Feature

Share that ATM

With almost 18,000 ATMs in India, outsourcing seems to be the order of the day for banks, finds Shivani Shinde

Why do companies outsource services? Some common replies are reduced costs, better services and the ability to manage a growing customer base. For the same reasons, banks are increasingly outsourcing their value-added services, especially ATMs, to third parties.

Many analysts believe that the Indian ATM outsourcing scene resembles the American banking scenario of the 1980s when ATMs were growing at a frenzied pace, and ATM outsourcing broke the traditional mould of doing business. ATM growth has also been fuelled because banks have realised that handing over this function to third parties allows them to concentrate on their core functions—money management.

Now that the RBI has given the go-ahead to ATM outsourcing, the concept has got a much-needed fillip. With initiatives such as a single switch for banks, i.e. the National Financial Switch (NFS), shared ATMs could well be the future.

What’s on offer?

The Indian ATM outsourcing market has matured from annual maintenance contracts to encompass managed services, including total implementation services. The vendor handles issues such as real estate procurement and leasing, including consulting services wherein ATM locations are determined and the hardware and software deployed.

Some of the major players in this field are NCR Corporation, Euronet, eFunds, 3i Infotech and Hughes Software Systems. These vendors are providing not just maintenance, but an end-to-end solution that looks into most of the functionalities of the bank, along with future additions, in terms of value-added services.

For instance, Euronet provides services such as ATM switching management, site selection, card management and gateway services. Recently, they also included reconciliation services which allow a bank to know about any incomplete or incorrect transactions. eFunds offers, among other services, ATM processing and gateway services, consulting services, customer services, back office-contract management, customer payments, and ATM monitoring and reporting.

Of course, there are banks which prefer to choose their own model. For instance, HDFC Bank follows a customised model whereby both network monitoring and problem resolution (within agreed turnaround times) are managed by its partners. In addition to vanilla monitoring, which merely identifies an ATM as being down, their vendor also follows up with the respective service provider (based on the type of problem, which could vary from the ATM itself to linking problems regarding UPS, air-conditioning systems, etc.) and ensures that the problem is resolved, and that services are restored at the earliest.

NCR is providing a complete suite of services to HDFC Bank, including ATM monitoring and management, consumable and cash replenishment, and cash optimisation.

The question arises—should a bank go in for complete or partial outsourcing (for managing ATM outlets)? Many prefer to go for complete outsourcing, but not all. For instance, IDBI sub-contracts only for managed services, gateway services, and field and switch services to Euronet, with the assets remaining with the bank. As Sanjay Sharma, Head, IT, IDBI Bank, says, “There are two reasons for this. One is the internal philosophy of the bank. The second is that the arrangement can be terminated in case services are not up to the mark. As we have chosen only a few services, we are driving down cost; further, since we are not tied to a single vendor, we control the quality and retain the assets.”

The why of ATM outsourcing

Explains Srinivas Rao, Director, Sales, Euronet Services India, “The growth of ATMs in India is due to the initiative taken by foreign banks and traditional PSU banks which also feel the need to reach out to customers.”

With a growing market and customer base, the need arises for third-party intervention to take care of ATMs. For foreign banks, the concerns are time to market and the need to concentrate on the core business. For traditionally-run public sector banks, which are region-specific, technology is an issue as they do not have the expertise. Thus, they need someone who can provide the technology and do the installations rapidly.

The other reason for banks opting for third-party participation is the maintenance of the ATM network. Initially, an in-house IT team was enough for running a bank’s IT set-up. But with growing transactions and diversification into spread geographies, the in-house team was overburdened. It was then that IDBI decided to go in for ATM outsourcing. As Sanjay Sharma explains, “The main reasons for or advantages of outsourcing the ATM network are reduction in cost and 24x7 network uptime. Once an ATM network grows, the process becomes difficult to handle. The bandwidth requirements go up, and costs also keep on rising.” Though IDBI has opted to outsource the maintenance of its ATMs to third-party vendors, all assets are provided by the bank.

Says Rahul Bhagat, VP, Retail, HDFC Bank, “We embarked on the outsourcing project to improve uptime and enhance the customer experience.” Their offsite ATM network in Mumbai was taken up as a pilot in December 2004.

The crucial element then is cost reduction. According to analysts, the reduction is to the extent of 10 to 20 percent. The fee structure is either based on per-transaction or on a monthly basis. It ranges from Rs 70,000 to Rs 100,000, depending on the services provided.

According to Atul Kunwar, Managing Director India, eFunds, “The key to making ATM outsourcing successful and profitable is knowing what to look for in the outsourcing relationship, how to choose the right provider, how to measure outsourcing ROI, and how to maximise the value of the outsourcing relationship.”

And the options are...

Presently, there are three options in outsourcing that banks consider—total outsourcing, partial outsourcing, and shared networks. While the ownership of an ATM may be with a third party, many banks prefer to connect to ATMs through their own switch. The bank’s switch, in turn, can be connected to a third-party service provider’s switch to which several other banks’ ATMs are connected. Transaction pricing and switching fees, and the cost of outsourcing have to be factored in before deciding on the mode of outsourcing that is best suited for a particular bank.

V K Ramani, President, IT, UTI Bank, feels that with ATMs becoming pervasive, many banks which manage ATMs may prefer to go in for infrastructure sharing.

Considering this, the Institute for Development and Research in Banking Technology has initiated the NFS project under the umbrella of the RBI. This will provide for a common switch for all banks to transact through, without having to spend much on building infrastructure.

The initiative will benefit both small and large banks. Large banks make huge investments in infrastructure. However, it has been found that ATMs are not used to their optimal capacity. Small banks do not have the required funds to put up ATMs. The NFS initiative will be able to widen the customer base and act as a solution for all banks. It has been decided that there will be default interchange switching fees between banks. The Clearing Corporation of India will be the clearing and settlement agency for the switches.

Though the NFS initiative has its followers, efforts such as Cashnet and Cashtree have already succeeded. Prominent members of Cashnet include Citibank, IDBI Bank, UTI, Centurion Bank, Dhanalakshmi Bank, Dena Bank and HDFC Bank. Cashtree, an initiative started by eFunds, has members such as Bank of India, Syndicate Bank, Indian Bank and Dena Bank.

Deepak Chandnani, Managing Director, NCR Corporation India, believes that though managing ATM networks in a country as vast as India is a challenge, third-party players such as NCR and Euronet can do better as they have the required infrastructure and technology.

According to Loney Antony, MD, Euronet Services India, initiatives such as Cashnet, Mitra and others will eventually be connected to the NFS at the country level, the Holy Grail being that any bank’s ATM card can be used at any ATM outlet. “Cashnet will continue to be a consortium initiative with a focus on ATM sharing and value-added services such as mobile recharging,” he adds.

Only one way to go

Sometimes these tie-ups fail, as did Swadhan, an association of banks which included Bank of Baroda, Bank of India, Canara Bank, Bharat Overseas Bank, IDBI Bank, ICICI Bank, Janata Sahakari Bank, Rupee Co-operative Bank and foreign banks such as ABN Amro Bank, Standard Chartered Bank and American Express Bank. Anurag Khanna, MD & CEO, Banknet, brushes off such concerns. “Swadhan was ahead of its time. About 1,000 ATMs were connected and there were hardly 200 transactions per day. There was a limit on cash withdrawals, and no attempt was made to build customer confidence.” He adds that the situation is completely different now, with many banks going in for automation and the RBI pushing for the same.

The most important criterion of control in costs is also happening. As Antony says, Visa or MasterCard customers were charged at least Rs 50, but by sharing a network, the charges at Cashnet have come down to Rs 25.

Another reason is the nudging from RBI. This is in sync with its directive to reach a bigger market, especially in rural areas. As Antony points out, “Since ATMs will be shared, they will start penetrating geographically into other areas. Right now ATMs have not gone beyond 400 cities, while mobiles have gone beyond 2,000 cities; ATMs can also penetrate the market to the same extent.” With increased infrastructure development and improvement in connectivity, this seems like a realistic goal.

The future has a lot to offer on this front. Though ATMs are traditionally used for cash transactions, value-adds will be a common feature. With RBI backing such a move, we expect issues such as security to be given ample consideration.

Today, 18,000 ATMs are already in operation, and this number is expected to increase to 45,000 in the next five years. What this means is that ATM outsourcing is here to stay. Besides, Indian banks are starting to realise that outsourcing is not just about cutting costs, but also about improving efficiencies, reducing operating and capital costs, and re-emphasising the importance of strategic banking initiatives.

shivani@expresscomputeronline.com