Network costs
(ATM and branches)
Source: McKinsey Payments Practice
For merchants in Europe, the cost of cash
equals, on average, 1.3 percent of the value
of each cash transaction. Levels of cash
usage vary from country to country, as does
the absolute cost of cash to merchants. In
France, for example, where consumers use
cash less frequently, the average “small-
ticket” merchant with annual sales of
€400,000 pays cash processing costs of
€2,900 each year. A similar merchant in
Germany pays €4,100.
Banks in Europe pay €28.2 billion annu-
ally for cash-related operations, which
amounts to 30 percent to 50 percent of so-
ciety’s total cash costs and represents 0.23
percent of GDP. This expense comprises
the fully loaded direct costs of cash opera-
tions, including the processing of cash at
the front office and back office, teller time,
installing and maintaining the ATM net-
work, security, fraud and theft, transport,
etc. The impact to banks is a 3 percent to
5 percent charge against their cost-to-in-
come ratio (Exhibit 1).
13
7 Other branch related costs
6 Float in branches
44 Cash processing costs
24 Administrative costs
10 Transport to/from branches
Cost of cash is increasing
The reduction in cash volumes raises logical
expectations of lower absolute cash costs,
but, perversely, the total cost of cash has ac-
tually risen. As shown in Exhibit 1, branch
and ATM costs represent the lion’s share of
banks’ cash costs. Allowing a customer to
access cash through branches is expensive,
and banks can substantially reduce their
branch costs by making ATMs the primary
channel for cash distribution.
But ATMs are complex weapons in the war
on cash. Consumers in many countries pre-
fer to access cash at the branch, despite the
widespread availability of ATMs. Conse-
quently, the expense of building and main-
taining ATM networks, added to already
high branch costs, drives the total cost of
cash upward. Even in some of the countries
that have sharply reduced cash transactions
in the branch, the cost of cash has still
risen, primarily due to the expansion of
ATM networks at a faster pace than growth
in ATM usage.
 14
Exhibit 2
Despite decreasing
cash usage, the
cost of cash keeps
rising
* EU27 excluding Luxembourg,
the Baltics, Malta and Cyprus
and including Norway and
Switzerland
Source: McKinsey European Payments
Profit Pools
It is a perverse phenomenon: Gradual decreases
in cash payments in Europe are generally
accompanied by rising costs to banks.
The Average Transaction Value (ATV) has
3
risen nominally, but when corrected for
inflation and GDP growth, ATV has decreased
in real terms relative to the cost of living.
4 Weighted average of 2002-2006 CAGR for
all countries except France for which we take
the 2004-2006 CAGR.
5 In most of Europe, the cost of cash to banks
ranges from 0.16% to 0.43% of GDP. By
reducing cash costs to 0.14% of GDP (the
amount paid by banks in the “cost buster”
countries), European banks can eliminate
€11.5 billion in costs.
McKinsey on Payments
Total Cash Transactions Europe*
€ billions
-1%
251
243 237
2002 2004 2006
Another trend pushing cash costs higher is
the gradual increase in the number of with-
drawals. We have found that in many Euro-
pean countries the number of cash deposits
and withdrawals is increasing and the aver-
age transaction value (relative to the cost of
living) is decreasing. Consumers are with-
drawing cash more frequently to spend rap-
idly.3 Absent incentives (and penalties),
simply increasing the availability of ATMs
can actually enable the “cash habit.”
It is a perverse phenomenon: Gradual de-
creases in cash payments in Europe are gen-
erally accompanied by rising costs to banks
(Exhibit 2). These increases are eroding
bank profit margins across Europe, and in
some countries, including Spain, Ireland
and most of Eastern Europe, banks’ cash
November 2008
Total cost of cash for banks in Europe*
€ billions
+2%
28.2
26.8
26.1
55%
55%
Branch 57%
45% 45%
ATM 43%
2002 2004 2006
costs have risen by over 3 percent annually,
for the period 2002-2006.
Best practices point the way to cost
reduction
To be sure, some countries (The Nether-
lands, Switzerland, Scandinavia, Belgium
and France) have managed to reduce their
overall cost of cash at an annual rate of 1.5
percent for the same period.4 These coun-
tries, which together account for around 20
percent of European banks’ cash costs, paid
€5.6 billion for cash processing in 2006. By
following the best practices of these “cost
busters,” banks in other countries can re-
duce their total cost of cash by at least
€11.5 billion, cutting the total cash cost for
European banks from €28.2 billion to €16.7
billion (0.14 percent of GDP).5
If they have not already done so, banks need
first to attack cash costs by implementing
lean structures in branches, streamlining the
flow of cash through the branch network
and shifting the balance of cash transactions
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
% of GDP CAGR
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”
DE ATT CZ SK
SK
“Convenience 0.16% 1.5%
25 seekers”
20 PT
DK SE
15
FI BE NO IE
CH UK
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

6 However, at 30% CAGR, growth rates
for electronic payments volumes in group
one are high.
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
European countries fall into one of four cat- withdrawals. Consequently, the cost of
egories, based on the growth rate of the cash for banks is exceptionally high (over
 16
Banks in “cost busting” countries can
push their cost of cash even lower by
tailoring payments services, including
optimized ATM functionality.
7 IADs, as non-bank operators offering
payments services, are similar to third-party
processors and independent sales
organizations (ISOs) in the U.S.
McKinsey on Payments
0.4 percent of GDP) and rising rapidly
(often over 5 percent CAGR), as banks
incur both high branch costs and the ex-
pense of building the ATM network.
Group 2: Cash addicts
Well-established ATM networks and strong
consumer preference for cash over electronic
instruments distinguish this group, which in-
cludes Germany, Austria, Italy and Spain.
These countries have adequate — and, in
some cases, highly developed — electronic
payments systems, but consumers and mer-
chants persist in their “cash addiction.”
ATM networks are strong but underlever-
aged compared to branches, as most con-
sumers go more frequently to branches for
cash transactions than other Europeans.
Consumers in these countries also tend to
withdraw higher amounts of cash for their
routine expenditures. The heavy use of
branches, combined with the expense of
maintaining robust ATM networks, is the
main factor in the steady rise in banks’ cash-
related expenses (increasing by nearly 2 per-
cent CAGR). The overall cost of cash relative
to GDP among “cash addicts” (0.28 percent
of GDP) is double that in other Western Eu-
ropean countries (0.14 percent of GDP).
Group 3: Cost busters
Countries that are reducing costs in Eu-
rope’s war on cash include The Netherlands,
Belgium, Scandinavia, Switzerland and
France. For most “cost busting” countries,
the downward trend in banks’ cash costs
began in 2002; in France, it started in 2004.
“Cost busters” demonstrate best practices
for banks in other markets to follow. Both
ATM and electronic payments networks are
November 2008
well developed, and banks have taken im-
portant steps to optimize their ATM net-
works, sometimes (as in Norway) in
coordination with independent ATM deploy-
ers (IADs).7 ATM growth is slow and out-
paces transaction growth only slightly. In
Finland, the ATM network is even shrinking
relatively quickly (-6 percent CAGR between
2002 and 2006).
Convincing consumers to withdraw cash
from ATMs instead of the branch increases
the likelihood that they will use cards for
point-of-sale (POS) purchases. Further-
more, banks in “cost busting”countries
consistently promote the use of the most
efficient instruments (ATMs, cards and
electronic transfers) with low or no fees for
electronic payments and light pricing for
cash withdrawals and paper-based transac-
tions (Exhibit 4 ).
Additionally, the cost of cards to merchants
in these countries is among the lowest in Eu-
rope, and both consumers and merchants
view cards favorably. Finally, thanks in part
to flat fees, cash-back at the POS is very
popular, which opens the door to further
optimization of ATM networks.
Thus, “cost busting” countries buck the typ-
ical trend of rising cash expense. The cost of
cash to banks in these countries is signifi-
cantly lower (0.14 percent of GDP) and still
shrinking in most countries (-1.5 percent
CAGR). They can, however, do more. Banks
in “cost busting” countries can push their
cost of cash even lower by tailoring pay-
ments services, including optimized ATM
functionality, to serve the needs of distinct
consumer segments.
Group 4: Convenience seekers
“Convenience seeking” countries (Ireland
and the U.K.) have several features in com-
mon with the “cost busters.” They have ma-
ture ATM and electronic payment networks,
the balance of cash transactions has shifted
from branches to ATMs, and both con-
sumers and merchants show a high level of
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
UK FI
85 CH SE BG Bulgaria
DK NO CH Switzerland

80 CZ Czech Republic
DE Germany
“Cost busters” & DK Denmark
75
SK “Convenience seekers”
AT ES Spain

70
CZ DE FI Finland
FR France
HU ES
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-
mental role played by IADs in the British
and Irish theaters of the war on cash. Now
controlling 40 percent of ATMs in the U.K.
and Ireland, IADs have increased the total
number of ATMs rapidly, not only encour-
aging consumers’ “cash habit,” but also rais-
ing the cost of cash to society.
In the U.K. and Ireland, IADs have increased the
total number of ATMs rapidly, not only
encouraging consumers’ “cash habit,”
but raising the cost of cash to society as well.
IADs have a highly profitable business
model in the U.K.: Making a “convenience
play,” they install cheaper, cash withdrawal-
only ATMs in high-traffic locations or wher-
ever the need is immediate and the customer
less sensitive to high fees (e.g., in restaurants
and pubs). IADs in the U.K. enjoy an
percent on annual revenue of €600 million.
Despite the sharp growth in ATMs, banks
in “convenience seeker” markets have not
been able to leverage IADs to optimize their
own networks. In the U.K., withdrawals at
bank-owned ATMs are free or priced very
low, and IADs charge for cash withdrawals
at “convenience locations.” This forces
banks to maintain their own networks in
order to serve their customers. In Ireland,
the pricing at IAD machines, which are
owned by banks but operated under a dif-
ferent brand, is comparable to pricing at
bank-branded ATMs. However, Irish banks
have not leveraged their IADs to optimize
their networks, as they have in Norway. If
banks in the U.K. and Ireland do not opti-
mize their networks, the wide availability of
ATMs will continue to feed the “cash habit.”
Remarkably, the cost of cash to banks in “con-
venience seeking” countries is comparable to
that in “cost busting” countries (0.16 percent
of GDP versus 0.14 percent of GDP), but this
cost is rising steadily (1.5 percent CAGR).
18 McKinsey on Payments
While IADs also operate in some “cost bust-
ing” markets, their business model has con-
tributed to the optimization of ATM
networks, particularly in the Nordic coun-
tries. Caution, however, is in order. Low fees
(to consumers or between banks) for trans-
actions at bank-owned ATMs may lead
IADs in some “cost busting” countries to
Position electronic payments instruments
as value-added services affording
consumers control over expenses, security
against fraud or theft, and availability of
resources whenever desired.
charge significantly higher fees than banks
do (as with the “convenience play” in the
U.K.). As a consequence, banks would not
be able to push customers to IAD machines
as a substitute for their own ATMs. Banks
in “cost busting” environments, therefore,
need to be careful in their ATM strategy so
as not to join the “convenience seekers.”
Position payments as value-added
services
While the “infrastructure builders” and
“cash addicts” vary in level of infrastructure
development, consumers in both groups are
similar in their preference for cash. If the
“infrastructure builders” increase consumer
use of cards and electronic payments, while
also leveraging ATM growth to reduce
branch costs, they may leapfrog the “cash
addicts” and join the “cost busters.” We
offer banks in both groups the following
recommendations for joining the “cost
busters” in the war on cash:
• Expand and improve electronic payment
systems as needed. Increase the number of
card-holders in the consumer market and
offer incentives to increase consumer usage
of cards for POS payments. Work with
merchants to increase their ability and
November 2008
willingness to accept card payments (e.g.,
the delay of payment makes merchants in
Germany hesitant to accept cards).
• Avoid the “commodity trap,” where
withdrawals and deposits are free at both
branches and ATMs. Poland and Bul-
garia have successfully avoided this trap
by charging for cash transactions at the
branch, and they rank among the highest
in profitability of cash, even when com-
pared to Western European countries.
Pricing cash transactions at branches is
not an isolated measure, but should be
one of several features in payments pack-
ages differentiated according to con-
sumer needs.
• Position electronic payments instruments
as value-added services affording con-
sumers control over expenses, security
against fraud or theft, and availability of
resources whenever desired. Boost the ap-
peal of cards and electronic payments
with innovative technology (e.g., RFID
and biometrics) and sophisticated fea-
tures like optimizing return, receiving re-
wards or even displaying status (as with
gold or platinum cards).
• Expand ATM functionality according to
a hierarchy of consumer needs in differ-
ent locations: (a) First-level machines of-
fering cash withdrawal only, (b)
Second-level ATMs adding bank-teller
transactions (e.g., credit transfers/direct
debit, balance inquiry, etc.), and (c)
Third-level ATMs including value-added
services (e.g., lottery tickets, as in Portu-
gal, or loading mobile phones).
Rethink ATM strategy
In the “convenience seeking” U.K. and Ire-
land, IADs have increased the availability
of cash through strong expansion of ATM
networks, and this expansion has occurred
without coordination with bank networks.
By contrast, IADs operating in some “cost
busting” countries have enabled banks to
reduce their networks, resulting in low
ATMs: Complex weapons in the war on cash
growth or a decrease in the total number of
ATMs. We observe four ATM strategies in
these markets, and banks should weigh the
advantages and disadvantages of each strat-
egy carefully as they rethink their game
plan for ATMs:
• Rationalize the network and optimize
the usage of each ATM. Retire under-uti-
lized ATMs to reduce costs (44 percent
of ATM expense is fixed cost) and pro-
mote alternative ways to access cash
(e.g., cash-back at POS).
• Position ATMs against the “convenience
game” of IADs. Optimize the network
not simply through capacity manage-
ment, but primarily by increasing the
payment services available at ATMs.
Value-added features (e.g., lottery tickets
as in Portugal and mobile phone uploads)
in bank-owned ATMs make it more diffi-
cult for IADs to enter the market.
• Make room for IADs to play the conven-
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.
19
• Following the example of banks in Ire-
land, join the “convenience game” by
building a network of ATMs with cash-
only functionality (operated under a sec-
ond brand). Charge a fee for cash
withdrawals to control consumers’ “cash
habit” and sustain a steady decline in
cash volumes.
***
Reducing the volume of cash payments does
not, in and of itself, reduce the cost of cash
for banks. Defining their ATM strategies
carefully, banks need to leverage their ATM
networks to reduce the number of deposits
and withdrawals in branches, while also
promoting electronic payments alternatives
that beat cash on security, convenience, so-
phistication and cost.
Olivier Denecker is a Payments Practice senior
knowledge expert, Florent Istace is a Payments Practice
knowledge specialist, and Mieke Van Oostende is an
associate principal, all in the Brussels office.