STRATEGIC PARTNERS
Federal regulators seem confident that financial institutions are well prepared for Y2K. Now they're turning their attention to EFT networks, processors and other service companies. by Ann All, editor
March 11, 2002
The Y2K clock is ticking a little louder for networks, processors and others involved in the EFT industry. Earlier this week, federally-insured financial institutions were expected to complete testing of all computer systems and electronic transactions involving data exchange with outside parties.
So far, most of the 10,400 institutions insured by the Federal Deposit Insurance Corp. are meeting regulators' criteria. In an FDIC report issued last month, only 205 were listed as "need to improve," down from 375 in a March report. And only 19 of those 205 earned a more serious "unsatisfactory" listing.
Because financial institutions appear to be doing a bang-up job of preparing for a possible big bang, regulators are shifting their focus to service companies that work closely with banks but operate under less government supervision. They are conducting on-site assessments at more than 300 companies, including EFT providers and software vendors.
Clint Swift, the Bank Administration Institute's managing director for operations and technology, said that end-to-end testing of EFT transactions poses a special challenge because network switches communicate with each other in so many different ways.
"That cloud is built to route messages along alternate paths, if necessary," he said. "You never know for sure along what path a message will be sent. It may not go the same way twice."
Yet most of the large regional EFT networks feel confident they are ready for Y2K. The Houston-based Pulse network began working on the Y2K problem in June of 1997. The industry has spent "millions of dollars and countless man hours" to address it, said Mary Brown, Pulse's senior vice president.
In 1998, Pulse updated its operating system, software and settlement application with an eye toward Y2K compliance. Pulse recently completed testing of its direct processors.
"Incredible efforts have gone into making sure we will have uninterrupted EFT service, not only from the networks but from all participants, including merchants, processors, switch operators and certainly our 2,000 (financial institution) members," Brown said.
Brown acknowledged that such components as electricity and telecommunications are "uncontrollables" of the EFT industry. "We can't ensure that electric banking will absolutely be working when the clock strikes midnight at Year 2000 because there are so many things that are unpredictable," she said. "If the electricity goes out, then nothing is going to work, for example."
What, me worry?
Brown believes one of the biggest remaining challenges will be getting "calming messages" out to consumers. "We need to help our member institutions get those messages out there," she said. "We have to educate consumers as to what Y2K is, what's been done to address it, and what are the options if the system doesn't work."
The results of a Gallup survey commissioned by the Maitland, Fla.-based Star Systems network indicate that consumers may not be all that worried about the new millennium. Of 1,606 adult respondents to a telephone survey, 79 percent said they expect Y2K to have "little or no impact" on their personal finances, including ATM transactions.
Still, the survey found about 64 percent of consumers plan to withdraw and set aside extra cash prior to New Year's Eve. Fifty-two percent said their withdrawal will be about the same as they would normally need for a weekend or holiday.
Swift, of the BAI, hopes the media will exercise good judgment when reporting on Y2K. For instance, he said, they should be aware that "a small percentage of ATMs will be down because they're out of paper or ink." Wrongly attributing such problems to Y2K could create a public relations nightmare for ATM owners.
Due diligence
ATM manufacturers like NCR are working with licensed sales representatives, resellers, networks and others to contact owners of their terminals. John Buschmann, director of NCR's ATM Year 2000 program, said his company sent out more than 5,000 letters in the first quarter of 1998 alone.
Buschmann said that notifying customers hasn't been too difficult. "You'd be hard pressed to find someone running a business who hasn't heard about this issue."
After modifying its software in 1997, NCR began selling upgrades in January of 1998. Software fixes cost approximately $500 to $1,000 per machine. Machines built before 1985 cannot be upgraded; those built from 1998 on do not require fixes.
Buschmann estimated that a total of 40,000 ATMs in the U.S. and Canada will be updated. He said that 90 percent of those upgrades have been completed. He puts the figure in Asia at close to 85 percent. Some European countries are lagging behind, especially those pegged to the euro. But he feels confident those countries will catch up.
"They're coming along and making good strides with each passing month," he said. "We are constantly monitoring our top customers in every country on this. "
NCR, which formed its first Y2K committee in 1996, has spent $205 million so far preparing for the millennium. Others in the industry are also spending big bucks. American Express has spent $383 million, according to its annual report, and expects to spend another $135 million to $160 million. Market research from the Gartner Group indicates that fixing Y2K problems will cost between $1 trillion and $2 trillion worldwide.
Judging by the phone calls he receives, Buschmann believes NCR customers are already beginning to look beyond the millennium. The first callers wanted to know what needed to be done and how to schedule testing. A second wave of callers requested verification letters from NCR to document testing. Now callers are asking about NCR's contingency plans -- which will be published in the company's second quarter report.
Platform problems
Despite all of the intense -- and expensive -- preparations, federal regulators have managed to identify problems at a few companies.
Atlanta-based First Data Corp., the fifth-largest transaction processor in the U.S., in March signed an agreement with regulators stating that certain Y2K problems would be addressed by June 30. According to a First Data spokesperson, the company's Merchant Services division experienced problems with its Nashville or Envoy platform, one of six the company uses for POS transactions. The front-end system processes about nine percent of the company's daily authorization volume.
After experiencing delays with its orginal plan for conversion to a new system, First Data in February decided to also remediate the code on the existing system. Because the remediation got a late start, it did not meet certain dates targeted by the Federal Financial Institution Examiner's Council. Now, the spokesperson said, the Nashville project is on schedule. The company expects to have the code fully implemented by July 11.
"We are meeting all FFIEC deadlines and expect that the Nashville platform will be able to process dates and times from, into and between the 20th and 21st centuries," the spokesperson said.
First Data has spent $105 million on its Y2K readiness programs so far, and will likely spend an additional $80 million to $95 million this year.
Another company that signed an enforcement agreement is TransAlliance L.P., a Bellevue, Wash.-based regional EFT network that provides ATM services to some 750 financial institutions in 13 Western states and Canada's British Columbia province. Like First Data, TransAlliance customers could be released from contractual obligations if the company's efforts don't satisfy regulators.
TransAlliance, which is half owned by Electronic Data Systems, fell behind in Y2K preparations while converting to a new EDS platform called EPOC in late 1998. An EDS spokesperson said the company experienced problems in its efforts to install EPOC with all its clients in time to meet Y2K deadlines.
"It's the nature of the business -- there's often some controversy with customers over platform changes," the spokesperson said. "We know we're not blameless. We made some mistakes."
The EDS spokesperson believes problems intensified when TransAlliance management did not deal with glitches uncovered by regulators during inspections earlier in the year. A management change "was the first response to the problem," the spokesperson said. Former EDS executive James D. Benson became president and CEO of TransAlliance when Denny Dumler resigned on April 29.
Acknowledging that it was "embarrassing and difficult" to be singled out by regulators, the spokesperson said EDS is committed to helping TransAlliance solve its problems. "We have the ability and the wherewithal to address problems without worrying about cost. We'll make these investments no matter what."
