This document discusses problems that banks have encountered when implementing electronic funds transfer systems (EFTS). It finds that banks have often underestimated costs and failed to consider customer needs and wants. While EFTS promise benefits like cost savings, many early systems have failed due to high costs and lack of consumer acceptance. The document argues that for EFTS to be successful, banks must carefully evaluate costs, consider consumer concerns, and determine which systems consumers will actually want to use through marketing research rather than just waiting to see what becomes popular. Overall adoption of EFTS will be slower than initially expected due to the difficulties many early systems have faced.

1. Bankers and the Cashless Societ Y
Electronic funds transfer systems can bring problems as well
as greater service and efficiency. Careful attention must be
paid to system costs and customer needs before instituting EFTS.
ROGER C. BENNETT AND ROGER A. STRANG
38
Roger C. Bennett teaches marketing at McGill University;
Roger A. Strang is on the business faculty at the University
of Southern California.
At the present time, banking and thrift
institutions are involved in the most far-
reaching technological changes in their his-
tory. There have been major changes in the
past, including the introduction of computers
and magnetically encoded checks, but the
complex range of new equipment, organiza-
tions, and services, which goes under the
banner heading of electronic funds transfer
systems (EFTS), can literally be called a
technological revolution.
In many quarters EFTS have been hailed
as revolutionary, with promises of cost savings
and increased business. Some bankers have
heard these calls and rushed into systems with
little or no consideration of the costs or
benefits, or their acceptability to present and
potential customers. Thus, problems asso-
ciated with these systems have predictably
begun to arise, and thoughtful executives are
beginning to question the wisdom of hasty
investment in this area.
Despite this trend, our recent discussions
with executives in banks and thrift institu-
tions of all sizes and~from many parts of the
United States indicate that many are eager to
repeat the mistakes of their predecessors. 1
Others are considering EFT systems but are
confused about the most appropriate ele-
ments for their institutions.
The pressures on banks to introduce new
systems have been formidable. Most banking
literature has concentrated on the advantages
of the developments and has failed to men-
tion or has not dealt thoroughly with the
problems associated with them. Only recently
have articles appeared suggesting that the
immediate future may not be as automated as
had once been expected. These writings tend
to concentrate on operational or legal diffi-
culties rather than the likelihood that the
system will be successful in the marketplace.2
None of these articles has proposed ways of
distinguishing between acceptable and un-
acceptable systems.
This article reviews the major choices
1. Informally structured interviews were held with
bankers in Boston, New York, Atlanta, Chicago, Philadelphia,
and Los Angeles, and with rural banks in New England.
Interviews were also conducted in Montreal and London. The
unascribed quotes in this article come from respondents who
were guaranteed anonymity. Interviews were also conducted
with hardware manufacturers, software suppliers, and con-
sultants.
2. See, for example, John B. Burton, "Electronic Funds
Transfer: Pitfalls and Payoff," Harvard Business Review
(July-August 1977).
BUSINESS HORIZONS

2. Bankers and the Cashless Society
presented by EFTS. It describes and analyzes
some of the problems that have beset the
innovators and suggests consumer-oriented
approaches that bankers can use in deciding
what EFT system, if any, is likely to prove
successful for their institution. Although the
discussion is limited to banks, it is relevant to
any industry that is in the midst of massive
technological advances involving the public.
WHAT IS AN EFTS?
Electronic funds transfer systems cover a wide
range of activities. Typically they are divided
into two main types-wholesale and con-
sumer. Wholesale EFTS apply to the large
amounts of funds, or data relating to them,
that are transferred electronically. This type
of electronic banking is not considered here.
Consumer EFT systems cover the wide
range of services that can be used directly by
bank customers, whether they are corpora-
tions, the government, or individual con-
sumers. Consumer EFT systems are also
normally considered to be of two types,
which are differentiated according to whether
or not the consumer uses a plastic card.
The first category consists of check guar-
antee and authorization schemes, and the use
of terminals--in retail stores operated by
either bank personnel or store personnel, or at
unmanned locations. These machines have a
variety of names, as listed in Figure 1.
FIGURE 1
Glossary of Frequently Used EFTS Terms and Acronyms
ACH
ATM
CBCT
Pay-by-Phone
POS
RSU
Switch
Automated Clearing House. A/lows the automatic transfer of
funds among account holders of member banks.
Automated Teller Machine. These can be found away from
financial institutions but are presently most often found inside or
outside banks. They" permit deposits, withdrawals, and transfers
between accounts.
Customer Bank Communication Terminal. FuU ATM at a dis-
tance from a clearing bank.
Customers may make direct transfers to the accounts of
merchants, utilities, and others who have joined the scheme. In
some cases, customers with push-button phones may gain direct
access to the computer witt~out going through an operator.
Point-of-sale Terminal. A machine most often found in super-
markets that performs a variety of services. In the most simple
cases it verifies checks. More complex machines provide full
banking services, as well as direct transfers between customers'
accounts and those of retail stores.
Remote Service Unit. This is the equivalent of a CBCT when
operated by a thrift institution.
The switching center operated by a bank or group of banks that
receives instructions from remote terminals. In ten states the
sharing of the facilities provided by a switch is mandatory.
39
JUNE 1978

3. ROGER C. BENNETT AND ROGER A. STRANG
Noncard services include preauthorized
transfers, such as utility and insurance pay-
ments using an ACH (automated clearing
house); preauthorized deposits, such as the
automatic transfer of payroll and Social
Security funds using an ACH; and payments
made by telephoning instructions to a finan-
cial institution.
PROBLEMS WITHEFTS
Despite all this activity, the number of success
stories is limited. Institutions have run into
problems with EFT systems for two reasons:
first, a serious underestimation of system
costs, and second, a failure to consider the
needs and wants of customers.
40
Justifying EFTS
There are four main reasons normally given
by executives in banks and thrift institutions
for their adoption of some form of EFTS.
-The system will lead to savings com-
pared with the costs involved in traditional
transactions.
--The system will enable the institution
adopting it to gain market share and even
stimulate some primary demand.
-The system is necessary because without
it the financial institution will lose market
share to its competitors.
-"Our institution has always been an
innovator and we intend it to remain one."
When one or more of these reasons apply,
there is a great temptation to adopt some
form of EFT system. In the nine years since
the introduction of automated teller ma-
chines, an estimated 4,400 banks and thrift
institutions have installed them. 3 We estimate
that at this time five percent of savings banks
and thirty percent of commercial banks offer
some sort of machine to their customers.
Both the Visa and Interbank (Mastercharge)
organizations have made efforts to introduce
national debit cards, and banks and savings
associations have developed their own sys-
tems. Approximately half the commercial
banks and a growing percentage of saving
banks offer their customers no-passbook plans
for savings and other accounts. Several banks
have introduced pay-by-phone systems.
3. Linda Fenner Zimmer, PSI Annual Symposium.
Chicago, 1976.
Underestimating Costs
There are two major errors related to costs
that we found among banks and savings
institutions in their evaluation of new sys-
tems. First, some have tended to ignore costs
completely or to calculate them only after a
system is in place, assuming them to be
minor. A revealing comment from one respon-
dent at a large New York savings bank
highlighted the problem.
We have the computer space. We have the program-
ming ability and personnel. The costs really come
down to the cost of the machines and the staff to run
the system when it's in operation.
Where costs have been calculated, the
results are striking. The Bank of America,
after a year's trial of sixty ATMs, found the
average transaction cost to be $1.25 com-
pared with $0.40 using a live teller. While
Buckeye Federal Savings and Loan in Colum-
bus, Ohio, a pioneer in implementing new
EFT systems, has franchised its software to
other institutions and appears to be thriving
under the system, a vice-president recently
noted the negative impact on profits and
stated that his association may be forced to
share its facilities "in order to lower its
burdensome cost."
The second mistake related to costs is a
corollary of the first. Even if efforts are made
to cost a proposed system, there is a tendency
to gloss over expenses dire~ctly related to the
introduction of the new system. Typical items
often forgotten are
--the cost of a "disaster plan." What
happens if the computer goes down, its
security is breached, or core records are lost?
BUSINESS HORIZONS

4. Bankers and the Cashless Society
--the marketing costs of the introduction
of the new system.
--the cost of providing record-keeping
devices for consumers.
--the cost of necessary changes to existing
services. For example, the change from pass-
book to statement savings is often ignored
when a system is proposed that cannot
operate in conjunction with a passbook.
--the cost of dealing with customer com-
plaints.
And even when these costs are considered,
they are often wrongly calculated. For ex-
ample, a publication extolling the virtues of
statement savings accounts mentioned that
the incremental costs of statement savings
conapared with passbook accounts varied
from $592 to $2,442 per thousand accounts
per year. 4 But its calculations ignored the
cost of maintaining a truly up-to-date address
list, a task not necessary in the case of
passbook accounts. It also neglected other
matters, such as the disturbing of dormant
accounts, which could have large, even incal-
culable, effects.
When these costs are included, then, the
cost-savings argument for EFTS normally
disappears, at least for the foreseeable future.
As Barry F. Sullivan, executive vice-president
of Chase Manhattan has commented, "At this
point in time the economics of electronic
banking range from uncertain to poor." He is
not the only banker who now expresses
doubts about the cost-saving potential of
EFTS. A recent survey found that executives
at a majority of federally chartered banks no
longer believe that EFT systems actually save
money, and only 50 percent believe they will
be cost justifiable in the future, s
Disregarding the Consumer
Many institutions have implemented EFT
systems with little thought for the wants and
4. Statement Savings: Why and How? U.S. League of
SavingsAssociations,1975.
5. S. L. Mandell,PSI AnnualSymposium.Chicago,1976.
needs of the consumer. C. Harry Comm,
vice-president of Girard Bank in Philadelphia
and a former president of the Bank Marketing
Association, concluded that EFTS have been
promoted by operations-oriented people.
There was a prevalent feeling that the public be
damned.., that this is what we want in banking and
we're going to do it. The public will get used to it.
But the public has not gotten used to it, as
noted in a recent editorial on EFTS in the
American Banker. 6
We have seen too many instances of projects under-
taken and hardware purchased because it was shiny
and new, only to find that the public did not want to
use it and found nothing in the new equipment worth
switching or paying more for.
This failure can be very expensive. It is
reported that some ATMs handle as few as
forty transactions per month, which is hardly
profitable for a $25,000 investment.
Failures of this sort often result when an
attenapt is made to switch customers to
no-passbook savings plans. To one bank
adopting the new system, it was much more
efficient, but it met strong resistance from
many consumers, as the editorial in the
American Banker makes clear.
The result has been that many institutions have
simply given up and continued to offer only the
passbook savings form. And of those who have been
able to talk the public into switching from passbook
to no-passbook forms, the price paid has been high.
For it has involved either more frequent calculation
of interest, a higher rate paid than would be available
on savings in passbook form, or both.
In addition to the problems caused by
lack of consumer acceptance, consumerists
have posed six main objections to electronic
banking.
-A lessening of competition could result,
because banks will share facilities.
-Account information might be made
available to unauthorized people, thereby
constituting an invasion of privacy.
-Float would be reduced.
--There could be record-keeping problems.
--The consumer would be unable to stop
payments.
6. American Banker, August 13, 1976.
4]
JUNE 1978

5. ROGER C. BENNETT AND ROGER A. STRANG
42
--The fraudulent use of plastic cards could
be difficult to prove.
Many observers believe that with the
possible exception of the third point, these
criticisms have some validity. In any case,
these complex issues are difficult to resolve. It
is fair to say, however, that most bankers who
have introduced systems have done little to
address these complex problems, let alone
eliminate them. Industry committees, though,
tend to be more aware of the problems than
individual bankers, and they are frequently
discussed at conventions and other meetings.
The problem of float is different. Al-
though float will, in some cases, be reduced,
the consumer's right to receive free use of
money has not been asserted. Rather, the
present use of float is viewed as a result of an
inefficient system. If the system is improved,
it is not clear that the consumer should
necessarily continue to benefit from its
former slowness.
EFTS WILL COME
Despite these difficulties, it is likely that some
EFT systems will survive and come into
widespread use. While the outlook for success
might seem gloomy, there are considerable
potential benefits for both banking institu-
tions and their customers. Traditional banking
is becoming more expensive as labor costs
increase; once an EFT system has operated
beyond the introductory stage and met with
wide consumer acceptance, increased savings
are likely. As for the customers, they will
benefit from easier access to funds at all times
of the day and the ability to transfer funds
simply and cheaply. The expansion of EFTS,
however, will be slower than anticipated, and
more clearsighted management than has been
shown to date will be needed.
High costs are to be expected with the
development of any new product or service,
and they should be recognized and allowed
for. It is probable that some of these costs
will eventually be reduced. For example, one
observer believes that costs of POS terminals
will decline in a similar fashion to those of
desk calculators. Better locations for ATMs
and increasing acceptance by consumers will
improve their usage rates.
Institutions can also reduce costs if they
share facilities. "Doing it alone" often means
setting up a full network even if only part of
it is to be used. Consumerist objections can be
blunted by passing on any cost savings to
customers, by demonstrating competition in
other areas, and by adapting procedures to
meet other objections.
CONSUMER ACCEPTANCE
The critical factor in the future success of any
EFT system will be consumer acceptance. But
how can the banker decide which system will
be attractive to the consumer? His two main
alternatives are to "wait and see," or to use
marketing theory and research to evaluate
consumer acceptance.
The "wait and see" method has apparent
advantages. It allows competitors to make and
pay for mistakes and means that a financial
institution need only move when the exis-
tence of a market has been proved. There is
already considerable evidence available from
the systems that have already gone into
operation throughout the United States.
Some systems, like pay-by-phone in Pitts-
burgh (see Figure 2), the check-guarantee
scheme in Arizona, and the POS system in
Lincoln, Nebraska, had great early successes.
But as we have seen, there have been many
more failures. It takes a long time for most
new products or services to gain widespread
consumer acceptance. In the United King-
dom, many EFT systems, including ATMs, are
considered successful. But there, some ele-
ments of the system, such as preauthorized
payroll deposit and preauthorized payments,
have been in existence for many years. And
the introduction of customer-operated
machines started in the early 1960s.
BUSINESS HORIZONS

6. Bankers and the Cashless Society
FIGURE 2
Pay-by-Phone: Example of the Use of Diffusion
In Pittsburgh, Dollar Savings Bank offers a service
where customers can pay utility bills, charge
accounts, and certain other local bills by direct
transfer from their savings account to the account
of the party to whom they owe money. By using a
personal code number followed by code numbers
for each party to whom they are making payments
and the amount owed, customers make all these
Theory
transfers by phone instructions. Those with push
button phones can make their transfers without
talking to the human teller. The customer is
charged ten cents for each transaction. The likeli-
hood of the system's success can be judged
according to the criteria suggested by diffusion
theory.
RELATIVE ADVANTAGE
Cost
Reliability
Ease of operation
Other
It is cheap compared to the cost of a stamp and
check charges. (But if there were no check charges,
would it be perceived as cheap?)
All conversations are recorded. (Would there still
be doubt in the customer's mind about unauthor-
ized use of her account?)
Most people can use the telephone.
It can be used at times when the bank is closed.
COMPATIBILITY
Individual values
Practices
COMPLEXITY
DIVISIBILITY
COMMUNICABILITY
Little problem here.
The use of the phone is common. But using it as a
bill paying instrument is not. Using a push-button
phone as a computer terminal is not yet accepted
practice.
The new system will certainly seem complex to
older citizens but younger consumers should grasp
it more quickly.
The first major step is acquiring a code number.
The system can then be used as much or as little as
required. Perhaps getting a code number is a
smaller step than obtaining a card as required by
an ATM or POS.
The system is easy to describe but difficult to
observe.
There seem to be no major objections to the
system. The theory provides indications of where
marketing effort should be concentrated. The
promotional material should mention the security
of the system, stress its simplicity and, in some
cases, include visual aids that show the system in
operation.
A financial institution that follows a course similar
to what is described here will probably avoid
making some of the mistakes of those competitors
who have implemented a pay-by-phone system.
43
JUNE 1978

7. ROGER C. BENNETT AND ROGER A. STRANG
44
The disadvantages of the "wait and see"
method of marketing lie in the fear that
competitors will preempt the market. A typi-
cal comment comes from Robert Long of the
Bank Administration Institute.
More and more businessmen are coming to realize
that money and financial information will flow over
the most convenient channels. If they do not have
these "most convenient" links, they may be by-
passed.
Such a point of view seems reasonable.
But it also requires a bank to recognize those
channels the consumer regards as the "most
convenient." Investing in a system that is not
used as expected is worse than having no
system at all.
Determining whether a proposal will gain
consumer acceptance without waiting for
evidence gained through the experience of
others is a complex matter. Diffusion theory
provides some guidelines which can be used as
an aid in estimating likely success. Everett
Rogers suggests that there are five characteris-
tics that affect the rate of market adoption of
a new productfl These have all been tested
and found useful.
1. Relative Advantage. The greater the
perceived relative advantage of the proposal
compared to previous products, whether in
terms of cost, reliability or ease of operations,
the more quickly the innovation will be
accepted.
2. Compatibility. The more closely the
innovation is compatible with existing individ-
ual values and practices, the more quickly it
will be adopted.
3. Complexity. The more difficult an
innovation is to understand and to use, the
more slowly it is likely to be adopted.
4. Divisibility. If it is possible to try the
new product on a limited basis, it is more
likely to be accepted quickly.
5. Communicability. If it is possible to
describe or to observe the results of the
innovation with relative ease, adoption is
likely to occur more quickly.
This kind of evaluation not only predicts
the rate of market adoption of EFTS; it can
also identify problems that may call for
changes in marketing strategy. These might
include stressing consumer benefits to over-
come reluctance, providing additional incen-
tives for use, or modifying the system to
make it easier for consumers to understand.
An example of this last approach is the
mobile ATM demonstrator used by the Mosler
Corporation, which allows the institution's
customers to practice working the machine in
a no-risk situation.
A further advantage to this method of
evaluating EFT systems has been noted by
Leonard Berry, who points out that it is
possible to construct a matrix to compare
alternative EFT plans, s This makes it easier to
select the plan most likely to be successful in
the marketplace.
MEETING CONSUMER NEEDS
The surest way to guarantee acceptance of
EFTS is to develop a new system which meets
consumer needs or improves upon present
methods. Most EFT systems are aimed at
cutting bank costs by reducing the flow of
paper, by removing the need for longer hours
and additional personnel, or by limiting the
capital costs of new full-service branches.
The approach of responding to consumers'
needs involves some market research. It can-
not, however, be done by conventional
methods, which ask consumers what they
would like in an electronic banking system or
which system they prefer. Most people, after
all, find it difficult to say what they would
like when they do not know what technology
can offer as an improvement. Unless they
have used actual systems, consumers find it
difficult to make reliable comparisons. There
are, however, some techniques that can be
used to help consumers verbalize their needs.
7. Everett M. Rogers, Diffusion of Innovation (New
York: FreePress,1962).
8. "DiffusionTheory and EDTS,"addressbefore the
PSRPWorkshop,March26, 1976,Philadelphia,Pa.
BUSINESS HORIZONS

8. Bankers and the Cashless Society
For example, focus group interviews can be
used to formulate hypotheses about the pub-
lic's reaction to present and proposed services.
Thematic apperception testing can be em-
ployed in an attempt to understand likely
consumer reaction to a proposed system.
One other research approach that could be
successful concentrates on major commercial
customers who have large numbers of em-
ployees. Systems that were useful to them
and their employees could prove beneficial in
banking. The introduction of such systems
could safeguard the bank from losing impor-
tant customers, and the experience gained
from this approach could be of great value in
promoting the acceptance of other forms of
EFTS.
The approach most likely to be successful,
though, is to focus on consumer problems
within the present system. Consumers can
readily talk about their objections to products
or services they are already using. Similar
research led to the development of dog food
that smells good, and to "Have it your way"
at Burger King. When the major problems
have been identified, new systems can then be
developed or current systems improved to
provide real benefits for the consumer.
PROVIDING A NEEDED SERVICE
An example of meeting an existing need is the
check guarantee systems that are operating
throughout the United States, particularly in
California and Arizona. Many bankers say
that they have given up on the check system.
The editorial in The American Banker noted
that leaders in EFTS in the banking industry
are now pointing out that
The check has ceased to be a negotiable instrument.
And if the public wants to obtain money away from
home, a magnetic stamped card can be a better source
of identification than any driver's license, friendly
teller, or relative in another town.
This may be so, but the fact remains that
80 percent of the adult population have
checking accounts; by contrast, only 33 per-
cent have a regular credit card, even after
twenty years of promotion. The check guar-
antee system makes the check a negotiable
instrument again by allowing the consumer to
use his or her checkbook at tens of thousands
of businesses throughout the country. Even-
tually this system may be supplanted by
terminals and a card-based system, but in the
meantime it presents a significant and growing
market opportunity. The system involves no
changes in consumer habits and has been
developed to be acceptable to banking organi-
zations.
Bll till it .as been shown t.at ,here are
1]1I1 problems associated with the intro-
duction of new banking systems. Top manage-
ment should, therefore, carefully examine all
budgets submitted. Danger signals to watch
for might be the use of variable costs instead
of full costs and the failure to account for
some related but necessary change. An impor-
tant question to answer is, "What happens if
something goes wrong?"
If costs have been correctly calculated,
market data should next be examined. How
have the forecasts been determined? Are they
based on hope, guesswork, marketing theory,
advanced research techniques, or the experi-
ence of other institutions? It is likely that the
forecasts will become more reliable as the
forecasting technique appears higher on this
list.
Finally, top management should be vitally
concerned about the selection of marketing
programs. These programs should be based on
research techniques similar to those used in
generating forecasts. The consumer will re-
quire a large amount of information to
understand the system and to overcome
doubts that might arise. Providing this infor-
mation will be time consuming and expensive,
but it will also pay off.
45
JUNE 1978