Department of Mathematics

MSU Federal Credit Union


Analysis of costs and income from an ATM network *

Financial institutions establish automatic teller machine (ATM) networks to provide convenient remote banking services to their customers, and to garner additional income from their use. The many regional ATM systems have joined into a cooperative, seamless, nowadays worldwide system, where customers of one financial institution may use the ATMs of other institutions.

Often a financial institution (bank A) will not charge their own customers for using their ATMs, but will surcharge withdrawals by guests. Moreover the guest's home financial institution (bank B) will also charge their customer some additional penalty for using the "foreign" ATM of Bank A. The network connecting both institutions will charge a fee to bank B as well as pay a smaller fee to bank A.

Thus income from an institution's ATM network is from three sources: surcharges on guests, penalties on customers, and fees from networks. The costs of ATMs are machine first costs, mechanical and software maintenance, and fees to networks.

MSUFCU's experience is that machines far from any one of their offices provide a net income (since most users are guests), and that campus and nearby machines produce a net loss (since most users are credit union members). They plan to install an additional 30 new machines in 5--10 new locations. The credit union would like an overall study of profitability of their ATM network. Should they institute a surcharge on guest withdrawals? How large a surcharge? Would surcharging cause more people to join the credit union in order to avoid the surcharge? Would surcharging decrease guest transactions, therefore reducing income? Would loans and shares increase based on a change in ATM strategy? What are the political issues related to surcharging? Is surcharging consistent with credit union philosophy? Is there a strategic partner not currently identified who would increase the number of ATMs deployed?

Where should new machines be placed? What type should they be --- full service, cash only or other? What is the ideal volume of certain machines at certain locations? What strategy is best for members and therefore for the credit union?

The deliverable from this project will be a set of recommendations together with Excel simulations of one or more successful future strategies for enhancing income from their ATM network.

This project will be managed by Gábor Francsics, Department of Mathematics.

* This summary was prepared by Jeffrey G. Jackson.

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