RETAIL DELIVERY SPECIAL REPORT
Evaluating ATM Partnerships
BY KAREN EPPER HOFFMAN
ISOs
offer an alternative to network management,
and many institutions are weighing their
options. cheaper machines and dial-up
connections are one way to go; surcharge-free
access in choice locations offers a different
value proposition.
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SYNOPSIS | The
declining profitability of the ATM
channel finds financial institutions
entering into partnerships with independent
sales organizations (ISOs). Smaller
institutions can save as much as 30%
to 50% on operations costs by offloading
off- and on-premise machines while
many big banks want to use the major
ISOs’ choice locations as a means
to extend their brand. The process
of selecting a partner should include
considering a long-term vision for
the ATM network, the institution’s
objectives, what kinds of machines
they want to offer, which responsibilities
they’ll bear and which they intend
to off-load, and their consistency
and quality expectations of third-party-managed
ATMs.
Under pressure from mounting
ATM maintenance expenses that yield little
incremental value? Eager to cost-effectively
expand your organization’s footprint?
Certain you could use better management
of your on- and off-premise fleet of ATMs?
To many organizations anxious to get a
better grip on a popular yet ever-costly
channel,
partnering has never looked so good.
Whether to better manage existing investments
or to expand their ATM presence, financial
institutions are increasingly turning
to independent sales organizations
(ISOs), nonbank companies that operate massive fleets of ATMs. But the decision
to partner isn’t an easy one. Not all ISO arrangements are equal and there
is some work to be done to assure that priorities and standards align.
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Partnerships can take
many forms. Some ISOs will share joint
ownership of machines with the financial
institution handling the maintenance and
support, while other arrangements enable
a bank or credit union for a fee to put
their name on the ISO’s machines
and give their customers free access. The
task is to analyze potential partners carefully
to find the one that best synchs with the
financial institution’s goals and
strategy.
Small and mid-size institutions, for
example, typically look to ISOs or
other service providers to manage their
off-premise and, in some cases, even
their on-premise machines, and to expand access for customers. Large banks tend to
be interested in branding deals with the more mature and well-placed ISOs in
order to more quickly and cheaply expand free ATM access for their customer bases.
Since these deals can
have five-year terms or more with little
or no room to back out halfway, experts
encourage bankers to first devise a long-term
vision for what they hope to achieve. Is
it simply to cut costs, to expand their
footprint
to reach more existing customers, or
primarily to increase the profitability
of the ATM channel? They also need to think
through the possibility of competitive
issues, since some outsource providers
are owned by rival banks.
The details of the deal need to be spelled
out, including service levels and maintenance
standards. Customers will be reacting
to the machines as extensions
of the institution. “The ATM is an important component in the brand image
of the institution,” says Peg Bost, director of financial industry marketing
for North Canton, Ohio-based Diebold, Inc. “If the outsource provider fails
to provide a level of service that maintains and enhances that image, the financial
institution suffers.”
RANGE OF OPTIONS
As the ISO market itself has grown and
matured (see sidebar)
so, too, has the range of outsourcing options
available
to financial institutions.
Smaller and mid-size organizations are
gravitating toward deals that would put
much of their ATM network in the hands of a third party. This may or may not
include on-premise as well as off-premise machines. Given its scale as the largest
ISO, Cardtronics claims that there are “a number of deals” where
smaller institutions are better off using Cardtronics to manage their on-premise
machines, says Keith Myers, executive vice president of the financial division.
Houston, Tex.-based Cardtronics manages and operates 25,000 ATMs nationwide.
“There’s just no way a small community bank can manage its machines
as efficiently as a Cardtronics can,” agrees William H. McCracken, CEO
of Atlanta-based Synergistics Research Corp. Depending on the deal, a small or
mid-size institution could save as much as 30% to 50% on its operations costs
by off-loading at least part of the work to an ISO, he estimates.
First American Bank in
Texas, which was acquired earlier this
year by Citigroup
Inc., is an example of how the economics work. Franklin Patterson, the bank’s
former executive vice president for retail banking who’s now starting
up a de novo bank in Texas, says First American developed a relationship with
ATM Ventures, a Spring, Tex.-based ISO. The bank shared ownership of its entire
ATM network, which grew to 82 machines in all, with the ISO. First American
supplied the cash for the machines, says Patterson, while ATM Ventures did
virtually everything
else. And, Patterson says, the bank ended up netting as much as $5,000 a month
from ATMs — this at a time when many banks have chalked up the channel
as a loss leader.
It helped First American’s business case that the ATMs being used for its
off-premise installations were mostly cheaper Triton machines — which Patterson
says cost little more than half of what a more traditional high-end ATM might
cost. They also used dial-up connections instead of more expensive dedicated
lines. But having a focused partner to handle the maintenance and service was
the key element, Patterson says. Given the lower volumes at sites where some
of the bank’s ATMs were placed, “I could never have put my own ATM
there. I could never pay for it on my own on 300 transactions a month,” he
says.
Steve Swafford, president of the Alabama
Credit Union in Tuscaloosa, Ala., enlisted
support from Genpass Inc. and Triton
Systems Inc. in order to expand
his network
from three ATMs in 1998 to 25 now. This move enabled the credit union to reach
various sponsor groups on the campus of the University of Alabama at Huntsville,
and nearby Mercedes and JVC plants. Swafford credits the ATMs with helping
the credit union ultimately double its member base. “We just couldn’t
do it on our own,” says Swafford, adding that the lower cost Triton machines
and dial-up lines they used at some of these newer ATM sites saved expenses,
making it possible to offer more machines.
“We’re seeing a lot of other credit unions following what we’ve
done,” he adds.
LEVERAGING THE BRAND
Larger banks,
meanwhile, view ISOs as a means to extend
their brand to an already
existing network of well-placed off-premise
ATMs without having to purchase and maintain
additional machines. In this scenario,
says Ben Allen, executive vice president
of Innovus Inc. a New Orleans, La.-based
ISO, a bank pays a small recurring fee
to an ISO in order to place its name
on ATMs that are already established,
typically in popular convenience stores
or other high-traffic locations. In turn,
the bank’s customers get surcharge-free
access, which strengthens their connection
to the bank.
“These deals are done with the hope that if you have more ATMs, you’ll
have more customers,” says Tony Hayes, managing director for the financial
services practice for Dove Consulting Inc. of Boston, Mass. “In the main,
these are becoming good deals for financial institutions because to operate their
own ATMs is much more expensive.”
Recent examples of this trend include J.P.
Morgan Chase & Co., which in
June announced a deal to brand ATMs in 216 Duane Reade drug store locations
in New York City, and another 30 at Duane Reade stores in nearby Long Island,
Westchester and New Jersey. Duane Reade’s ATM network is managed by Cardtronics.
“The Duane Reade deal gives us a huge advantage over competitors, a huge
visibility, and for our customers a huge network of free ATMs. The fact that
we don’t own them is not crucial to our goal,” says Morgan Chase
spokesman Tom Kelly.
Similarly, PNC Financial Services Group
Inc. of Pittsburgh in February signed
a deal with Cardtronics to brand more than 150 of that ISO’s ATMs deployed
in Walgreens drug stores located in Ohio, Kentucky, Indiana, New Jersey and
Pennsylvania. Here again, the multi-year agreement leaves the operation and
management of the machines in the hands of Cardtronics, while PNC customers
will be able to use the machines without paying an additional fee.
Such deals highlight the continuing value
to banks of reaching out to existing
and potential customers through the ATM
network. They also point to one
of the key values that established ISOs can bring to the table: choice
sites. “It’s
like real estate — it’s location, location, location,” says
Myers of Cardtronics.
Consultant Hayes adds that the scarcity
factor is driving a lot of the current
deals. “There are only so many ATMs in drug stores, supermarkets and
airports that are considered choice locations.” FINDING THE RIGHT FIT
ATM outsourcing is not for everyone, however.
Institutions that use their ATM channel
as a key point of competitive differentiation,
for example, are loathe to give up
any control to a third party — no matter
how challenging the economics become.
Case in point: First Commonwealth Bank,
a $6.2 billion-asset bank based in
Indiana, Penn., has been undergoing a massive
upgrade of its entire network of
110 machines,
prmarily to implement triple DES
security. The overhaul
affects the whole network — all but
eight machines will have been upgraded
by year-end. But in spite of the $1,500
to $10,000 cost per machine, Edward A.
Kennedy, the bank’s senior vice president,
says, “We have never considered outsourcing — it’s
just not a part of the overall vision of
the bank.”
Jerry Silva, an analyst with Needham,
Mass.-based TowerGroup Inc., names
Wells Fargo & Co.,
Bank of America Corp. and National
City Corp. as market-leading
banks that have invested heavily
in cutting-edge machines. Because
they
consider the ATM
channel central to their strategy,
don’t look for them to partner
with a third party, no matter how attractive the deal might seem, Silva says. “They’re
just not going to be willing to pass control to someone else,” he says.
Banks that do consider outsourcing need to tread carefully. The typical
deal can often last for five years or more. It can be difficult to
undo since
transferring ownership of the ATMs (or just ending a bank’s affiliation with those
machines) can be legally and logistically complex. Experts recommend that banks
analyze their outsourcing options in terms of the following key questions. What’s
your vision?
Bob Tramontano, vice president for product
marketing
management and engineering for Dayton,
Ohio-based NCR Corp., which has been
managing Royal Bank of Canada’s entire fleet
of more than 4,500 ATMs for a few years,
says that “coming up with a joint
vision, a long vision, is the first thing
we do.” After all, he says, once
the deal is in place, “it can be
a monumental task” to move that ATM
management back in-house.
Is your primary goal to expand your institution’s
footprint without adding expense (a
la Morgan Chase and PNC)? Or is it to lower
the costs of managing
the ATMs you already have in place? Large ISOs offer footholds in key retail
locations, which is appropriate if you just want
to extend your brand and access to customers. If you’re looking to lower
costs by off-loading the management of your existing machines, you may want
to shop around to see who can offer the best service for the lowest cost. Some
operators might be more willing to offer a more service-intensive relationship
with the banks they work for, or better financial terms, or the option to share
the ownership of the machines. Do you
want basic cash dispensers or more advanced machines?
In spite of some interesting bells and
whistles that have been added to ATMs,
roughly three-quarters of ATM transactions
are still cash withdrawals. As a result,
many banks ink deals that add simple,
less expensive cash-dispensing machines to their network. Other
institutions see the onslaught of Windows
programming
and check imaging and envelope-less deposits
at ATMs as the start of a change in how
ATMs will be used.
While traditional ISOs have typically
placed and managed the more low-end
machines, some are intentionally moving upscale in the hope that
more advanced functionality
will lead to better marketing and sales opportunities at the ATMs — and
ultimately greater profitability. Diebold’s Bost says the expanded power
of the Web-enabled ATM will make it easier for banks to offer an expanded range
of services, such as bill payment, statement printing, retrieving check images
and targeted marketing. Such new services create new revenue streams and can
engender more interest from potential customers, she says.
“Financial institutions should be sure their outsourcer can provide a migration
path to new technologies that are available now and that might be available in
the future,” Bost recommends. Do competitive issues concern you?
Banks have long dealt in the fuzzy world
of “coopetition” — working
with a rival in one area and competing
with them in another. The uneasy question
is: “How much business do I want
to give my competitor?” For example,
Elan Financial Services and Genpass are
both owned by U.S. Bancorp. Innovus’ Allen
says any financial institution operating
in the same geographic area as U.S. Bank might think twice about how much they
want to fuel their rival’s success.
Jan Estep, executive vice president
for transaction services at U.S.
Bancorp, counters that her unit is “kept segregated” from the bank itself. “In
most cases, customers don’t see us as a competitor,” she says.
Rather, Estep argues that having a bank background makes Genpass a more capable
ISO, since its parent company is well-versed in bank and network regulations,
anti-money laundering compliance and other regulatory concerns. “You
have to ask yourself, ‘Who is managing the keys? Who is managing the
cash?’” Estep says. How clearly are responsibilities spelled
out?
Working out the detailed responsibilities
of both bank and ISO can help avoid problems
down the line. And it’s not just
a matter of who handles what, but also
of how well those responsibilities can
reasonably be met. In other words, how
long can a machine be down before it will
be serviced? And, do both parties have
responsibility for forecasting the cash
management needs of the machines?
Synergistics’ McCracken says contracts should clearly delineate issues
such as “expected turnaround time for restocking of cash and fixing technical
issues.” Some banks may want to consider prioritizing certain machines — those
that are located in particularly high-traffic areas or areas where a lot of
customers live or work or machines that are located relatively far from another
machine — and insist that the turnaround times on those machines be faster
in order to satisfy more customers.
Uptime for machines, experts say, is a key
metric to consider when choosing a third party. What good are cost savings
and wider networks
if your customers
have trouble accessing their funds through these ATMs? Non-functional
machines can also create a bad impression of the financial institution
itself and
turn off customers. Hayes of Dove
recommends banks look for at least a 98% uptime from
prospective partners.
How much will these outsourced machines resemble on-premise
ones?
Consistency is important, especially as
the ATM is, in many cases, the primary
channel through which some customers
deal with their bank. If a customer encounters
an off-premise ATM that isn’t clearly
connected to their bank — if the
bank logo is hard to locate or the screen
isn’t clear — it can be off-putting.
Myers of Cardtronics says that many banks
are insisting that their service providers
replicate the look and feel of their
on-premise machines as much as possible. Where are the ATMs located?
Particularly in the case of branding deals,
it’s all about location. What can
the ISO offer in terms of increased availability
and access that a bank doesn’t
have itself? Hayes says that the incremental
value of a single ATM in one specific
location, no matter how good, is pretty
low. But if an ISO can deliver a dense
crop of ATMs that’s relevant to
a bank’s customer base — a
couple hundred machines at popular convenience
stores in a highly concentrated urban
area — that can do much to extend
the bank’s reach.
Questions
or comments about this article? Post
them at the Banking
Strategies blog.
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