Why would any bank or credit union outsource their off-premise ATM fleet to a third-party provider to manage all of the various required services? For years, this question has been bandied about the halls of our most venerable financial institutions and, for the most part, the answer has been, “We wouldn’t.”
Superficially, that makes sense. After all, why would you let a third-party interact with one of your customers at an ATM with your brand on it? How can the third party run your system as well as you do? And they certainly don’t know how to market to your customers as well as you do.
Wrong on all counts. Here’s the simple fact of the matter: a number of third-party ATM operators conduct their business with better expertise and lower costs than do the vast majority of banks and credit unions in the U.S. today. It’s time to get over the control hang-ups and look at the practical side of the question.
The Cost Issue
The sad but true fact is that ATM economics are no longer what they used to be. Transaction volumes have essentially stabilized, surcharges are under pressure and costs have continued to climb (if ever so slowly). The biggest positive in the current economy is that the cost of cash is lower today than we have seen in years, largely a result of a zero interest rate market.
Average monthly costs for on-premise ATMs climbed from $1,314 to $1,444 over the 2003 to 2006 period, according to the 2006 ATM Deployer Study by Dove Consulting, a division of Hitachi Consulting. For off-premise ATMs, the increase was significantly greater – from $1,194 in 2003 to $1,450 in 2006 – a compounded average annual increase of 6.7%. Obviously, these costs vary from financial institution (FI) to FI, with scale advantages going to the larger fleet owners.
Include direct ATM revenues into this picture and banks and credit unions lost money on a per unit basis – $262 per month for large bank deployers; $1,603 per month for smaller credit union deployers.
If the ATM is seen more as a marketing/servicing device, these costs should take on an additional flavor – how they compare to the cost of a customer impression using other marketing venues. Based on the 2006 ATM Deployer study, that would be 13 cents per customer impression for a large bank deployer and 71 cents for a smaller credit union – a cost per thousand (CPM) of $130 to $710. Expensive, but the question still stands: what is the potential for reducing this cost?
To answer that question, we turn to a recent study from Dove Capital Partners, which shows that large banks could save almost 20% on their direct costs per month per ATM by outsourcing to a third-party managed services provider. Using a hypothetical sample of 750 ATMs, annual savings would amount to more than $1 million, and this does not include any additional indirect cost savings associated with managing the myriad of activities associated with off-premise devices, such as contract administration and payment, access for moves/adds/deletes/resets, power and communications. Nor does this figure take into account the impact of increased availability.
Such savings may not be over the moon, but they likewise are nothing to dismiss, particularly in light of the fact that they’re equivalent to about 10 full-time positions.
Added Value
Now, let’s consider the issue of expertise as it applies to third-party providers. Two words come to mind – scale and focus – that should translate into material advantages for a bank or credit union.
Scale: Not all third-party managed services providers can make this claim, but several can. The fact that these companies deploy and manage many more off-premise ATMs than a bank or credit union should give them a clear advantage when it comes to experience and unit costs.
Focus: Building a company – processes, people, skills, infrastructure, systems – that is tuned to the deployment and management of a network of ATMs is a huge advantage when it comes to expertise and the application of that expertise against the daily issues that occur in the world of distributed ATM networks.
Say what you will about companies in the managed services business. But whether their roots lie in the equipment itself (Diebold and NCR) or in the deployment and management of that equipment (Cardtronics), third-party providers have been doing this for a long time, they have developed an infrastructure and set of skills to do it well and they deliver cost advantages that the vast majority of banks and credit unions can’t get close to.
Everything you have in place now, a managed services provider should be able to replicate, particularly around the customer experience. Depending on their level of sophistication, these companies should be able to add other elements of value, such as one-to-one marketing and campaign management.
Beyond that, you should be looking for ways the third-party provider can enhance your network, not just manage it better and more cost effectively. Do they offer a branding program that could extend your network to ATMs they own? Can they offer direct connect services to these branded ATMs that essentially extend your proprietary network and in doing so provide even better economics? Can they expand the surcharge-free population of ATMs for your cardholders? Are they willing to acquire some or all of your off-premise fleet, and by doing so free up capital?
In other words, look beyond the “can you do what I do for less” solution to elements of value that are additive to what you do/have in place today.
Off-premise ATM outsourcing is about creating value for you as a bank or credit union; it is also about maintaining and/or increasing the value you present to your customers. In addition to cost savings, you should be looking to leverage the focused infrastructure that managed services providers have developed over the years. You very well may be surprised with just how much additional value you can achieve through this leverage.
Mr. Dove is managing general partner with Beaver Creek, Colo.-based Dove Capital Partners LLC, a venture capital and consulting firm focused on two sectors within financial services – payments and alternative channels. He can be reached at ddove@dovecapitalpartners.com.
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