Futurama | Kennebec Savings Bank invests in cutting-edge ATMs to stay ahead of the competitive curve

In the Augusta suburb of Manchester, on a busy stretch of Route 202 dotted with gas stations, shops and office buildings, sits the future of Maine banking. The future is a brick building one-third the size of a typical banking branch, decorated with pine garlands and Christmas lights. The future's lobby has the crisp, cellophane smell of a newly unwrapped toy, which makes sense, because the future is all brand new to Maine.

Behold Kennebec Savings Bank's new electronic, completely unstaffed, 24/7 banking branch. Here, you can pull up, deposit money or checks into your KSB account instantly and withdraw cash using a state-of-the-art ATM. Or, park your car and swipe your KSB ATM card to gain access to the branch, where you can move your money around using another ATM inside, log onto the computer for free Internet banking (if you wander away don't worry — a motion detector will automatically log you off), or just zone out for awhile watching the 32-inch flat screen television on the wall, which fades slowly between colorful print and television advertisements describing all the things KSB can do for you, the customer. Because the customer means everything to KSB, a mid-sized bank by Maine standards, with four branches including the e-branch. KSB, like many nstitutions its size, finds its roster of competitors in the Internet age ever-expanding. To stay in the game, then, KSB built the e-branch, which contains two of the state's most technologically advanced ATMs.

"It's really the ultimate in customer convenience," says KSB CEO and President Mark Johnston, standing in the branch's lone public room on a recent morning as a piano version of KSB's theme song plays softly through ceiling-mounted speakers. The e-branch, Johnston explains, "offers expanded hours for people who can't make it into the branch during the normal nine-to-five time frame."

The e-branch's crowning jewel is a set of two envelope-free ATMs that create digital images of deposited checks, verify they are endorsed and legitimate, and instantly beam the image to Kennebec Savings' main branch in Augusta, which credits the deposit instantly. The client then receives a copy of the digital check on their receipt. This deposit image ATM, manufactured by Ohio-based banking tech company NCR, can also instantly count and deposit a stack of up to 40 bills arranged any which way — "just shove 'em in there" says Johnston. Each unit costs about $20,000 more per unit then regular ATMs. Kennebec Savings and NCR say Kennebec is the only company in the state to offer envelope-free check and cash deposits at image ATMs. (Industry observers like Chris Pinkham, president of the Maine Association of Community Banks, and Mark Walker, vice president of the Maine Bankers Association, say that could indeed be the case, though they couldn't confirm the claim.)

Though the cost of upgrading Kennebec Savings' four existing ATMs to image deposit machines last summer and of building the roughly $750,000 e-branch that opened in June 2006 was "significant," Johnston says, the gamble is already beginning to pay off. According to Senior Vice President Andrew Silsby, KSB's branch in the nearby town of Winthrop, which with six full-time staff is about the size a staffed Manchester branch would have been, costs about $415,000 a year to operate. The electronic branch? $42,000. And the e-branch in October, the most recent tallied month, completed only about 350 fewer transactions than its Winthrop counterpart, which logged 5,202 transactions.

Thanks to rapid customer adoption rates and low costs at the e-branch, KBS is currently enjoying life in Tomorrowland, but it's only a matter of time before its competitors catch up.

ATM economics
ATMs have in recent years been more of a money pit than a greenback bridge for banks around the country. While the number of ATMs in the United States increased from around 125,000 in 1995 to 400,000 in 2006, monthly transactions per ATM declined from around 7,000 to just over 2,000, according to a June 2007 report by industry consulting company Celent. Banks have spent millions operating the machines, upgrading their software and securing them, even as fee revenue from ATMs has plummeted because few consumer transactions now require cash. While the average on-premise ATM costs $1,444 a month to operate, it generates only $1,104 in revenue, according to the 2006 ATM Deployer Study by Dove Consulting in Boston.

Still, transactions at ATMs are two to three times cheaper than teller transactions, according to Bob Meara, senior analyst at Celent, and so banks are hungry for new ways to expand ATM use. Finding a way to up deposits at automated machines is a natural choice.

Historically, customers have been wary of depositing checks at ATMs. According to the Celent report, only about eight percent of ATM transactions are deposits. Image ATMs, like the ones KSB now offers, are designed to boost that percentage.

Banks buy image ATMs because "they want to increase deposit account relationships and have greater geographical penetration" says Bill Allen, director of business development for deposit solutions at NCR, the ATM giant that made KSB's new machines. For a rural bank like KSB, which has staffed branches in Augusta, Winthrop and Waterville in addition to the electronic branch in Manchester, expanding reach without the cost of staffing or regularly shuttling deposited checks from remote ATMs can provide a key competitive advantage.

"The competitive landscape is extensive," says KSB's Johnston. "It goes from local credit unions to big, regional banking and money centers to bigger financial institutions that are offering all types of services now. I think we all have to be a little smarter as to how we provide customer service, and the [e-branch] is a version of customer service."
Johnston says customers want to be able to complete common transactions like deposits and check-cashing without the hassle of going into a staffed branch.

"It's an investment in customer service," says Johnston. "It's not person-to-person customer service, it's another way for people to transact business with the bank on their own terms, when they want to do it."

In April and June, KSB held two "open houses" to introduce customers and the general public to the new ATMs and the Internet banking kiosk. For the preview event, the bank mailed invites to customers in the area and gave the 488 people who showed up a free five-dollar check to deposit at one of the new ATMs. The second open house introduced about 800 members of the general population to the e-branch to encourage them to become customers (about 100 people joined the bank after the event, according to KSB Senior Vice President Andrew Silsby). When open house attendees saw the image of their check on their receipt and confirmed the money's instant deposit, the response, says Silsby, was "wow."

"The customer adoption rate is really the big issue," Silsby explains. "There are very few places we go where we don't get complements on the grounds, how beautiful it is, or the convenience of it."

More than one year after those open houses, the Manchester branch has lived up to the hype. The e-branch enjoys the highest deposit rate as a percentage of ATM transactions of all of the bank's ATMs — 33%, compared with an average of 22% at KSB's other image ATMs — and has helped KSB beat national averages during its first-quarter, as the bank's total monthly transactions per ATM averaged 38% higher than the national average. Meanwhile, its deposits as a percentage of transactions were 21%, nearly three times the paltry national average of eight percent. (KSB didn't track ATM use prior to the upgrade, but Silsby is confident there has been an "absolute rise" in customer use since the ATMs were upgraded.)

"No banker would ever want to admit that they're looking at what their competitor does, but in reality they're looking at [KSB's electronic branch] from a couple of perspectives — one, it's an innovative way to go into a town without the cost of hiring people," says Pinkham of the Maine Association of Community Banks, and two, because the cost of the building and the advanced equipment is "fairly expensive."

"This is a new and different approach and I think they're all interested in seeing how it goes," says Pinkham of the association's 22 members, which includes banks with assets ranging from around $72 million to around $3.4 billion. Kennebec Savings Bank, a member of the association, has assets totaling $623 million and employs 78 full-time workers. "You have to recognize that bankers in general are pretty risk-adverse."

Setting the pace
If you're on a tear to try out the new image ATM in the United States, you'll likely come face-to-face with bankers' notorious risk aversion. Celent estimates slightly more than 20,000 image ATM software licenses have been sold as of March 2007, and orders for the ATMs hover around only 3,000, or less than one percent of the total ATMs in the country. The consulting company expects 3,000 to 5,000 new installations in 2008, and gradual installation acceleration in 2009 and 2010. Wells Fargo and Bank of America have both announced plans to replace their ATM networks nationwide with image machines, and Bank of America will begin the switch in New England "over the next couple of years," according to regional spokesperson Ernesto Anguilla. Five of the 10 largest banks in the country will begin replacing deposit-taking ATMs with image ATMs over the next five years, according to Celent's Meara, and by 2009 most deposit-taking ATMs in the country — some 50,000 to 100,000 ATMs — will be image-based. But today, banks like KSB, which Meara profiled in his image ATM report, are alone in front.

"In my experience, it is often the community banks who are leading with new technology," says Meara, because smaller institutions don't have to spend an enormous amount of money to integrate and update a teller system. "Kennebec Savings only had a handful of ATMs, so the price differential was on the order of tens of thousands for them, not millions."

KSB began building the framework necessary to open its electronic branch in 2003, when Congress passed Check 21, legislation that permitted banks to accept and send electronic images of checks. By 2006, KSB had completely converted to electronic check processing and eliminated paper processing. The upgrade, which Walker of the Maine Bankers Association says less than half of his members can match, gave the bank the technological foundation necessary to turn Johnston's 2005 game day epiphany into reality.

"The first idea [to install image ATMs] occurred during a Super Bowl ad," explains Johnston, who says KSB will likely open more e-branches though it doesn't have any specific plans to do so yet. "It was a Bank of America ad showing the ATMs and I said 'There's no reason we can't do this.'"