Article

Some FIs buy into ATM outsourcing

ATM owners will make big technology investments in the coming months -- which is good news for ATM outsourcing, say companies that offer the service.

November 4, 2003

ATM owners will make big technology investments in the coming months. Some dollars will be spent to comply with regulations, such as Triple DES and ADA compliance. Others will go toward efforts to capitalize on market trends such as one-to-one marketing and enhanced deposit-taking capabilities.

It's all good for outsourcing, say the companies that offer such services.

"You've got financial institutions that are driving their own terminals today, and they're looking at a huge upfront capital investment for adding Triple DES and voice capability to their ATMs. So they're saying 'why not take a look at (outsourcing)?'" said Kevin Carroll, director of ATM Services for Concord EFS.

Many financial institutions (FIs) are also interested in developments like Check 21, a piece of legislation expected to become law in early 2005 that will make it more feasible to offer check imaging at the ATM -- but will require hardware and infrastructure upgrades.

"They're not necessarily ready for all of these changes," Carroll said. "The ATM has been the ugly stepchild; it's gotten left out of a lot of IT budgets."

Concord, in contrast, has tried to stay ahead of the technology curve. "We've got 1,500 'talking' ATMs up and running. We've already made the personnel and infrastructure changes necessary to deal with Triple DES. We've already developed CRM (customer relationship management) transactions," Carroll said.

The transaction processor and owner of the Starnetwork recently partnered with the nation's two largest ATM manufacturers, NCRand Diebold, to offer turnkey programs to FIs. Rather than making an upfront investment in hardware and software, FIs will make monthly payments on machines. Fees will also cover transaction processing, network services and ATM maintenance and monitoring.

According to Carroll, monthly costs will vary from approximately $500 to $1,200, depending on the number of transactions, whether customers opt for ATM upgrades or new machines, and other factors.

To establish a baseline, Concord used Dove Consulting's 2002 survey of ATM deployers that indicated that FIs incur monthly ATM operating costs of $1,111 to $1,688. "With this program, their monthly expenses will be about the same or less as what they are currently spending, but they'll get all of the latest, greatest technology so they'll be ready to play when new products hit the market," Carroll said.

ATM outsourcing is "picking up momentum," agreed David McCrary, vice president of sales for eFunds' ATM division, which offers programs including ATM hardware, maintenance and monitoring to FIs.

Driving the trend

McCrary, a Bank of America veteran who joined eFunds in March, said that more FIs are concluding that ATMs are not part of their core business. "We're getting their attention by saying 'You focus on the customers, and we'll focus on the ATM network.'"

Concentration on core banking services is listed as one of the key drivers of outsourcing in a Celent Communications report, "ATM Outsourcing Services: A Global View."

Other drivers include: reduction of operational costs and performance improvement, with Celent concluding that FIs may be able to save 15 percent to 25 percent through outsourcing; importance of the ATM as a self-service channel; and meeting client expectations, with Celent noting that managing ATMs becomes more complex as services offered via ATMs become more advanced.

"Some financial institutions are starting to realize that it's not ownership of the ATM itself that has value, but the reliability of the ATM services attached to their name," said Doug Deitel, executive vice president of corporate services for Cardtronics, a Houston-based ISO that recently inked a deal with a major East Coast financial institution to deploy and manage some of its off-premise ATMs.

Before the FI agreed to pilot an off-premise ATM management program with Cardtronics, it had paid the ISO to offer surcharge-free access to some of its EBT customers at Cardtronics ATMs. Those kinds of programs offer a logical way for companies to prove themselves with potential outsourcing customers, Deitel said.

Cardtronics hopes that it may be able to expand its relationship with another prominent financial institution, JP Morgan Chase. Cardtronics recently re-branded 215 ATMs in Texas ExxonMobil locations with the Chase name. Chase customers "can walk up to the machines and enjoy an experience very much like what they get at other Chase ATMs," including surcharge-free access and similar transaction screens, said Deitel.

The final factor tapped by Celent as an outsourcing driver is cross-border expansion, which benefits companies that are international in scope, such as Leawood, Kan.-based Euronet Worldwide which has dual transaction processing switches in Budapest and Little Rock, Ark.

Clients like GE Capital, Citibank and Raiffeisen Bank outsourced ATM programs to Euronet rather than making  their own infrastructure investments after purchasing FIs in European markets.

"With all of the merger and acquisition activity, you might have a bank with subsidiaries in 10 countries that has no homogenous product set or infrastructure," said John Romney, Euronet's senior vice president of EMEA (Europe/Middle East/Africa). "They're looking for consistent service across the markets, and we can give it to them."

Most of Euronet's 25 outsourcing clients are international financial institutions, though Euronet also serves local banks and consortiums such as the four Indian banks that comprise the newly-formed Cashnet shared ATM network.

Romney said the Indian market is receptive to outsourcing because of its lack of existing infrastructure and also because "they do so much outsourcing themselves for Western markets, providing services like software development and call centers."

Not for everyone

Despite some of the obvious appeals of outsourcing, Celent estimates that just 14 percent, or $2.2 billion, of the $15.3 billion in total North American ATM operating costs in 2002 was allocated for outsourcing services. Currency management, transaction processing and maintenance together accounted for 75 percent of all outsourcing.

Cost is a factor for many large FIs, according to the Celent report. "A large bank may process more than 25 million transactions a year, a scale large enough to make maintaining its own network the most cost effective alternative."

Yet it's sometimes difficult for FIs to evaluate the total cost of an ATM program, because responsibility for the program may be split among several different departments, said Dave Bucci, senior vice president of Diebold's Customer Solutions Group.

For all but the largest FIs, companies like Diebold can often leverage economies of scale to gain better deals with service providers than the FIs may be able to obtain themselves, Bucci added. And even big banks sometimes conclude they can gain efficiencies by outsourcing some services.

Diebold in 2002 won a key deal with Bank of America, valued at $71 million, to provide first- and second-line maintenance for its ATMs and other branch-related equipment -- services that the bank had previously kept in-house.

Balancing the scale

Gary Staub, chief marketing officer of Genpass Technologies, which provides transaction processing, ATM maintenance and monitoring to about 1,000 FIs, said it's more common for smaller FIs to consider turnkey programs. While there are some notable exceptions, the average Genpass client has fewer than 10 ATMs and less than $1 billion in assets.

Larger institutions tend to show more interest in niche programs such as "Bank at Work," in which Genpass manages ATMs for FIs at the corporate offices of their commercial accounts, Staub said.

Many FIs resist turnkey programs because "they feel like they are giving up too much control," Staub said. "In reality, they are augmenting their operations because we can give them a bigger team to help build their solutions."

Bucci agreed that a key advantage gained with a turnkey outsourcing program is ease of managing ATMs. "We become a single point of contact for them to ensure that they get what is guaranteed in all of their SLAs (service level agreements)."

"It's attractive when you've only got to manage one subcontractor versus 10," agreed Euronet's Romney. 

Cardtronics' Deitel said that the ISO has 100-plus employees devoted to different areas of ATM management, a number that few deployers can match. Each client is assigned a relationship manager, who is responsible for taking care of the client's needs. Prospective clients tour Cardtronics' 28,000-square-foot facility where "they get to meet the people who handle client accounts, stand and watch those people work," he said.

The key to winning outsourcing business is quality service, said Genpass' Staub. "You cannot afford to have their customers impacted in a negative way," he said.

Concord's Carroll said his company attempts to alleviate concerns over control and service quality by making it easy for FIs to access information about their own ATMs and perform a variety of functions themselves, if they wish. "We can even give them the ability to remotely open and close terminals," he said.

Another challenge for outsourcers is the tendency of many FIs to cling to the traditional way of doing things. "There is sometimes a mental hurdle for them to overcome, that just because you've managed ATMs for the past five years doesn't mean you have to keep managing them," Romney said.

On the grow

Despite these factors, Celent predicts in its report that ATM outsourcing will continue to grow for the foreseeable future as FIs opt to eliminate non-core operational activities.

Bundled services, such as Concord's new program with Diebold and NCR, will become more popular. Celent also expects to see more collaboration between ATM outsourcing companies -- with the Concord program again a strong example -- as well as competition for companies to expand their offerings.

McCrary, of eFunds, welcomes the competition. "The more companies like Concord offer this, the more visibility it brings to outsourcing as an alternative," he said.

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