Asias Dragon and Tiger Atm Markets

By: Jose Allan Tan

Among the world's mature markets (North America, Western Europe and Japan), banking transactions through automated teller machines or ATMs are in rapid decline. Customers have adapted the use of the Internet to do most of their banking requirements, including paying bills and transferring monies.

All is not bad news for the world's ATM manufacturers, including IBM, NCR, and Wincor Nixdorf among others. Fast growing economies like China and India are predicted to take up the slack and then some.

According to market analyst Celent, retail banking across both countries is exploding as consumers' buying power rises, increasing demand for a range of financial services products from mortgages to credit cards as well as demand for more flexible and convenient access to bank distribution channels.

With fairly large proportions of the population being either unbanked or underbanked, particularly in India, and with low branch density per capita in both countries, financial institutions face pressure to grow their retail distribution capabilities to meet growing demand. Given the extremely low penetration levels of ATMs in both China and India, better leveraging this cost-effective self-service distribution channel represents a key opportunity for meeting this challenge.

Celent predicts the next three to five years will witness an even higher growth in these two countries to reach 350,000 ATMs in 2010 from about 125,000 ATMs in 2006.

Drivers of growth

Celent analyst Sandeep Hebbar notes that two drivers have combined to drive demand for ATMs in both markets -- strong economic growth and even stronger retail banking demands. "Retail banking across both countries is exploding as consumers' buying power rises, creating heightened demand for a range of financial services products from mortgages to credit cards as well as demand for more flexible and convenient access to bank distribution channels," says Hebbar.

Celent research suggest that a fairly large proportion of the population is either unbanked or underbanked, particularly in India, and with low branch density per capita in both countries, financial institutions are facing pressure to grow their retail distribution capabilities to meet growing demand.

Banks began investing in building their ATM networks instead of branch networks as the high real estate costs and cost of operating a branch network became prohibitive in the urban areas (the real estate costs in some of the top Chinese and Indian cities are amongst the highest globally).

"In addition, customers prefer the convenience of round-the-clock neighborhood banking offered by ATMs. Both China and India are predominantly cash based societies. The relatively high need for cash and preference for ATM banking further drives the consumers to ATMs more frequently," says Wenli Yuan, senior analyst at Celent.

Inhibitors

Both China and India have densely populated urban cities and relatively under-developed rural areas. As expected, city dwellers in both countries have easy access to banks courtesy of extensive ATM networks. "Banks considering to deploy ATMs will need to study the economics of setting up new ATMs in these cities more closely," says Yuan.

This is a very different picture among smaller towns and rural population where "infrastructure (especially telecommunications infrastructure) and cultural factors (such as fear or technology) might hamper its growth. However, we believe that these inhibitors of growth are much weaker than the growth drivers," adds Hebbar.

In October 2007, the State Bank of India announced plans to grow its ATM fleet to 25,000 machines over the next three years. India's second largest bank is planning to add up to 2,500 additional ATMs to its network of 3,600.

For its part, China is working furiously to add more ATMs in preparation for the Beijing Olympics in 2008. Queuing remains a big problem in urban China. Chinese people use ATMs to check their bank balance as often as twice a day. According to the People's Bank of China up to 40 percent of their transactions are deposits. Ergo, long queues!

Advice on ATM adoption

The good news is that there is still plenty of unbanked customers in both countries. The bad news is that competition is stiff and will get stiffer as governments slowly and reluctantly open up the markets to foreign players.

"Banks should start looking to expand their ATM networks in midsize and small cities and suburban areas, as well as off-premise locations in major and second tier cities," observes Yuan.

"With cost escalating, small banks in China and India may want to consider outsourcing ATMs installation and maintenance to third party providers," advices Hebbar.

Hebbar also notes that many of the current crop of ATM machines still offer basic functions only -- deposit taking, balance inquiry, withdrawal and transfers. There is a need for innovation and more functionality.

"Innovation in functionality of ATMs is needed. Consumers in these markets (both China and India) will more readily adopt functionality such as mobile phone top-up, bill payment, and ticketing," says Hebbar directing his focus on ATM vendors.

Celent research suggests that ATM vendors need to start working with other industries such as petrochemical companies to implement more off-premise ATMs in major and second tier cities.

Yuan agrees. "Innovations in business model helps. Vendors can offer more ATM's ownership models to customers; for example, they should consider co-running the ATM operations and maintenance with customers in addition to merely providing them the machine or solution," she adds.

Finally, as ATM technology become increasingly complex in response to market demands, vendors "should establish a wide network of sales and servicing centers, including in the smaller towns and rural areas of both these countries, since these areas will drive future business growth," concludes Hebbar.

Hey ATM vendor -- better start paying attention to your customers -- not your sales targets!

Editor's note:To obtain a full copy of the report, please click here: http://www.celent.com/PressReleases/20071126/ATMChinaIndia.htm.

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