The purpose of this paper is to empirically examine the direct and indirect effects of automated teller machines (ATMs) on the performance and scope economies of the Japanese financial institutions.
Stochastic frontier approach is adopted to estimate banks’ cost and profit efficiency indices and to examine the relationship between inefficiency scores and the number of ATMs.
The study concludes that the banks not only minimize costs and save money by using ATMs, but also spend the saved funds on hiring highly skilled staff to introduce a better product mix which allows the banks to observe scope economies.
The findings suggest that although branches would remain a crucial interaction point for relationship banking, but given their high fixed cost, shifting routine banking transactions from the branch to low-cost electronic channels can significantly reduce costs and enhance efficiency of the financial institutions.
