Will VTMs disrupt the ATM industry in China?

Written by Fiona Zhao || August 08 2014

China has been going through rapid urbanization during last decades and in the past ten years alone the percentage of population residing in cities has leapt from 40.5% in 2003 to 53.75% in 2013.

VTMs in China coming at the right time

So did labor costs and rents, which have become a big concern for commercial banks, who list employees and office rent as their main costs. In addition, under the negative impact of internet finance as well as the diminishing interest rate margins, commercial banks have to figure out a way to maintain their profits. The emergence of VTMs, or Video Teller Machines, seems to come at the right time to fill commercial banks’ needs.

The first VTM was installed in July 2012 by China Guangfa Bank (CGB), and marked a start of a new era in banking. In 2013 there were over 30 banks installing VTMs and the rapid rise continues. It is estimated that deployment will grow five to eight times in 2014. The main advantage driving VTM purchases is the costs of operation. The managing director of CGB, Dong Jianyue, says that three tellers’ annual salaries can cover the cost of one VTM. However, once installed, a VTM can replace two counters in an outlet and reduce headcount cost by two resources. Other sources confirm the advantage of VTMs: Huawei, a leader in information technology equipment field, has estimated that deploying VTMs can save 30% of banking comprehensive costs in three years.

In addition, VTMs in China have earned popularity among joint-stock commercial and city commercial banks. Different from big five banks, joint-stock commercial banks have always lagged in terms of outlet coverage. Take China Everbright Bank as an example, which has around 700 outlets nationwide. In Beijing, it only owns 50 outlets. These few outlets are not enough to serve all potential customers in the city, the emergence of VTMs has a strategic meaning for these banks.

Moreover, the boom of community banks, as well as spread of small and medium banks’ sub-branches, which mainly serve small- and micro enterprises and community residents, have posed potential growth opportunities for VTMs in China. Last December, the CBRC has rolled out No.227 notice to regulate community banks. According to the notice, community banks may be granted limited-scope business licenses only. Those that haven’t adjusted their business to the requirement will have to provide self-service banking or terminate operation. In half a year, Minsheng Bank has been granted over 700 community banking licenses, which allows it to set up an equal number of branches, while Shanghai Pudong Development Bank received more than 300 licenses. The fast approval of community banks imply that development of the industry will be on the accelerated track. However, the real innovation of community banks is the combination of both online and offline business. Banks will offer counter service and virtual counter service, as well as 24-hours self-service and regular service during working hours, said Li Jian, general manger of Electronic Bank Department at China Everbright Bank. This particular business model has made VTM the first choice for new community banks.

VTM market will continue to grow

It has been estimated by CITIC Securities that VTM market will continue to grow in 2014 and the demand will be between 1000 and 9000 sets. Guotai Junan Securities also estimates that VTM market size will be over RMB 8 billion, which is approximately 2-3 times that of ATM market. However, despite the promising potential growth, we should realize the fact that VTMs are still a nascent banking technology. The main influencing factor is the speed of banks’ adjustment of their business procedures. VTMs combine electronic banking services and offline counter service, and require integration of multiple bank departments. Moreover, who will be in charge of the remote client services is still a question. However, under the impact of internet finance, banks are reviewing their positions and are focusing more on “clients”, rather than on operations.

We forecast that although there are factors slowing down growth of the market, with adjustment in the way banks serve their customers the VTM boom is certain. In this promising market, what we also find interesting is the potential rearrangement of the ATM/VTM vendor market. We will focus on this theme in the next commentary.
To be continued…