Article

The Year 2000'—A Crisis Facing the ATM Industry?

Everywhere you go, the three big letters greet you with an annoying grin. "Y2K," a computer bug phenomena topping news headlines, is becoming a household word.

March 7, 2002

It's like an epidemic. Everywhere you go, its three big letters greet you with an annoying grin. "Y2K," a computer bug phenomena topping news headlines, is becoming a household word.

But as an ATM owner or operator, do you really have anything to worry about?

First some history.

The Y2K crisis stems from an early 1960s programming search for efficient methods to handle data. To save storage space, programmers abbreviated dates with the last two digits of the year. For example, "1998" is stored as "98," and "2000" is stored as "00." These two-digit dates are used in millions of data files and are integral parts of chips embedded in everything from nuclear power plants to microwaves.

The software on these embedded chips was burned in as permanent programming, and cannot be changed unless a new chip is installed. The problem, however, is not necessarily fixing the code on the chips--it's finding all of them in time, and then testing and reinstalling them before midnight on January 1, 2000.

Pessimists point out that anything you plug into the wall may have an embedded chip and therefore runs the risk of failing when the next millennium ticks into the present. Medical equipment, airplanes, cars, power and sewage utilities, bank vaults, prison gates, elevators, fire alarms, and grocery stores are only a few problem areas.

The federal government will face the largest chunk of the country's potential $600 billion bill once everything's said and done. They own roughly one-quarter of all the computers in the U.S. The Pentagon alone has 1.5 million machines--and it keeps discovering more. Although the Pentagon began addressing Y2K in 1995, repairs of the most vital computer systems were only 9% complete this spring.

Y2K product and service litigation costs alone could soar to over $1 trillion or more.

The Effects on Banking

Banking faces major challenges as well. For example, although Citibank and NationsBank say they will be done with their internal fixes this year, thousands of small community banks and credit unions who won't be compliant in time may cause a domino effect that will ripple throughout the banking system since so many institutions interact with each other. If one weak link in the chain isn't Y2K compliant, problems may occur in the downlink.

BankAmerica, which is merging with NationsBank, says work is 60% complete, and has 1,000 employees working on the crisis full time. It plans to spend $380 million and has prioritized its efforts ahead of some its merger concerns.

A new report by the FDIC shows that of the 6,304 banks it regulates, 88% are making satisfactory progress, 12% need to improve and less than 1% were unsatisfactory. But the Comptroller of the Currency, which oversees about 2,600 national banks, has examined 87% and says about 14% were not satisfactory.

But other dates besides Jan. 1, 2000 loom as potential problems. April 9, 1999 translates into an internal computer message of "9999" on some programs because that date is the 99th day of 1999. The glitch hits when the computer reads "9999" as "end of data file," automatically and permanently closing files on that day.

February 2000--with a highly unusual leap-year day--gave Microsoft fits by forcing the company to correct the mistake after it distributed advanced new versions of Windows NT.

According to Toronto-based Peter de Jager, who created the Web-based Year 2000 Information Center, another inconvenience is credit cards that expire after 2000. He suggests it's a good idea to hold on to older cards; some reports have revealed that a few network terminals already rejected cards expiring in the new millennium.

Should we be worried about accessing our cash? Not if your bank's teller lines are open for business or there's at least one working ATM nearby. And if no cash is readily available for some reason, most retailers accept debit card transactions, many banks offer Internet banking services, and credit cards are always an option. The ability to purchase products should not be a major issue.

Concerns for the ATM Owner

John MacAllister, evp of Benton International, a Torrance, CA-based consulting firm, says there are two levels of concern in ATM Y2K compliance. The first is the machine itself, and secondly the network communications it relies on for completing a transaction.

"If the ATM itself isn't compliant, it's not going to work, so it doesn't matter who it talks to," he says. "If the internals aren't compliant, then it's going to be dead when the millennium turns anyway."

MacAllister thinks most of the new machines will work fine--it's the more sophisticated, multi-function refurbished ones that need to be checked. Many of them use older embedded chips that need to be updated, and then it's a matter of upgrading the PC operating system inside the machine itself. "But a good number of the older machines do not have Y2K compliance problems," he adds, "because they don't have clocks in them. All they're doing is passing along the data format."

"The problem is that for a number of those devices to accommodate the new operating system, you have to alter the hardware internals of the devices. So there's a go or no-go decision that an ATM owner has to go through to decide whether he's going to upgrade that device or replace it entirely."

The upgrade cost per machine runs anywhere between $500 and $1,500 depending on the model and how much upgrading needs to be done. "To a smaller operator that's not a lot of money," says MacAllister, "but to someone who owns 4,000 non compliant ATMs, it's a different story."

All the major ATM manufacturers have provided upgrade or migration announcements to their dealers and owners. The most problem-free machines will be those purchased directly from the manufacturers. ATMs purchased from dealers and retailers may have more problems because the distributors haven't taken the time to make sure their machines are compliant.

The easiest way to check an ATM's status is to give the manufacturer its serial number to see if it falls within the manufacturer's compliant band of numbers.

The Networks Prepare

"The networks are doing a really good job of working out contingency plans in case a bank is not yet compliant," says MacAllister. "Some will even provide funding in concert with the FDIC and the office of the Comptroller of the Currency."

"One thing to remember is that the networks only serve the needs of those consumers who are using some ATM other than their own. The networks are in the market to provide time/place convenience." Consumers will be able to use their own bank's ATMs or the tellers in the case of network failure, so if the crisis fulfills a pessimistic prophecy, cash access habits may have to be changed--nothing more.

It's all about choice. Just as consumers use their own bank's ATMs to avoid surcharges, they'll have the same option if any given foreign ATM doesn't work for them because of a network problem.

"The fundamental question is, when you get to your bank, will that financial institution's ATMs be operating, or will EFT applications have been prioritized so low on the list that they never got done. That's the $64,000 question: what's the priority assigned to electronic funds transfer?"

Other obvious higher priorities for a financial institution include deposit and loan accounting, tax and loan accounts with the fed and wire transfers.

According to information provided by U.S. Processing in Brown Deer, Wisconsin, while the Y2K situation is certainly critical, the EFT industry is not as date dependent as many other financial applications and therefore not as risky. The life cycle of an ATM transaction through the electronic network is generally just 24 hours, whereas long-term loans and investment require accruals and other calculations throughout their lives.

An added protection against the crisis is that because processors and networks deal with financial institutions, they are subject to the same regulatory examination and audit--which should set every ATM owner at ease.

Y2K Side Effects that may Pose Greater Problems

In a recent press release, Diebold announced it would cut about 8.5% of its work force--500 to 600 jobs--to compensate for a shortfall in earnings per share.

"Banks are putting all their resources into getting their [Y2K] systems compliant," says Diebold spokesman John Kristoff. "Buying ATMs is not a priority."

The slowdown in ATM sales to banks may come as a result of the recent megamerger wave combined with paying for Y2K compliance.

Analysts have said the banking industry's consolidation eventually will benefit large ATM manufacturers as the large institutions start focusing on building market share and deploying more ATMs to attract customers.

The CIA recently announced its concerns that major companies and banks are opening themselves up for security breaches--or worse. Many of the programmers working on the problem are non-American and the programs are foreign-produced. Plus, says CIA Director George Tenet, hackers or foreign enemies may enter U.S. computers unnoticed while people place blame for the evidence of their attacks on the Y2K problem.

Peter de Jager foresees a problem with the new wireless communication technology being applied to ATMs. Referring to the recent blackout of PanAmSat's Galaxy 4 satellite that silenced 40 million pagers, he says, "When that satellite went walkabout, a large number of ATMs were affected as well. It hasn't been confirmed yet, but I've heard that all cellular phones--including cellular-linked ATMs--might not work when 2000 hits."

The ATM industry has enjoyed recent prosperity never before seen in its history, and although the foreboding year 2000 and numerous megamergers may cause it to stumble, once the winds of change pass some experts predict we'll see a continuation of the international explosion in off-premise ATM deployment by the major banks.


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>Sources:

• Benton International--Contact John MacAllister, executive vice president, phone (310) 534-2611.

• U.S. Processing--Contact Julie Keller, marketing manager, phone (414) 410-5115, fax (414) 354-7404; e-mail jakeller@usprocessing.com, Web site www.usprocessing.com.

• Year 2000 Information Center--Contact Peter de Jager, phone (905) 792-8706; Web site www.year2000.com.

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