ATM outsourcing – few hints
Cash will be present for a long time – whatsoever bank’s digital managers are dreaming about cashless societies – there is and will be a considerable amount of customers preferring such method of payments.
To meet customer’s needs – retail bank shall take care of cash distribution. I can list three main channels to distribute cash:
– cashback – for small amounts
– ATM’s – for mid amounts
– branch – large amounts
Each channel listed having own pro’s and con’s I am not going to focus on – focusing on ATM’s instead.
There are several options to distribute cash via ATM’s financial institution can choose from:
– using other institutions ATM’s via issuing international branded cards like VISA or MasterCard
good: no special investments/development needed
bad: limited service set; pricing
– using other institutions ATM’s via domestic agreements
good: no or limited special investments/development needed, better service set
bad: perhaps pricing and still limited service set
– investing into own ATM network
good: tailored service set
bad: non-earning assets in bank’s books, need to ensure development and tech support to keep network up to date
– co-operating with other players and establishing dedicated company driving ATM’s on behalf of banks
good: tailored service set; probably lower cost
bad: many partners with different opinions – ATM company will drive the business
– buying cash distribution/ATM services from external vendor either alone or co-operating together with other financial institutions
good: tailored service set; no non-earning assets but still under bank’s own brand
bad: vendor might change strategy – need to have bulletproof exit conditions; in case of cooperation with other banks – need to make compromises.
Although it is possible to spend some room to describe all listed options more closely – I will focus only on last option – outsourcing ATM services to 3rd party vendor together with few other partner financial institutions.
First things first – what are the services bank is looking for? Major decision point here is need for cash depositing options in addition to cash withdrawal. In such case it might be reasonable to look for so-called recyclers – e.g. ATM’s able to use cash deposited for cash withdrawals as well. In terms of other services not directly related with withdrawal or depositing cash – I would focus only on services directly related with cash or card. (PIN change – yes; bill payment – no)
Partner/vendor selection – probably best way to select the vendor is to go through RFP process – issuing RFI first – to identify potential vendors interested and then RFP. During selection process you need to ensure that selected vendor is:
– capable to offer service – e.g. existing references
– having long-term strategy staying in such business and region
After having selected best vendor you face next very important step – service agreement. Which is major thing to be focused on when establishing ATM partnership with vendor. In a fact – if dealing together with other local bank/partners – there might be at least 2 agreements:
– agreement between bank(s) and vendor – service agreement
– agreement between banks – interbank agreement
Service agreement – issues to focus:
In fact its possible to split service agreement into two parts:
– implementation agreement – covering activities needed to set up the service including installing ATM’s
– service agreement – covering all aspects of cooperation except implementation
Implementation agreement – major items to focus are timing and options to terminate if vendor is not being able to set up the service
– Try to make it structured in a way to minimize number of signatures needed in case of changes.
– Term and termination – what to do when agreement term is over as ATM’s together with their locations has become an important part of value proposition and how to ensure smooth transition to another service provider if this is the case. How to handle early termination from both sides. – – How to handle the situation when some cooperating bank is willing to step out of the agreement.
– How to change agreements – when implementing new services or / and new participants
– Size of network – how it can be increased or decreased
– Service pricing options – transaction-based or ATM-based or mixed. How to share costs between banks.
– Service levels – reporting and even cleaning
– Ensuring vendor commitments to follow legislation, central bank requirements. card organization rules and other requirements valid for such kind of networks
– Ensuring vendor commitments to proper fraud management including efficient and up to date bill recognition
ATM locations – location decisions shall be made by banks (not by the vendor). In terms of locations – there are places all co-operating banks are interested in but also locations (like bank branches) they have single interest only. There is need to find a solution how to keep such location decisions in balance.
One matter to take care is cash ownership – e.g. who owns cash in vendor owned ATMs. Quite often vendors are reluctant (for bookkeeping reasons) to take such cash into their books. In multi-bank agreement is reasonable to agree on one bank which act as cash owner. Few things to consider more:
– the cost of cash to be charged other banks network participants
– the fee charged vendor in order to ensure efficient cash circulation
– Network branding – neutral brand or having logos of all participant banks
– Procedure to agree on ATM locations
– How to add new participant banks or/and terminate a relationship with existing partner banks
– Cash owner and related fees
– Collaterals or other ways to secure cash owner bank against insolvency of other network members
– Agreement on acquiring bank and relevant income – its reasonable (simplicity) to have one acquiring bank in cooperation model and such bank could be same which owns cash in ATM’s. However – as acquiring does mean income – process for changing acquirer shall be also agreed. Note: an acquiring bank shall be careful with MasterCard reporting in order to avoid reporting (and paying fees) transactions and volumes made by other participants customers.
There are many more things to focus on when setting up and running outsourced ATM services, I believe the listed ones still help on your journey.