The proliferation of automated teller machines (ATMs) has wrought radical change to the banking landscape in the Middle East. Networks have expanded rapidly and, with a few exceptions, will continue to do so. In addition, the machines themselves are becoming increasingly sophisticated and able to deliver a broad range of services. Bankers throughout the region are united in the view that ATMs are not only a crucial tool by which product ranges can be developed, but that they also contribute to improved profitability.

The number of ATMs in the Middle East has grown rapidly in the last few years. In Saudi Arabia, they numbered 1,970 at the end of October 1999, up from 766 at the end of 1993, and plans are in place for further expansion. Last November, Saudi British Bank (SBB) announced it would add another 25 ATMs to its current 78, and bankers say that some of the larger Saudi banks are planning to open hundreds of new units by the end of this year. 'Some of the banks want to have ATMs on every street corner, and it's going to change the way in which commercial banking works here,' says one Saudi banker.

In Egypt, the recently formed National Telecommunications Company was awarded a licence in September for the establishment of an electronic network linking financial institutions and it has announced plans to set up 2,000 ATMs nationwide during the next three years. On a lesser scale, Beirut bankers say that ATM networks in Lebanon are expanding rapidly. They say the decision last May by Banque du Liban (central bank) to allow 'off-site' ATMs has opened the door to a flurry of new installations. In contrast, Bahrain is one of the few countries in the region that has already approached saturation point, with about 120 ATMs serving a population of 600,000.

Both the carrot and the stick are behind the costly network expansion. Commercial banks are confronted by the danger of losing customers if their rivals offer services and convenience they can not match. More importantly, they have discovered that ATMs offer significant cost cutting benefits.

Figures from Saudi Arabia show how extensive the saving can be. The Saudi Arabian Monetary Agency (SAMA - central bank) ensures that the cost of ATM transactions to customers is limited and the Saudi payment automatic network (SPAN), which includes all the local banks, operates a system by which each bank pays SR 4 ($1.07) when one of its customers uses the ATM of one of its peers. For comparison, the cost of each over-the-counter transaction, in terms of teller time and infrastructure, is about SR 20- 25 ($5.33-6.67). 'The proliferation of ATMs is to get customers wanting to conduct routine transactions out of the branches,' says one banker. 'Not only is it cheaper for us but it also allows us to reduce queuing and get the right sort of business done efficiently over the counter.'

Hole in the wall

The availability of ATMs has to be matched by rising levels of use, and this seems to be the case. An SBB official says they have a 40-50 per cent penetration of utilisation, up from 10-15 per cent two years ago, and that the figure continues to rise. 'There is always going to be a proportion of the population that will be reluctant to use technology they don't understand,' says the SBB banker. 'But there is plenty of room for further growth before we get to those levels.'

The service offered by ATMs is also changing with banks seeking to increase their flexibility and move a greater number of transactions out of the branches in Bahrain and Saudi Arabia. The basic functions of cash withdrawals, account inquiries and chequebook ordering have already been augmented with systems that allow utility bills to be paid, and some offer foreign exchange withdrawals. As the technology becomes available, and customers are prepared to use it, other products and services will almost certainly be added to the list.

While most of the region's banks have embraced the benefits of ATM networks and are investing heavily in them, they are already confronted, in the shape of the smart card, with the next generation of technology which might itself alter the nature of commercial banking in the region.

There is awareness that resistance to change can be dangerous. An apocryphal tale tells the story of a senior GCC banker responding a decade ago to questions on the future of ATMs. He dismissed them as a fad, a short-term phenomenon that had little future and warned that those banks that invested heavily would get their fingers burned.

Analysts argue that a similar scenario exists today. The embedded chip in a smart card allows vast amounts of information to be stored, and offers the opportunity for a dramatic expansion of the card's utility. Their use as electronic cash carrying devices, and as vehicles for portable, sophisticated banking activities presents the commercial banking community with a new vision of its future.

The cards also offer much better security. While this has been a major selling point in other parts of the world, where credit card crime has been rampant, it is less of a factor in the Middle East. 'Unlike elsewhere, there is no real credit card fraud problem in the Middle East,' says Anthony Ussher, manager of personal banking at HSBC Bank Middle East in Lebanon. 'And as a result, some of the impetus for smart cards is missing.' He says that while this might delay their introduction, it will not prevent it. 'With security being less of an issue, the case for smart cards is a little undermined, but they certainly come, its just that there is no real rush.'

Some banks in the region have already begun to draw up plans for their introduction and use, but they are playing their cards close to their chests. 'There is a lot of interest in smart cards,' says Greg Bark of SBB. 'But the need for international regulation and a sort of code of conduct is needed.' He says that Visa International and Mastercard are currently developing regulations and that the central bank is waiting for international and regional agreements.

Progress in the UAE is likely to be more rapid with Sheikh Mohammed Bin Rashid al-Maktoum, the crown prince of Dubai and the UAE defence minister, having made public his wish to see smart cards introduced as soon as possible. Peter Scriven, Visa's general manager for the Middle East, says smart cards - many of which will carry the Visa logo - are undergoing tests at a number of UAE banks, and adds that they are likely to be issued to customers as early as the second quarter of the year.

It is easy to predict that the development and availability of new technology will change the face of commercial banking in the Middle East, but it is impossible to say just how or when. As with the first generation of ATMs, bankers will have to be careful that they make the right decisions at the right times because the impact of globalisation might well mean that they will not get a second chance.