In some areas of the payments industry, outsourcing is
becoming increasingly important as financial institutions scramble
to cut costs and streamline processes. ATM outsourcing is of
particular interest as ATMs evolve with more functionality,
bringing with it added cost, as Victoria Conroy
reports.
Go deeper with GlobalData
From originating as basic cash withdrawal mechanisms,
ATMs have evolved to such a degree over the past decade that they
can now perform a wide range of financial services functions, such
as depositing cash and cheques, checking transaction history,
paying bills, and reloading air time for mobile phones.
As such, ATMs are a vital customer
touchpoint and the preferred remote access method for bank
customers all over the world.
According to a 2007 Javelin
Research study, 42% of bank clients cite ATM access as a key
criterion for selecting a financial institution. As many financial
institution customers interact with their financial institution
solely via the ATM, an upgraded ATM fleet with the latest
technology and functionality can be an important competitive
differentiator.
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By GlobalDataThe main aspects of operating an
ATM network include the purchase and maintenance of terminals,
real-time transaction processing, monitoring, daily and monthly
reporting, settlements, cash replenishment and handing disputes,
and daily collection of deposited cash or cheques.
However, the provision of these
services typically generates very little income compared to other
banking service lines.
On the income side, revenue is
generated on a per-transaction basis through surcharges and
interchange. On the expense side, deployers incur operating costs
(depreciation and lease expenses, cash replenishment, processing
and so on) on a per-ATM basis.
However, it is incumbent on the
financial institution operating them to ensure that they act as an
extension of the bank’s customer service strategy – and ATMs are
one of the most costly and complex services to manage. According to
figures from global payment processor First Data, an upgraded ATM
can cost in excess of $55,000 and depreciates at an average of
$11,040 per year.
ATM outsourcing garners
increasing interest
Paul Stanley, vice-president of
payments solutions at First Data, told EPI that although
the payments industry has talked about ATM outsourcing for years,
there has been a significant uptake in interest over the last few
years.
“The financial crisis has increased
the focus on cost and efficiency for many banks, and we have
noticed a significant increase in enquiries about outsourcing.
Certainly elements of the value chain have traditionally been
outsourced, for example in areas such as cash replenishment and
engineering maintenance and so on,” he said.
“But for many years there’s been a
discussion about whether you could introduce operational and
financial efficiencies into the value chain if you did an
end-to-end outsource on the whole thing. It’s only really in the
past two years that we’ve seen banks start to seriously address
that, so it’s quite a recent phenomenon.
“We have seen a significant uptake
and a lot of interest in this and there are a number of good
reasons for that. Partly there’s a generation of technology that’s
reaching the end of its useful life and needs replacing, so the
banks are faced with some big capital expenditure decisions at a
bad time for them.”
He said that many
institutions are faced with the issue of overhauling their core ATM
driving and switching technology, and that there had been
significant interest in end-to-end ATM outsourcing, partnership
deals to deploy new off-premise estates, and processing and
gateways.
“We’re seeing it in all markets,
even the transition economies and the developing economies where
people are rolling out ATM networks for the first time,” Stanley
said.
“In those markets we’re seeing
people come to us and say: ‘We can probably look after our branches
but we don’t have experience in rolling ATMs out to off-site
locations’, such as a retail location, for example. So we’ve found
banks willing to partner with us on that side of the network. There
is a lot more activity and focus than we’ve ever seen really in the
ATM market around outsourcing, and it’s very much a global
phenomenon, not just in specific regions.
“In emerging markets, banks seem to
be interested in accessing the latest technology and also
leveraging First Data’s global expertise. In mature markets, banks
are focused on improving their competitiveness and replacing legacy
technology.
“Each bank will have its own
reasons and business case to outsource. However, choosing to
outsource to a global scale player does allow the bank to buy into
significant economies of scale.”
As ATMs have evolved to be more
functional, Stanley adds that processing or maintenance costs have
also changed.
“If you look at a simple cash
dispenser it’s got a relatively low capital cost and it’s
relatively easy to manage and maintain in the field,” he said.
“You’re switching very low-cost
transactions across the network typically. But if you enhance that
with more services, everything from balance enquiries, to accepting
vouchers and cash, to allowing people to make transfers and through
to some of the media applications, then that does start to change
the cost base complexity.
“We even now have a generation of
self-service devices that don’t dispense cash at all, they’re
simply information terminals, so you take away the cash servicing
costs and the requirement for a safe, but the software that those
machines run on is significantly more complex.”
Changes in business
models
Typically ATMs did not generate
much income, but this appears to be changing in certain
markets.
“Certainly in some markets we see
direct charging for cash dispensing. Australia’s probably the most
recent market that’s moved to that model and we also see
interchange fees in many markets that are compensation for
dispensing cash to other banks’ customers, but also there’s often
an interchange fee for balance enquiries or simple transactions,”
Stanley said.
“The other transactions that people
undertake at the ATM are only really done for cost saving and to
improve branch efficiency. By accepting cash and vouchers at the
ATM it’s obviously a low-cost alternative to using the branch
counter service and frees up branch staff to do more commercial
activities, typically selling other products or general customer
service activities.
“But it isn’t a revenue-based
business model for most of the other services, it’s typically cost
and efficiency.”
Stanley added that as the ATM
outsourcing market has grown, the traditional business models that
underpinned the value chain have also evolved.
“It’s changed completely in the
last two years. Historically, the bank did a number of elements of
the value chain themselves, so typically they’d forecast around
cash, they’d do the ATM driving and switching, they’d provide the
gateway services into the card schemes, and they’d outsource each
individual component of the value chain to a specialist provider.
Installation and maintenance might go to NCR, cash in transit might
go to Brinks and so on,” he said.
“What we’ve seen over the last two
years is the shift to the banks saying: ‘We’d like someone to take
all this away from us, and we just want one contract and one
service-level agreement that deals with all of this, instead of
having to manage multiple sub-contractors.
“Because we’ve got this interesting
position in the value chain where we’ve got the technology to drive
the ATMs, to do the switching, to provide the gateways, and to
collect the data that allows us to monitor and manage the network,
that’s positioned us so that we can take responsibility for the
other sub-contractors in the value chain and provide an end-to-end
service to the bank.”
China’s increasingly prominent
position and its growing attraction for payment processors and
outsourcing organisations has been highlighted in new figures
published by Retail Banking Research (RBR), showing that China has
overtaken Japan to become the world’s second-largest market for
ATMs, with over 200,000 terminals across the country. This
expansion occurred despite a slowdown in economic growth in the
country last year.
Asia-Pacific markets ramp
up activity
By the end of 2009 there
were around 208,000 ATMs in China, 42,000 more than a year earlier,
and 113,000 more than in 2005 – only the US has more ATM terminals,
and the fact that China has leapfrogged Japan only 23 years after
installing its first ATM terminal means a significant shake-up in
payment processors’ future growth strategies in the region.
However, despite the rapid rise in
ATM numbers, RBR says the ratio of machines to people and branches
is still relatively low, leaving plenty of scope for further
growth. According to RBR, the growth is in part due to a
transformation of the bank branch in China from a mere transaction
point to a service outlet, stepping up the pressure to migrate
basic transactions to self-service.
But according to Stanley, there are
barriers to entering the market, such as strict governmental
regulation in China, and the fact that non-banks are not allowed to
deploy terminals without a financial institution’s involvement and
branding.
“The short answer is that we’re not
doing much in ATMs in China. We see that as a relatively closed
market at this stage. However, in India we think there’s a huge
opportunity for ATMs. We’re partnering with Yes Bank, who are a
very innovative bank in the Indian market, to roll out an estate of
ATMs into third-party locations,” he said.
The deal between Yes Bank and First
Data marked the first time an ATM installation by a third-party
company had been signed. First Data will be setting up 3,000 ATMs
for the bank over the next five years, while Yes Bank will handle
the banking transactions such as cash management, complaints
management, and interbank settlement.
India is an attractive market for
ATM outsourcing specialists, thanks to a rapidly growing base of
cardholders and a favourable view of the market by the country’s
central bank, the Reserve Bank of India (RBI), which in 2009 issued
guidelines that made ATM transactions free of charge across all
banks, helping to drive up ATM transaction volumes and value.
According to RBI, the number of
ATMs in the country as of May 2009 stood at 44,857, a rise of
10,357 ATMs compared to the end of 2008, or a 30% growth rate. And
according to the Global ATM Market & Forecasts 2013 report
published by RBR, the penetration of ATMs in India is relatively
low compared to other Asian markets. Currently, India has about 33
ATMs perm inhabitants whereas China has about 98 ATMs perm,
Singapore has 419 ATMs perm, and South Korea has a density of 1,600
ATMs perm.
According to Stanley, the future of
the ATM outsourcing market is for the most part extremely
positive.
“I think most markets are
reasonably open to outsourcing around the ATM value chain. We don’t
see many markets that are totally closed. Generally speaking, this
is a business model that we can transport almost anywhere,” he
said.
“The issues then become around our physical presence in the
country, whether you can process in-country or whether you can
process cross-border, and just making sure that the right mix of
service partners is available for us to construct the value
chain.”
