E-transactions Increase as Cash Use Declines

If cash is king, then it is a magnate with a diminishing monarchy.

Over the last several years, debit and credit transactions have increased dramatically and as a result, the banking business has had to change.

Several Northwest Arkansas bankers said they’ve seen a decline in the demand for cash among their customers.

Greenbacks aren’t the only paper that banks are seeing less of. Electronic transactions have also cut down on the pounds of paper that banks print and mail in the forms of statements, receipts and checks.

In the last few years, The Bank of Fayetteville has seen a dramatic increase in debit and Automated Clearing House transactions such as direct deposits and automatic drafts, said Billie Pelton, executive vice president and COO.

The amount of money transacted through these means increased 80 percent from 2005 to 2007, while the total number of electronic transactions increased by 98 percent, Pelton said. The bank saw a 31 percent rise in direct deposits during the same period. E-banking is also popular.

“Electronic transactions are skyrocketing and visits to actual banks are, if anything, stable or declining,” said Mary Beth Brooks, BOF president and CEO.

Teller transactions were flat for a while, but are now increasing, Pelton said.

Paper checks are also used less frequently. Many BOF customers are ordering fewer checks, which prompted check printers Deluxe Enterprise Operations Inc. to reduce the number of checks in an order, she said. Electronic transactions mean faster turnaround on checks, too.

“Float isn’t as meaningful as it used to be,” said Lisa Sagely, assistant COO at the bank.

According to a 2007 study by the Federal Reserve Board, check payments fell 6.4 percent from 2003 to 2006.

At the same time, debit, credit and ACH transactions increased by 12.4 percent. ATM withdrawals — another segment bankers said was down — slipped 0.4 percent.

Paper Chase

The Fed has urged banks to cut down on paper usage for years, said Howard Hamilton, president and COO of Liberty Bank of Arkansas’ Northwest Division.

Hamilton wasn’t sure if banking would become entirely paperless in his lifetime, but in recent years “there’s much less paper flow in the banking system,” he said.

While Liberty does have some guidelines on how much it keeps in cash reserves at each branch, it doesn’t have to keep as much cash on hand as it did at one time.

That decrease is mostly because the amount of cash people use has declined, Hamilton said. Which is not necessarily a bad thing.

“From a bank standpoint it’s positive,” he said. “It’s less labor intensive, and helps us more efficiently cut costs, and hopefully that translates in to more efficiency for our customers and better service.”

Handling cash costs money in the form of servicing ATMs and paying transport services, among other necessities.

The ascendancy of debit and ACH transactions hasn’t been the only major shift for the banking business.

The Check Clearing for the 21st Century Act, which was signed into law in 2003 and took effect in 2004, has revolutionized the banking business, said Michael Wingo, executive vice president of treasury services and funding for Signature Bank of Arkansas.

According to the Fed Web site, Check 21 facilitates faster check turnaround by creating a substitute check, which lets banks treat a check image the same as a paper check, and process it electronically.

Check 21 came about at a good time for Signature Bank, which started in May 2005.

The law effectively eliminated the need for startup banks to buy expensive reader/sorters — which can cost about $150,000 — and to pay for the staff to operate and service the machines, Wingo said.

Signature spent a fraction of the cost of buying reader/sorters on the hardware and software to process checks electronically.

Banks are continuing to capitalize on electronic transactions, he said.

“It’s just a plain fact that cash costs more money to handle,” Wingo said. “So businesses, including banks, endeavor to reduce costs and this is one of those ways where we examine the processes and do our best to utilize all the technology and, along with the desires of our client base, to provide service at the most reasonable cost we can.”

The reduction in overall costs for banks “is tremendous for our industry,” he said. “And so that drives the notion that eventually, we will attempt to do to handle as little cash as possible.”

Certain bank branches will have more cash on hand than others, particularly branches that have many commercial accounts. FDIC rules and retailers’ needs for cash and coin will always necessitate cash reserves.

Expensive Advertising

Banks aren’t the only ones handling less cash. There has been a decline in ATM usage and in the amount of cash that customers are requesting from The Bank of Fayetteville, Brooks said.

Some of this has to do with more people shifting to direct deposit, but another factor is that many of the biggest retailers — Target, Wal-Mart, Walgreens — offer cash back on credit and debit purchases.

Security is another concern. If someone’s debit or credit card is lost or stolen, a report can be filed and the situation can be rectified before any money is misused.

“Everything is going to debit cards,” Brooks said. “It’s just safer.”

Card users must be diligent about fraudulent card use also. Suspicious account activity must be reported in a timely manner to ensure a refund for misuse.

At one time, a broad network of cash machines was seen as a major profit and marketing advantage for banks.

That perception has changed.

“As much as you have a bank on every corner, you have three to four ATMs on every corner,” Wingo said. This saturation has caused bank customers to become less concerned about a wide network of ATMs.

Liberty Bank has seen a bit of a decline in ATM use, Hamilton said. The bank now views its cash machines as advertising and customer convenience as much as anything, he said.

“Anybody who tells you they put in an ATM for a profit center, they’re not telling you the truth,” Hamilton said.

Pelton echoed that assessment.

“ATMs are signage,” she said.

And at $20,000 to $50,000 apiece to install — in addition to maintenance costs — they’re expensive signage. That’s why many banks have begun offering their customers a refund on fees they pay at other banks’ ATMs.

“What has happened over the last several years is, we decided there’s already an established [ATM] network,” Wingo said. “The machines are very expensive and really didn’t provide the bang for the buck they used to, so we decided that rather than spend $20,000 per site and $1,000 a month to operate, we’d refund fees.”

The Bank of Fayetteville also offers fee refunds for certain checking accounts.

Nonetheless, the old real estate mantra applies to cash machines as well. The Bank of Fayetteville ATM at its Dickson Street branch is often empty by Sunday, drained by the weekend’s revelers, many of whom want to use cash when going to bars.

Any bank looking to put in an ATM at a particular location should examine its motivations for choosing that spot, Pelton said.

“It’s got to be a destination,” she said.

As for the Dickson Street ATM, “we can’t keep it stocked,” Pelton said.