A New Deal

When Royal Bank of Canada recently turned over the management of its 4,700 ATM fleet to NCR, both proclaimed the $192 million, seven-year deal a milestone. But more than marking a turning point, the deal culminates a trend already under way.

As Canada's largest financial institution, Royal Bank holds that country's most far-reaching automatic banking machine network. Although third-party vendors or retailers had performed about half the services Toronto-based Royal passed on to NCR, the bank managed the contracts in-house, said Ron McClure, senior manager for self-service networks at Royal Bank. NCR will now essentially take charge of automatic banking machine services, either by supplying them directly or contracting them out.

NCR had already provided Royal Bank's second-line maintenance, which covers mechanical failures, or "the break and fix piece of the business," said Dave Henderson, vice president of high-availability managed solutions at NCR. Under the new agreement, NCR will also take responsibility for fixing cash jams, receipt jams and replacing ribbons-the less complex, first-line maintenance-as well as monitoring and resolving network problems and breakdowns, a role formerly assumed by the bank. Although NCR had previously replenished the money in Royal Bank's automatic banking machines, the bank maintained the contract with the armored car carriers. NCR will now hire the carriers directly.

Using the OptiCash tool developed by Transoft, NCR will also take over the bank's cash optimization, or forecasting the amount of money to go into the machines, a task most banks keep in-house. "Like for most networks, cash sitting in our machine is a big expense," said McClure.

In addition to assuming command of the cash management operation, NCR will also run the help desk and take care of all consumables, such as ATM receipts and statement printouts. It will also replace about half of Royal's in-branch, full-function ATMs, which the bank said would take until mid-2002 to complete. The bank will continue to issue bank cards and handle the network telecommunication lines, and retain ownership of the machines, said McClure.

Ongoing machine maintenance, cash management and acquiring and installing the cash terminals can be big ticket items for an ATM operation, said Beth Costa, director of financial services at Dove Consulting. "The cash component is certainly capital intensive," said Costa. "The management of the cash often has not received the focus and optimization that it could." The bottom line, she added, is keeping enough cash in the machines so they don't turn up empty but at the same time not have extra cash in there doing nothing.

Although the agreement extends what NCR had provided already, "what's unique is the bundling of the whole set of services together," said McClure. "We think the extent of what we've done is a first in Canada, and for that matter, in various parts of the world."

"It means...having one delivery mechanism for the bank," said NCR's Henderson. "I think banks look for the ability to offload the daily ATM management requirements."

The NCR deal "will definitely save us money," said Royal Bank's McClure. "It has resulted in considerable reduction in our operating expenses and allowed us to reinvest in the hardware. It has allowed us to upgrade technology support...the software we used on our help desk and cash management application."

A MIXED BAG

Most U.S. banks outsource at least a portion of the services it takes to run an ATM operation. About 40% of those with more than $4 billion in deposits contract with third-party providers for all or part of their ATM monitoring and management, according to a 1999 GartnerGroup survey of 629 U.S. banks and thrift organizations. Smaller banks with less-extensive ATM fleets show more interest in outsourcing at least part of their ATM network. "For them to compete in the marketplace with the larger financial institutions...they're going to have to do a lot of off-premise work to keep up," said Jerry Clinger, vice president of financial information services at NCR.

Despite these advantages, teller machine outsourcing remains a mixed bag, often hinging on whether a bank views its ATM operation as a differentiator or a cost item, said Jerry Silva, a senior analyst at TowerGroup. "It used to be you could differentiate yourself with the service you provided at the ATM, either by being first or having the most machines. Now every bank in the world can do ATMs. Retailers can do ATMs. The ATM is no longer the kind of differentiating point that it used to be."

Most banks have readily outsourced maintenance and currency replenishment. "The cash couriers and the machine manufacturers can do it faster and better than a bank," said Jack Kucler, executive vice president and chief operating officer of electronic services at Cleveland-based KeyCorp, which oversees 2,500 ATMs. "Many years ago we tried to do that, but there's a lot of training for the engineers to try to keep up."

KeyCorp, which has a contract with ARCO, the gas and convenience store chain, in five western states, also selectively outsources new machine installations. "We make a decision on each installation of any kind as to whether it makes sense to do an installation as an outsourced kind of deal or from our own staffing," said Kucler. "I would say it's 50-50."

But KeyCorp remains adamant about keeping certain ATM services in-house. Although many banks have outsourced monitoring-determining whether machines are up or down and dispatching repair crews-KeyCorp has not. "We hold sacred keeping our availability and uptime ratios, and we've spent a lot of time and effort over the years perfecting that part of the business," said Kucler. KeyCorp also manages the currency levels in its machines, and the number of cash deliveries. "We've developed some good forecasting techniques using software."

Bank of Montreal, with a 2,070 terminal self-service network, takes another tack. "We look at outsourcing on a regular basis and weigh if the benefit is big enough to take on the risk," said Monica Schmid, vice president of the automated banking machine channel at Bank of Montreal. "At this point we haven't outsourced any of it. We manage all the contracts ourselves. Except for armored-car servicing, we're essentially in-house."

THE COST COMPONENT

Cost can play a major role in whether a bank decides to outsource parts of its ATM network, especially since ATMs can be a drain on profits. According to Federal Reserve figures, large banks garnered only 7 cents per transaction in 1998, or $2,142 per machine, while smaller banks lost 18 cents, or $4,845 per machine.

GartnerGroup's survey found that large U.S. banks spent on average $8.7 million annually on external ATM expenditures, such as hardware, software, maintenance, processing and cash replenishment, per institution. They reported spending on average just less than $1,300 a month per unit to operate their on-premise machines, but 14% reported spending more than $2,000 a unit.

Bank-owned, off-premise units cost banks slightly more than $1,200 per month per machine, with 10% reporting average costs exceeding $2,000. Costs can include the lease, property or space rentals, telecommunications, replenishment and management service contracts, utilities, insurance and security. Yearly servicing costs, which can include replenishing cash and collecting deposits, hiring armored cars, maintenance, repair, depreciation, site improvements, alarms and electricity, can range from $4,445 to $6,195 for a single terminal.

Outsourcing ATM services can definitely save money. "Usually you're talking about at best maybe a 15% savings, which is not trivial when you're talking about a large ATM network," said TowerGroup's Silva.

Although cost savings can push a bank toward a deal like the one between Royal Bank and NCR, it's not the only consideration, said Silva. "Technology refresh is a big component of any outsourcing deal of that magnitude. NCR can turn the machine around and upgrade the technology. It gives Royal an edge against competitors."

Some banks have turned to technology vendors to help them Web-enable their ATMs, said Costa. "These organizations have a broader base of customers to spread their investment across on some of these newer technologies that do not have broad consumer acceptance yet. You're seeing more partnering with organizations to help spread the cost and the investments. There's lots of different areas these ATMs are expanding into that can be costly for organizations to take on themselves."