Article

Mexican banks forge ahead with ATM networks

The business-friendly government of Mexican President Vicente Fox is helping to generate a massive influx of foreign investment for America's border neighbor to the south.

June 18, 2002

The business-friendly government of Mexican President Vicente Fox is helping to generate a massive influx of foreign investment for America's border neighbor to the south.

ATM sales in Mexico are riding this national economic upturn, as banks have built their ATM networks on a large scale and manufacturers are projecting continued sales growth.

There are about 18,300 ATMs in Mexico, which has a population of 100 million people. Between 1995 and 2000 the market grew an impressive 150 percent, from 6,976 to 17,446 ATMs, according to a report from BBVA Bancomer, Mexico's largest financial group in terms of assets.

The country's second largest financial group, Banamex -- bought by Citigroup (NYSE: C) last year -- is a good example of the spectacular growth of ATMs.

Banamex's network grew from 16 ATMs in 1982, to 1,238 in 1992 and 4,500 today, according to VP of remote banking Jesus Berumen.

The world's two leading ATM providers, NCR Corp.(NYSE: NCR) and Diebold (NYSE: DBD), are betting on continued strong demand in Mexico. The ATM is popular with Mexican citizens because it is easy and inexpensive to use, especially compared with Internet and telephone banking.

Diebold expects total ATM sales between 2,000 and 2,500 units per year, said Hector Aguirre, Diebold's country manager in Mexico.According to Mexican switch Prosa, Diebold has 9,815 ATMs installed in the Mexican market, followed by NCR with 6,983.

The rest of the ATM market is divided between several international ATM providers, including (in order of ATMs placed) Fujitsu, Wincor Nixdorf, Triton Systems, Olivetti and Digital.

Diebold's Aguirre said his objective in Mexico is market share. "Diebold's objective is to obtain at least 50 percent of all sales -- every year," he said.

NCR expects annual sales between 1,500 and 2,000 units annually, said Juan Carlos Villamil, the company's sales director in Mexico.

Diebold's Aguirre expects between 30 percent and 40 percent of future sales in Mexico to be upgrades of the existing ATM network. Wincor Nixdorf's Lorenzo Gonzalez, sales and marketing vice president for Latin American, said he expects his company to succeed by replacing old ATMs with new ones.

"The market is today in a phase of renovation because much of the installed base is old and obsolete," Gonzalez said.

Wincor's moves in Mexico

Third among manufacturers worldwide and fourth in Mexico, Wincor plans to aggressively market its products to improve on its 5 percent Mexican market share. It has about 800 ATMs installed, behind Diebold, NCR and Fujitsu.

Wincor's relationships with the two banks in Spain help the company's push for more market share in Mexico, but that does not mean the company has forgotten the multinational mantra: "think globally and act locally."

Wincor opened an office in Mexico in April to provide better local coverage and support for its clients, Gonzalez said.

Wincor is using two international technology heavyweights, IBM and Unisys, to sell its ATMs in Mexico. Those companies have extensive post-sales service networks, Gonzalez said. "We have our own office now, but we don't want to change our business model."

Gonzalez said Wincor's goal is to capture 15 percent of Mexico's installed ATM market in the near term and 25 percent of all shipments in three years.

Mexico's financial system has been a hotbed of high-profile mergers and acquisitions recently. The wave of acquisitions reached its peak last year when the world's largest financial institution, Citigroup, acquired local financial group Banacci (owner of the Banamex bank) for a stunning US $12.5 billion.

The Banamex acquisition is a telling example of how Mexican M&A activity has changed the landscape of the local financial system -- namely, big and well-known international players buying up local groups to secure a foothold in an increasingly attractive banking market.

It has been a mixed blessing for ATM vendors, building the potential for increased sales while sometimes delaying purchasing decisions.

"The M&A process and the great influx of foreign banks have strengthened Mexico's financial system, but it has somewhat diminished the demand for ATMs," said Diebold's Aguirre.

"M&As produce black-out periods when the banks are not buying anything," said NCR's Villamil.

Five large financial groups now dominate the financial system, and the top tier is an exclusive club of foreign companies. It includes Citigroup and Spain's two largest financial groups, BBVA (NYSE: BBV) and SCH (NYSE: STD). Trailing the foreigners are local groups Bital and Banorte.

While the international groups have brought their know-how and their technology platforms to Mexico, they have not revolutionized ATMs and e-banking there, said Robert Lacoursiere, head of Latin American equity research at Lehman Brothers in New York. "Before the foreign invasion the locals were already doing it (e-banking)," Lacoursiere said. "Foreign banks bring a lot of advantages but not necessarily all the sunshine."

Citigroup's acquisition of Banacci, which led to the creation of the country's second-largest financial group Banamex, demonstrates that it's not a walk in the park to bring advanced home-country technology to a less developed market.

"The technologies are very different, and there is no integration between the group's ATM platforms," said Banamex's Berumen "Any integration would be for the long-term."

What has changed is the relationship between ATM providers and the buyers, because executives in Madrid and New York make some purchasing decisions.

Networks and charges

In Mexico, banks drive their own ATMs, but three switches serve the banks when customers use an ATM not owned by their home financial institution.

The biggest switch is Prosa, which today serves 23 Mexican banks and six banks in the Caribbean and Central America, according to Prosa CEO Jose Molina Martinez. It is owned by its member banks. A second switch, E-global, is owned by Mexican banks BBVA Bancomer, Banamex and Bital.

The newest switch, Procesa, was established in February by Capture Systems, the exclusive Triton distributor in Latin America, and transaction processor TII-Smart Solutions. It serves primarily Mexico's independent deployers.

Mexican banks typically charge their clients when they use the ATMs of rival banks and offer free transactions at their own ATMs. However, banks are moving to offering a specific number of free ATM transactions, then charging their own clients for ATM transactions.

The banks charge about 10 pesos for interbank cash withdrawals and three pesos for checking balances. According to Bital's head of ATMs, Claudia Ignacio, banks will lower the interbank surcharge to eight pesos in 2003, while the surcharge for checking balances will remain flat in an effort to promote convenience banking.

"We don't want to end up at the same situation as in the U.S., where the owners of the commercial stores are the owners of the ATMs," she said. While some retail chains operate their own ATMs, Mexico's convenience market is still small.

Retailers aren't likely to start installing ATMs as in the U.S., because the financial systems of the two nations differ, according to Banamex's Berument. "In Mexico there are a few large banks and most plastic cards are issued by the banks."

However, Jorge Fernandez, president and chief executive officer of Capture Systems, said that there is a growing retail market for ATMs in Mexico. Fernandez said his company is currently in the midst of a 1,000-machine rollout for several unnamed retailers.

Fernandez said that several leading retailers, including the Cinemark theater chain, the Oxxo convenience store chain and petroleum dealer PEMEX, are adding ATMs to their businesses.

Inbursa and off-premise

One Mexican bank offers a unique strategy in serving customers exclusively through its network of off-premise ATMs. Banco Inbursa is considered the king of off-premise deployments in Mexico, and operates a network of 600 NCR and Triton ATMs at retail stores, hotels and movie theaters.

Inbursa -- which is owned by Mexico's richest man, Carlos Slim -- began operating as a wholesale bank. Recently it entered the retail segment and carved out a banking niche by serving its customers at ATMs and online.

"Our strategy was never to open branches," said Inbursa's VP of e-banking Roberto Sada.

The bank's ATM network is growing. In Sanborns retail stores, the number of units will jump from 35 to 120 by September, Sada said.

Although the off-premise market is still small in Mexico, Inbursa may be leading a move to more off-premise machines.

Inbursa has also been a forerunner in terms of functionality, becoming the first bank to offer real-time cash deposits without envelopes last December. "For the Mexican market, that's something new and innovative, and we're making noise in the market," Sada said.

Is it safe?

Security is a key issue in Mexico, where crime at ATMs and elsewhere has been a continuing problem.

"Our emphasis on security is very strong, and we are promoting this together with the banks," said Diebold's Aguirre.

NCR's Villamil said attendance at company-organized conferences is a good gauge of banks' interest in ATM security. "In the conferences we organize here on ATM security, there's almost always 100 percent attendance whereas it's usually a lower percentage of the invited that attend the other conferences," he said.

Both Aguirre and Villamil said ATM providers and banks are educating the public about ATM security issues. They encourage customers to protect PIN numbers and refuse help from strangers.

Common ATM crimes in Mexico include the duplication of plastic cards through skimming and stealing PINs. More violent crimes occur as well, including assaults and hijackings in which customers are forced to empty their ATM accounts at gunpoint.

Diebold offers specially equipped ATMs for areas in cities that are considered high-risk areas, Aguirre said. The ATMs are equipped with cellular sensors that send an alarm if someone is trying to cut the cable and remove cash.

BBVA Bancomer has purchased a number of these ATMs, and several other Mexican banks have shown interest, Agurrie said.

The security problem has also led to an increased interest in off-premise deployment, the ATM executives said. "In a convenience store, (criminals) don't know if you're coming out with bubble gum or cash," said NCR's Villamil.

Back to the future

Mexico is a ripe market for new machines with advanced functionality features, and banks seem primed to expand their ATM networks.

Banco Bital, for example, will launch a string of new functions this year to satisfy customer demand for more advanced ATM solutions.

The bank's customers already buy phone time for cell phones and pay some bills. The ATMs are used for advertising. It recently added pre-approved consumer loans through the ATM. This month it will extend its payment function to include more utilities and offer account transfers between customer and third party accounts, Ignacio said.

In the run-up to the World Cup, Bital, Pepsi, and a state-run lottery promoted betting through the ATM.

Bital plans to initiate some Web-ATM pilot projects in August and expects to roll out Web ATMs by year's end.

Bital and other banks are betting that Mexicans living in the U.S., who already send millions to relatives still in Mexico, will make that money accessible through the bank's 4,000 ATMs in July.

Executives from both Diebold and NCR said that remittance between Mexico and the U.S. will become a big business and one of the key drivers of future ATM growth in Mexico.

A key challenge for Bital and other banks is Mexico's disproportionate income structure and the resulting large number of unbanked citizens. Only one in three Mexicans has a bank relationship, and economists believe that it will take at least five years before that figure reaches 40 percent.

On the other hand, the nature of the country's income distribution, and its citizens' lack of access to the Internet, probably means the ATM will remain the favorite e-banking channel of the Mexican public for many years to come.

As Ignacio from Bital put it: "It will take many years before online banking will reach the same levels as the ATM."

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