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ATM Outsourcing in India and Global Trends

Leveraging Economies of Scale

Even as the global volume of non-cash payments continues to grow, transactions conducted in cash still dwarf the non-cash transactions1. This is true of even the most mature economies like the USA and the Euro zone. Retail Banking Research projections indicate a 6% growth in ATM installations and an increase of 8% per annum through 20162. The ATM Future Trends Report 2012 (ATM Market Place, ATM Industry Association) indicates that the total number of ATM installations across the globe to be over 2.3 million. Retail Banking Research’s recent report forecasts the number of installed units to rise to 3.4 million by 2017.

While US, Japan, Brazil and China account for half of the global ATM market, Asia Pacific remains the largest regional market. ATM installations and expansion of ATM network is expected to play a greater role in the evolution of payments in view of the large numbers of the unbanked/underbanked population. The population per ATM in India stands at 16,2433 In contrast the population per ATM in US is 7614. The Reserve Bank of India reports a 24% growth in year 2010-11 over the previous year. With more than 65 per cent of the total ATMs (74,505 – as on March 2011) belonging to the public sector banks, they are poised to play an important role in the growth of ATM installations India.

Also known as automated banking machines (ABMs), cash-machines, cash-points, cash-lines or sometimes holes-in-walls, ATMs (Automated or Automatic Teller Machines – bank linked machines that debuted in the late 1960s) are basically computerized telecommunications devices that enable the clients of Banks and other financial institutions to perform financial transactions without the need for cashiers, human clerks or bank tellers.

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Evolution - (Technology and Applications):

From once being purely cash dispensing mechanisms, ATMs have significantly evolved to perform a wide range of financial services - depositing cash and cheques, checking transaction history, printing bank-statements, paying bills, mobilephone top ups, dispensing postage stamps, ticketing, gold-exchange, delivering pre-approved loans and being a games kiosk. ATM as a

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delivery channel is assuming greater significance and the ATM industry is undergoing a major transformation. Some of the technologies and applications, which have not yet gained worldwide acceptance, are biometric authorization, barcode scanning and multicurrency recognition.

Standard ATM Device:

Outsourcing (OPEX Vs CAPEX):

Increased focus on better customer experience through value added functionalities, regulatory compliance and the pressure to cut down the operational costs are the key trends shaping the ATM industry. A series of financial crises, over recent times, has raised the focus on costs and efficiencies as evidenced by a significant rise in enquiries relating to ATM outsourcing.

One of the ways to bring down the cost in ATM management is by achieving economies of scale. There have also been initiatives in inter-bank cooperation to pool ATMs, as in the case of Sweden, where five of the biggest banks are transferring ownership of their ATMs to a separate company in the interests of economies of scale.

India is also moving in a similar direction. This trend is seen to combine with efforts to outsource ATM installations and their management. Thanks to the rapid growth in

cardholder base (25% growth over previous year in debit cards during year 2010-11) and the central bank’s focus on financial inclusion through card penetration and operational efficiency of ATM channels, India is emerging as an attractive market for ATM outsourcing. The government favours the OPEX, or operational expense, model for ATM expansion in the country rather than the conventional CAPEX or capital expenditure, model.

The past few years have seen some large ATM outsourcing deals. In 2010, the deal between ‘Yes Bank’ and ‘First Data’ marked the first of such deals. First Data was to set up 3,000 ATMs for the bank over five years, while Yes Bank would handle the banking transactions such as cash management, complaints management, and interbank settlement. Around the same time, ‘Axis Bank’, the

country's third-largest private sector lender signed contracts with Prizm Payment Services and AGS Infotech to set up and manage 5,000 ATMs on a purely variable model outsourcing deal. As it’s a fully outsourced deal, the bank would not incur any capital expenditure. The ATMs are to be owned and managed by the two service providers. Axis Bank would only be responsible for cash settlement and would pay the service providers a per-transaction fee. The fee for each cash withdrawal would be Rs 13 to 15, and for a balance enquiry Rs 3 to 5.

Giving further impetus to the ATM outsourcing trend, public sector banks (PSBs) have ensured a drastic reduction in ATM transaction costs by inking one of the largest outsourcing deals in the financial sector under which nine firms have been contracted to install and manage over 63,000 ATMs . The nine companies - Tata Communication & Banking Infra Solutions (TCBAIL), Electronics Payments and Systems (EPS), AGS Transact Technologies, PrizmPay, NCR, FSS, FIS, Accura Infotech and MphasiS – includes a medley of start-ups and giants like the Tata group and NCR. The deal is expected to generate revenues of over Rs 1,000 crores (about $18.19 million), in seven years against a capital expenditure of about Rs 350 crores.

State owned PSBs have chosen service providers by dividing the country into 13 zones and auctioning the

contracts for installing 3,000 to 6,000 ATMs with each zone going to the lowest bidder. By coming together, the public sector banks have brought down the transaction rates through economies of scale. At present, a bank pays a transaction fee of Rs18 to the third-party ATM operator every time its customer accesses the ATM of another bank. With the current deal, banks have managed to bring these down the rates dramatically. It is interesting to note that at the lower end of the spectrum TCBIL charges Rs 6.6 for offsite cash transactions for the Tamil Nadu zone and at the upper end EPS charges Rs 11.9 for offsite cash transactions in Maharashtra and AGS charges Rs 12.10 for Chandigarh, Haryana, and the Himachal Pradesh zone.

The ATM market is poised for further interesting developments as operators are now trying to get manufacturers of the machines to opt for a new business model, whereby they will be paid for every transaction, instead of getting an upfront payment for acquiring the machine9.

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White Paper - ATM Trends

Reliability and Security:

With the rapid rise in ATM installations, outsourcing, pooling and a multiplicity of newer applications, reliability and security become ever more critical.

ATMs and the supporting electronic networks are generally very reliable, with industry benchmarks typically producing 98.25% customer availability for ATMs and up to 99.999% availability for host systems that manage the networks of ATMs. Nevertheless, considering the gravity of malfunctions in a rapidly evolving environment, before an ATM is commissioned to transact, it has to undergo extensive testing with both test money and backend computer systems. Such testing would have to be more and more rigorous as more and more features are incorporated. Front-end and

back-end systems are also accordingly built to weed out counterfeit currency (bill validation) and to audit each transaction in case of disputes.

As with any device containing objects of value, ATMs and the systems they depend on to function are the targets of fraudsters. Such fraud takes several forms.

Shoulder surfing, stand-in-time exploitation, card cloning, card-thefts through the Lebanese loop and waylaying replacement cards are some of fraudulent routes that both the card service provider and customers need to religious guard against despite counter measures such as smart cards, which cannot be easily copied or spoofed by unauthorized devices.

Outsourcing (OPEX Vs CAPEX):

Increased focus on better customer experience through value added functionalities, regulatory compliance and the pressure to cut down the operational costs are the key trends shaping the ATM industry. A series of financial crises, over recent times, has raised the focus on costs and efficiencies as evidenced by a significant rise in enquiries relating to ATM outsourcing.

One of the ways to bring down the cost in ATM management is by achieving economies of scale. There have also been initiatives in inter-bank cooperation to pool ATMs, as in the case of Sweden, where five of the biggest banks are transferring ownership of their ATMs to a separate company in the interests of economies of scale.

India is also moving in a similar direction. This trend is seen to combine with efforts to outsource ATM installations and their management. Thanks to the rapid growth in

cardholder base (25% growth over previous year in debit cards during year 2010-11) and the central bank’s focus on financial inclusion through card penetration and operational efficiency of ATM channels, India is emerging as an attractive market for ATM outsourcing. The government favours the OPEX, or operational expense, model for ATM expansion in the country rather than the conventional CAPEX or capital expenditure, model.

The past few years have seen some large ATM outsourcing deals. In 2010, the deal between ‘Yes Bank’ and ‘First Data’ marked the first of such deals. First Data was to set up 3,000 ATMs for the bank over five years, while Yes Bank would handle the banking transactions such as cash management, complaints management, and interbank settlement. Around the same time, ‘Axis Bank’, the

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White Paper - ATM Trends 3

country's third-largest private sector lender signed contracts with Prizm Payment Services and AGS Infotech to set up and manage 5,000 ATMs on a purely variable model outsourcing deal. As it’s a fully outsourced deal, the bank would not incur any capital expenditure. The ATMs are to be owned and managed by the two service providers. Axis Bank would only be responsible for cash settlement and would pay the service providers a per-transaction fee. The fee for each cash withdrawal would be Rs 13 to 15, and for a balance enquiry Rs 3 to 5.

Giving further impetus to the ATM outsourcing trend, public sector banks (PSBs) have ensured a drastic reduction in ATM transaction costs by inking one of the largest outsourcing deals in the financial sector under which nine firms have been contracted to install and manage over 63,000 ATMs . The nine companies - Tata Communication & Banking Infra Solutions (TCBAIL), Electronics Payments and Systems (EPS), AGS Transact Technologies, PrizmPay, NCR, FSS, FIS, Accura Infotech and MphasiS – includes a medley of start-ups and giants like the Tata group and NCR. The deal is expected to generate revenues of over Rs 1,000 crores (about $18.19 million), in seven years against a capital expenditure of about Rs 350 crores.

State owned PSBs have chosen service providers by dividing the country into 13 zones and auctioning the

contracts for installing 3,000 to 6,000 ATMs with each zone going to the lowest bidder. By coming together, the public sector banks have brought down the transaction rates through economies of scale. At present, a bank pays a transaction fee of Rs18 to the third-party ATM operator every time its customer accesses the ATM of another bank. With the current deal, banks have managed to bring these down the rates dramatically. It is interesting to note that at the lower end of the spectrum TCBIL charges Rs 6.6 for offsite cash transactions for the Tamil Nadu zone and at the upper end EPS charges Rs 11.9 for offsite cash transactions in Maharashtra and AGS charges Rs 12.10 for Chandigarh, Haryana, and the Himachal Pradesh zone.

The ATM market is poised for further interesting developments as operators are now trying to get manufacturers of the machines to opt for a new business model, whereby they will be paid for every transaction, instead of getting an upfront payment for acquiring the machine9.

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Shape of things to come:

Considering operating costs, ergonomics, trimming user transaction times, convenience, hygiene, privacy, flexibility and security the ATMs of the future are set to take the following shapes and sizes.

White Paper - ATM Trends

The IDEO• Turned 90° sideways to

make others waiting in line visible to user

• 19’ touch screen for less confusion

• Two slots for card insertion and deposits

• Most banking options in an intuitive manner with personalized settings per user

• Transaction time in minutes

• Piloted in 2009 and being beta tested since 2010

• Designed by IDEO a global consultancy firm for BBVA the Spanish Banking group

The Cash Barrel• Screen free cylinder for

withdrawals only

• Selection from a flashing row of fixed sums after dipping card or scanning thumbprint.

• Cylindrical design ensures better security with no corners to pry

• Low production costs with fewer moving parts

• Transaction time in seconds

• Designed by NCR presently the world’s largest ATM manufacturer

The Tower• No physical interface but

for NFC enabled technology.

• Users set up withdrawals on cellphones and then tap them on the console to get the cash.

• Small and slim design saves physical space

• Transaction time in seconds

• NFC = Near Field Communication

The Motion Sensor• Touchless interface that

involves finger pointing and waving.

• Better hygiene in the absence of germ-riddled touch screens and keypads

• Provides for numerous in-depth banking options

• ATM shape of a woman sitting invokes calm**

• Transaction time in minutes.

• ** calm helps to overcome fear of technology amongst first time users and those with technology phobia

• An NCR design

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Bibliography

1 World Payments Report - 20112 Future of ATMs Infographic3 Report on Trend and Progress of Banking in India 2010-11, RBI4 Overcoming ATM Challenges in India, Richard Slawsky5 2012 ATM Software Trends and Analysis6 http://www.livemint.com/2012/06/20220703/Outsource-ATM-management-to-cu.html7 http://www.vrl-financial-news.com/cards--payments/electronic-payments-intl/issues/epi-2010/epi-274/atm-

outsourcing-heads-east.aspx 8 http://timesofindia.indiatimes.com/business/india-business/PSBs-strike-ATM-outsourcing-deal/articleshow/

14681944.cms9 http://dawn.com/2012/07/09/popularising-atm-usage/

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