Automatic teller machines (ATMs) have met with mixed success since their introduction in the early 1970s. Some 165,000 are now installed in the United States, handling 900 million transactions a month. Yet few of them earn their keep.

An average-sized bank might spend $20 to $25 million a year on a network of 1,000 ATMs—a net cost of $20,000 to $25,000 for each one after revenue from fees charged to banks and customers has been deducted (Exhibit 1). This sum has, on the whole, proved to be an extra expense, since ATMs have not produced the personnel savings or branch closures that were expected. On the contrary, the total number of transactions has continued to rise, while the number of branches has increased over the past decade by a compound annual growth rate of 2 percent.

Alarmingly for the banks, the economics of ATMs could deteriorate still further as cash payments are replaced by point-of-sale debit (with and without cash-back), smart cards, and credit cards. A fall in the volume of cash withdrawals would mean a fall in ATM revenue.

There is, nevertheless, scope to raise the profitability of ATM networks. Experience shows that by reducing operating costs, improving...