Solution manual bank management and financial services 9th edition by rose, peter chap004

Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites CHAPTER ESTABLISHING NEW BANKS, BRANCHES, ATMS, TELEPHONE SERVICES, AND WEBSITES Goal of This Chapter: The purpose of this chapter is to learn how new banks are chartered by state and federal authorities in the United States, to determine what makes a good site for a new branch office, to recognize how the role of branch offices is changing, and to explore the advantages and disadvantages of automated banking facilities Key Topics in This Chapter       Chartering New Financial-Service Institutions The Performance of New Banks Establishing Full-Service Branches and In-Store Branching Establishing Limited-Service Facilities ATMs and Telephone Centers The Internet and Online Banking Chapter Outline I II III IV V Introduction A The Importance of Convenience and Timely Access to Customers B Service Options Available Today Chartering New (De Novo) Financial Institutions Establishing New Full-Service Branch Offices Setting Up Limited-Service Facilities Chartering a New ( De Novo ) Financial-Service Institution The Bank Chartering Process in the United States A The Chartering Authorities in the U.S B Benefits of Applying for a Federal (National) Charter C Benefits of Applying for a State Charter Questions Regulators Usually Ask the Organizers of a New (De Novo) Bank Factors Weighing on the Decision to Seek a New Charter A External Factors Level & Growth of Economic Activity The Need for a new financial firm The Strength and Character of Competition in Supplying Financial Services 4-1 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites B VI VII VIII IX X XI XII Internal Factors Qualifications and Contacts of the Organizers Management Quality Pledging of Capital to Cover the Cost of Filing a Charter Application and Getting Underway Volume and Characteristics of New Charters How Well Do New Charters Perform? Research Findings on New Bank Performance Establishing Full-Service Branch Offices: Choosing Locations and Designing New Branches A Advantages of Full-Service Branches B Trends in the Design of New Branches C Desirable Sites for New Branches Expected Rate of Return Geographic Diversification D Branch Regulation E The Changing Role of Financial-Service Branch Offices F In-Store Branching Establishing and Monitoring Automated Limited-Service Facilities (“Branchless Banking”) A Point-of-Sale Terminals B Automated Tellers (ATMs) History of ATMs ATM Services Advantages and Disadvantages of ATMs The Decision to Install a New ATM Example of the ATM Capital-Budgeting Decision Banking in Homes, Offices, Stores, and on the Street A Telephone Banking and Call Centers B Internet Banking Services Provided through the Internet Challenges in Providing Internet Services The Net and Customer Privacy and Security Financial-Service Facilities of the Future Summary of the Chapter 4-2 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites Concept Checks 4-1 Why is the physical presence of a bank still important to many customers despite recent advances in long-distance communications technology? Many customers still prefer the personal attention and personal service that contact with bank employees provides Moreover, for those services where problems can arise that require detailed information and explanation For example, when a customer discovers that his or her account is overdrawn, or if he or she suspects an account is being victimized by identity theft, or when the customer’s estimate of an account balance does not agree with the institution that holds that account, and checks or charges begin to bounce, the presence of a nearby service facility may become important 4-2 Why is the creation (chartering) of new banks closely regulated? What about nonbank financial firms? The creation of new banks is regulated to ensure the safety and soundness of banking system and to avoid excessive numbers of bank failures The same arguments are usually made for nonbank financial firms Financial-service firms that hold the public’s savings are at the heart of the payment process to support trade and commerce These firms often create money The failure of these firms could disrupt the economy and chartering too many might result in excessive growth in the money supply and inflation 4-3 What you see as the principal benefits and costs of government regulation on the number of financial-service charters issued? While control over the entry of new banks may reduce the number of failures, it also limits competition, so the public may receive a smaller volume or lower quality of services at excessive prices 4-4 Who charters new banks in the United States? New banks are chartered by the banking commissions of the individual states or, at the federal level, by the Office of the Comptroller of the Currency (OCC)–a division of the Treasury Department Thrift institutions are chartered by the states or at the federal level by the Office of Thrift Supervision 4-5 What key role does the FDIC play in the chartering process? The FDIC exercises some control over state bank charter activity as well as federal charters because most states insist that their new banks qualify for federal deposit insurance before they can open for business The FDIC requires new insured banks to maintain a certain ratio of Tier (permanent equity) capital to assets to provide an extra cushion against failure The Federal Deposit Insurance Corporation Improvement Act of 1991 requires all depository institutions— including both new federally chartered and new state-chartered banks—to apply to the FDIC for insurance coverage 4-3 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites 4-6 What are the advantages of having a national bank charter? A state bank charter? The benefits of a national charter are: a) It brings added prestige due to stricter regulatory standards that may help attract deposits b) In times of trouble the technical assistance supplied to a struggling institution by national authorities may be of better quality, giving the troubled bank a better chance to survive c) Federal rules can pre-empt state laws The benefits of a state charter are: a) It is generally easier and less costly to secure a state charter and supervisory fees are usually lower b) The bank does not have to join the Federal Reserve and therefore avoids buying and holding low yield stock of the Federal Reserve c) Some states allow a bank to lend a higher percentage of its capital to a single borrower d) State-chartered banks may be able to offer certain services that national banks may not be able to offer 4-7 What kinds of information must the organizers of new national banks provide the Comptroller of the Currency in order to get a charter? Why might this required information be important? The applicants for a national bank charter are required to submit a detailed business plan, which contains a description of the proposed bank and its marketing, management, and financial plans The Comptroller of the Currency asks for information on the number of competing banks and bank-like institutions in the service area of the proposed bank More competitive market situations limit the profit potential and perhaps the growth potential of a new bank Also requested is the information about shopping centers, retail and wholesale business activity, recent population growth, traffic counts, and personal income levels–all viewed as indicators of potential demand for banking services in the service area of the proposed new bank Applicants must also provide background information on the organizers and proposed management of a new bank so the Comptroller can decide if these people are qualified, law-abiding, and trustworthy to manage the public's funds as well as their own 4-8 Why you think the organizers of a new financial firm are usually expected to put together a detailed business plan, including marketing, management, and financial components? A detailed business plan demonstrates to regulators that the organizers of the bank have the expertise, experience, and skills necessary to be successful in managing the new bank If the organizers of a bank not know where they are going, they are unlikely to be successful In addition, it demonstrates whether the organizers of the new bank have a realistic picture of the community they are planning on serving and whether the organizers have a realistic view of the profit potential in the new bank 4-4 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites 4-9 What are the key factors the organizers of a new financial firm should consider before deciding to seek a charter? While a variety of factors are examined by different business people interested in establishing a new bank, most look at some or all of the following factors External Factors a The level and growth of economic activity b The need for a new financial firm c The strength and character of competition in supplying financial services Internal Factors a Qualifications and contacts of the organizers b Management quality c Pledging of capital to cover the cost of filing a charter application and begin operations 4-10 Where are most new banks chartered in the United States? New charters tend to be concentrated in large urban areas where expected rates of return on the organizers investments are likely to be the highest As the population increases relative to the number of financial firms, the number of new charters increases The success of local banks already in the area can suggest how successful the new financial firms will be Although, places with a higher concentration ratio of new banks tend to chartering activities 4-11 How well most new banks perform for the public and for their owners? Most new banks succeed, especially those whose organizers can bring in new deposits and loan accounts during the first year of the bank's operation Most are profitable within two to three years of opening There is some evidence that newly charted banks are “financially fragile” and more prone to failure than established banks They appear to be more vulnerable to real estate crises than established banks because their portfolios are often heavily invested in riskier real estate loans New banks tend to underperform their competitors until they have been around for a while and new banks are more closely supervised by the government regulators than established banks 4-12 Why is the establishment of new branch offices usually favored over the chartering of new financial firms as a vehicle for delivering financial services? The chartering of a new financing corporation is normally a lengthy and expensive process, requiring the completion of elaborate federal or state application forms, while the branch application process is normally far simpler and less costly Moreover, with the increase in the number of failures in recent years, regulatory-imposed capital requirements for new charters have increased substantially New branch offices usually carry significantly lower capital requirements Also, branch offices themselves are often much less elaborate and costly to build 4-5 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites and maintain than are the headquarters' facility of a new institution where some duplicate facilities can be eliminated (for example, checking processing, credit analysis, and records departments) 4-13 What factors are often considered in evaluating possible sites for new branch offices? Bankers first need to decide the goals and objectives of a new facility Often this means assessing whether the proposed new branch is aimed at selling one or more particular services, such as deposits or loans, and also deciding how closely correlated cash flows and returns from the new branch office may be with cash flows and returns from the other facilities operated by the bank If returns or cash flows through the proposed new institution are negatively correlated or display low positive correlation with the institution's other facilities, they may be able to lower the variance of its returns or cash flows by proceeding to establish the new office Other considerations revolve around the economic strength of the proposed branch office site– whether there is adequate traffic volume, large numbers of stores and shops, older or younger age populations who often require slightly different menus of services, recent area population growth, density and income, the occupational and residential makeup of the proposed new branch area, a large enough population to generate enough customers to breakeven, and the number and size of facilities operated by competitors Generally, for branches designed to attract and hold deposits, key factors to consider usually revolve around individual and family incomes, concentrations of retail stores and shops, older-than-average residents, and homeowners rather than renters For branch facilities emphasizing credit services residential areas with substantial new construction activity, heavy traffic flow, and high concentrations of stores and shopping centers are typically desirable for consumer and retail loan demand, while central city office locations are often chosen as locations for commercial loan facilities 4-14 What changes are occurring in the design of, and the roles played by, branch offices? Please explain why these changes are occurring Bank branches are increasingly becoming selling platforms in which more and more fee-based services are attractively and prominently advertised in order to maximize the fee-income generating potential of each branch Moreover, branches are becoming increasingly automated to reduce personnel and other operating costs and improve speed, efficiency, and accuracy in handling a growing service volume Branch design has come to reflect these trends with automated facilities placed at easy access points, along with information booths to speedily direct customers to the service areas they need Human tellers may be placed deeper inside branch facilities so that customers must pass by other service departments and conspicuous advertising in order to encourage customers to become aware of and avail themselves of other bank services 4-15 What laws and regulations affect the creation of new bank and thrift branches and the closing of existing branches? What advantages and what problems can the closing of a branch office create? The opening of new branch offices must be approved by a bank's or thrift’s principal federal or state supervisor According to the FDIC and other regulatory agencies, no new bank can enter 4-6 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites the industry without government approval, in the form of a charter, to operate The types of deposits and other financial instruments sold to the public to raise funds must be sanctioned by each institution’s principal regulatory agency The quality of loans and investments and the adequacy of capital are carefully reviewed by government examiners The principal regulatory agencies who issue charters for new national banks and depository institutions include the Comptroller of the Currency and the State Boards or Commissions Closing a branch office has become much more complicated in recent years as the result of several new laws and regulations For example, the FDIC Improvement Act requires 90 days advance notice of branch closings to both customers and the principal supervisory agency and a posting on the branch site at least 30 days prior to closing Banks and thrifts must also make an "affirmative effort" to reach all segments of their communities without discrimination under the terms of the Community Reinvestment Act which raises the danger of customer protests against closings if it appears the bank is under-serving certain groups of customers Finally, the Community Reinvestment Act can be used as a vehicle to prevent U.S banks and thrifts from branching expansion when they have a poor record of serving all segments of their communities Closing selected branch offices can reduce operating costs and divert resources from less profitable to more profitable uses However, they risk alienating good customer relationships unless it can serve those same customers with its remaining facilities 4-16 What new and innovative sites have been selected for new branch offices in recent years? Why have these sites been chosen by some financial firms? Do you have any ideas about other sites that you believe should be considered? Rapid increases in new branches located in grocery stores, shopping centers, and inside other businesses and facilities where the public frequently gathers have helped to reduce branch construction costs and promote cross-selling of goods and financial services Other branches have been opened in apartment complexes, senior citizen centers, and other customer-convenient locations as bankers come to realize they must adjust their service locations and service hours to conform to customer needs in an intensely competitive financial-services environment 4-17 What are POS terminals, and where are they usually located? Point-of-sale terminals are set up to accommodate customer purchases of goods and services These computer terminals normally are located in supermarkets, gasoline stations, and similar places with a link to the banks’ own computer records When a customer of the bank makes a purchase, the amount of the transaction is deducted from the customer's deposit account and added to the store's account Because the customer immediately loses funds, many bank customers have been hesitant to use the service as opposed to paying by check or credit card where payment is delayed for a few days However, this depends on whether the POS terminal is an offline or online terminal An offline terminal accumulates all transactions until the end of the day when all transactions are subtracted from a customer’s account This type of terminal is less costly for the bank to operate An online terminal subtracts the transactions immediately from the customer’s account and reduces the chance of an overdraft occurring but is more expensive for 4-7 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites the bank to operate Consumer reluctance to use POS terminals appears to be fading and as fees for other services rise, this reluctance will continue to disappear 4-18 What services ATMs provide? What are the principal limitations of ATMs as a service provider? Should ATM carry fees? Why? The earliest ATMs provided a convenient mechanism for cashing checks, making deposits, and verifying checking account balances, often at hours when the full-service branch offices were closed Today, ATMs frequently provide a wide menu of old and new services, including bill paying, transfer of funds between accounts, and the purchase of tickets for travel and entertainment Most authorities expect ATM usage to grow rapidly as these machines offer more services and as bankers increasingly move to restrict customer access to more costly human tellers and other bank personnel, often by charging extra fees for personal service ATMs have some significant limitations that bankers will have to work to overcome They break down and need to be replaced, sometimes quite frequently and annoyingly for customers, and as technology changes often become quickly outdated Customer activity around ATMs, particularly at night, has invited criminals to steal money and injure customers, sometimes creating liability for banks Moreover, not all customers make use of these facilities due to a preference for personalized service, fear of crime, or unfamiliarity with how the machines work Customer education and better service pricing are two important tools that could help with these problem areas in the future In addition, ATMs not rank high in their ability to sell peripheral services Some banks have found that there has been a sharp decline in their ability to sell other services Finally, ATMs are not necessarily profitable for all banks Because they are available 24 hours, some customers may make more frequent and smaller withdrawals from the machine than they would with a human teller, driving up the costs In addition, these same customers will often still demand a human teller to deposit their pay check, making the bank keep both tellers and ATM machines Whether ATM should carry a fee is rather controversial Recently, some of the largest ATM networks have decided to let owners of ATMs charge non-customers a surcharge Several regional banks have begun to charge fees as well These fees reflect the usage of ATMs About 80% of all ATM transactions consist of cash withdrawals and only about 10 percent represent incoming deposits In addition, in many places, ATM usage has declined as customers pass over ATMs in favor of credit and debit cards, onsite terminals and the Internet 4-19 What are self-service terminals and what advantages they have for financial institutions and their customers? Self-service terminals include ATMs and other computer-based limited-service facilities that permit a customer to call up information about his or her account and recent transactions with the institution or information about different services that the customer might be interested in purchasing Customer can also get copies of forms and legal documents and even schedule appointments with staff Many are accessible 24 hours a day or are easier to get to rather than wait for the help of personnel They can save on resources by saving on staff time Many institutions are adding telephones and video screens so that customers with problems can dial up 4-8 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites an employee day or night with problems This is also saving money because they can avoid duplication of staff at each branch 4-20 Why many experts regard the telephone as a key instrument in the delivery of financial services in the future? What advantages does the telephone have over other servicedelivery vehicles? Many different services can be marketed, delivered, and verified at low cost via the phone It is among the most popular channels for putting customers in touch with financial-service providers today Thus many experts regard the telephone to be the key financial-service delivery device into the future Increased call centers to assist customers in obtaining account information and in carrying out transactions, leads to avoiding walking or driving to a branch office or ATM The key feature of today’s telephone is mobility The biggest advantage of the cell phone is that it is easily transportable and not tied to any particular location Phone has revolutionized communications and delivery of services, lowering dramatically the cost of both The recent development of bigger and cleaner screens on mobile phones and the recent implementation of tighter security procedures in accessing accounts have made cell phones increasingly comparable to personal computers and even more convenient than PCs when traveling 4-21 What financial services are currently available on the Internet? What problems have been encountered in trying to offer Internet-delivered services? Customers can make payments, check on account balances, confirm that deposited funds have been received, checks have been cleared They can move funds between accounts and get applications for loans, deposits and other services In addition banks can advertise on the web Some of the problems include protecting customers’ privacy and heading off crime In addition, the web does not make it easy for a bank to get to know their customers personally The cost may also be prohibitive to some customers 4-22 How can financial firms better promote Internet service options? They need to emphasize the safety of their Internet services They need to promote their home page at every opportunity and update it frequently to keep customers’ interest They need to a customer survey about their satisfaction with the services and encourage dialogue via e-mail to resolve problems They can also provide programs to download to act as screen savers (and advertisements) and also information about the institution and the services it provides Problems 4-1 A group of businesspeople from Scott Island are considering filing an application with the state banking commission to charter a new bank Due to a lack of current banking facilities within a 10-mile radius of the community, the organizing group estimates that the initial banking facility would cost about $3.3 million to build along with another $500,000 in other organizing expenses and would last for about 25 years Total revenues are projected to be $400,000 the first year, while total operating expenses are projected to reach $160,000 in year Revenues are expected to increase percent annually after the first year, while expenses will grow an 4-9 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites estimated percent annually after year If the organizers require a minimum of a 10 percent annual rate of return on their investment of capital in the proposed new bank, are they likely to proceed with their charter application given the above estimates? Year Revenues Op Expense Net Profit $400,000 $160,000 $240,000 $416,000 $163,200 $252,800 $432,640 $166,464 $266,176 $449,946 $169,793 $280,152 $467,943 $173,189 $294,754 $486,661 $176,653 $310,008 $506,128 $180,186 $325,942 $526,373 $183,790 $342,583 $547,428 $187,466 $359,962 10 $569,325 $191,215 $378,110 11 $592,098 $195,039 $397,059 12 $615,782 $198,940 $416,842 13 $640,413 $202,919 $437,494 14 $666,029 $206,977 $459,052 15 $692,671 $211,117 $481,554 16 $720,377 $215,339 $505,038 17 $749,192 $219,646 $529,547 18 $779,160 $224,039 $555,122 19 $810,327 $228,519 $581,807 20 $842,740 $233,090 $609,650 21 $876,449 $237,752 $638,698 22 $911,507 $242,507 $669,001 23 $947,968 $247,357 $700,611 24 $985,886 $252,304 $733,582 25 $1,025,322 $257,350 $767,972 Required Rate of Return 0.10 Present value of future cash flows @ 10% $3,329,203 Initial investment $3,800,000 Net Present Value of Investment ($470,797) Given the above information, the organizers are not likely to proceed given that the net present value of this investment is negative The return they are going to earn is less than the 10% they need to earn 4-10 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites 4-2 Norfolk Savings Bank is considering the establishment of a new branch office at the corner of 49th Street and Hampton Boulevard The savings association’s economics department projects annual operating revenues of $1.6 million from fee income generated by service sales and annual branch operating expenses of $800,000 The cost of procuring the property is $1.75 million and branch construction will total an estimated $2.75 million; the facility is expected to last 20 years If the savings bank has a minimum acceptable rate of return on its invested capital of 15 percent, will Norfolk Savings likely proceed with this branch office project? Year 10 11 12 13 14 15 16 17 18 19 20 Revenues Op Expense Net Profit $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 $1,600,000 $800,000 $800,000 Required 0.15 Rate of Return Present value of $5,007,465 Future Cash Flows Initial investment $4,500,000 Net Present Value of $507,465 Investment 4-11 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites Norfolk is likely to proceed with this project because the net present value is positive This means that the interest rate that Norfolk will earn on this project is higher than the 15% they need to earn 4-3 Forever Savings Bank estimates that building a new branch office in the newly developed Washington township will yield an annual expected return of 12 percent with an estimated standard deviation of 10 percent The bank’s marketing department estimates that cash flows from the proposed Washington branch will be mildly positively correlated (with a correlation coefficient of + 0.15) with the bank’s other sources of cash flow The expected annual return from the bank’s existing facilities and other assets is 10 percent with a standard deviation of percent The branch will represent just 20 percent of Lifetime’s total assets Will the proposed branch increase Forever’s overall rate of return? Its overall risk? The estimated total rate of return would be: E (R) = 0.20 (12%) + 0.80 (10%) = 10.4% The risk attached to this overall return rate would be: σ2 = (0.20)2 (0.10)2 + (.80)2 (0.05)2 + 2(0.20)(0.80)(0.15)(0.10)(0.05) σ2 =0.00224 σ = 4.73% Thus   4.73% and the branch will slightly increase the bank's expected return but slightly increase its overall risk The bank should proceed with this project 4-4 The following statistics and estimates were compiled by Big Moon Bank regarding a proposed new branch office and the bank itself: Branch office expected return Standard deviation of branch return Existing bank’s expected return Standard deviation of existing bank’s return Branch asset value as a percentage of total bank assets Correlation of net cash flows for branch and bank as a whole = 15% = 8% = 10% = 5% = 16% = +0.48 What will happen to Big Moon’s total expected return and overall risk if the proposed new branch project is adopted? The bank's total expected return is: E (R) = 0.16 (15%) + 0.84 (10%) The bank's risk exposure is: 4-12 = 10.80% Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites σ2 = (.15)2 (.082 + (.85) (.05)2 + 2(.15)(.85)(.48)(.08)(.05) σ2 = 00244 And thus σ = 049395 or 4.94% The proposed project raises the savings banks expected return slightly and but slightly increase its overall risk The bank should proceed with this project 4-5 Life Is Good Financial Services has provided Good Things to Eat Groceries a proposal for in-store branches in two of its four Davidson locations Good Things to Eat counter proposed opening one in-store branch in one of the two proposed locations as a test case The locations would be identified as the Lily Branch or the Daisy Branch Given the following statistics and forecasts compiled by Life Is Good regarding the two alternatives, which branch should be used as a test case? Base your recommendation on returns and risk Correlation Coefficient Percentage Expected Standard Other Total Return Deviation Services Assets In-store branch at Lily location In-store branch at Daisy location Existing facilities 15.00% 6.50% 0.5 5.00% 15.50% 12.00 7.50% 5.00 0.3 5.00 95.00 Lily locationThe total expected return is: E (R) = 0.05 (15%) + 0.95 (12%) = 12.15% Risk exposure is: σ2 = (0.05)2 (0.065)2 + (0.95)2 (0.05)2 + 2(.05)(.95)(.5)(.065)(.05) σ2 = 00242 And thus σ = 0492 or 4.92% Daisy locationThe total expected return is: E (R) = 0.05 (15.50%) + 0.95 (12%) = 12.175% Risk exposure is: σ2 = (0.05)2 (0.075)2 + (.95)2 (.05)2 + 2(0.05)(0.95)(0.3)(0.075)(0.05) σ2 = 0.00238 4-13 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites And thus σ = 0.04876 or 4.87% Based on the statistics and forecasts, the expected return of Daisy location is slightly higher and the risk is slightly lower compared to Lily location, and thus Daisy location should be used as a test case 4-6 First National Bank of Conway is considering installing two ATMs in its Southside branch The new machines are expected to cost $37,000 apiece Installation costs will amount to about $15,000 per machine Each machine has a projected useful life of 10 years Due to rapid growth in the Southside district, these two machines are expected to handle 50,000 cash transactions per year On average, each cash transaction is expected to save 30 cents in teller expenses If First National has a 10 percent cost of capital, should the bank proceed with this investment project? Year Savings $15,000 10 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 Initial Investment Required Rate of Return Present Value of Future Cash Flows Net Present Value (.30×50,000) 104000 (37000×2+15000×2) 0.10 $92,168.51 ($11,831) The net present value of this project is negative First National Bank of Conway should not add the ATM machines to the Westside 4-7 First State Security Bank is planning to set up its own Web page to advertise its location and services on the Internet and to offer customers selected service options, such as paying recurring households bills, verifying account balances, and dispensing deposit account and loan 4-14 Chapter 04 - Establishing New Banks, Branches, ATMs, Telephone Services, and Websites application forms What factors should First State take into account as it plans its own Web page and Internet service menu? How can the bank effectively differentiate itself from other banks currently present on the Internet? How might the bank be able to involve its own customers in designing its website and pricing its Internet service package? The bank should remember that while the Internet is a relatively low cost way of expanding and allows customers to find the bank rather than the bank having to find customers, there are serious concerns about privacy In addition, the Internet is not limited by geography and while there are thousands of potential customers, there are also many financial institutions around the world competing for customer deposits and loans The bank needs to be aware that there are many bank web pages out there and that they will need to invest in employees with the technical expertise to manage the new web site well One of the first things the bank needs to is to take steps to protect its customers and let its customers know what its privacy and security policies are Another step the bank can take is to start with a customer survey to find out what its customers want and need from the bank’s Internet services They can run this as a contest and give away some small items to the customer with the best ideas for the web page and Internet service This should help get customers involved in the design and implementation of the web page and may help the bank start building an online customer base 4-15 ... A Telephone Banking and Call Centers B Internet Banking Services Provided through the Internet Challenges in Providing Internet Services The Net and Customer Privacy and Security Financial- Service... description of the proposed bank and its marketing, management, and financial plans The Comptroller of the Currency asks for information on the number of competing banks and bank- like institutions... regulated to ensure the safety and soundness of banking system and to avoid excessive numbers of bank failures The same arguments are usually made for nonbank financial firms Financial- service firms