Introduction

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ATM Managed Services:A Key Component in Retail Banking Strategy and Branch Transformation

ATMs have always held an important position in a financial institution’s banking services, but in today’s era of Universal Banking and branch transformation, the ATM channel is evolving into an increasingly critical component of enterprise-level retail banking strategies. These market changes make it valuable for institutions to gain a deeper understanding of the trends and dynamics taking place in the design, delivery, and integration of ATM services within retail banking franchises. For these reasons, Cardtronics commissioned an independent, qualitative market study1 based on first-person interviews with ATM channel strategists and managers in banks and credit unions across the U.S. in the mid-tier asset ranges.

The objective of the survey was to uncover the nuances of key financial institution trends, preferences, and practices in managing the complexities of delivering ATM services to their market. The survey focused on how the convergence of retail banking strategies and branch innovation within the ATM channel is impacting institutions’ relationships and strategies with ATM managed services partners.

The survey framework was constructed around four key categories of information:

ATM Channel Characteristics including current channel strategies, integration with retail branches, off-site ATM brand management and competitive market dynamics.

ATM Management and Servicing including the eco-system of delivery services, in-house vs. outsourced services management, and how participants currently manage their third-party servicing relationships.

1 Survey was designed and managed by PG Research & Advisory Services

Best Practices in Vendor Selection including the criteria participants use to assess third party vendors, ROI components, and key due diligence questions.

ATM Channel Innovation including the positioning of the ATM Channel in the bank of the future, retail banking market dynamics, and the new table-stake features of the future.

In this paper, we discuss the key findings of the survey across each of these categories and analyze the results within the context of how institutions are leveraging third party partners to enable and support their ATM channel strategies.

The notion that branch banking is on the decline in the United States was not supported by the results of this study. In fact, 90% of participant institutions had not decreased the number of branches they historically operated and more than 30% reported an increase in branches due mainly to M&A activities. What we did find changing is the branch banking model itself. Bank branches have entered a transformative period where they are becoming a hybrid service channel consisting of Universal Bankers and self-service technology centered around the ATM and digital channels.

But there is no one size fits all and we can see the evolutionary cycle slowdown in the smaller institution segment which prizes its traditional model of personalized, location-specific service. These institutions recognize that their services are often those of the last-bank standing in small communities and therefore manage their ATM channel to support this delivery strategy. For example, one participant cited their design of providing ATM drive-up facilities that can be approached from either side of the vehicle, and another retained core ATM servicing in-house to take care of customers’ ATM problems in-branch.

Yet, even these smaller institutions leverage a branded ATM in locations where it is not feasible to operate a branch facility. The strategic placement of off-premise ATMs and the use of surcharge-free networks for account access was a common finding in the survey.

ATM ChannelCharacteristics

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90%of participant institutions have not decreased the number of branches they historically operated.

All of this can be summed up in one important quote:

“People still want cash.”

Always-on access to cash remains a fundamental cornerstone of the ATM channel and our survey found that is the one common, high-value service across all institutions regardless of type or size.

Managing an increasingly sophisticated fleet of ATMs, along with addressing a seemingly endless list of regulatory requirements, means the operational overhead necessary to properly manage this channel has exponentially increased as well. Participants shared their concern about not only the cost and complexity of their upkeep, but importantly, the toll it takes on resources. This leaves institutions with a decision to make – outsource or manage in-house?

We found that what drives an institution to manage ATM services in-house, as opposed to outsourcing, depends on which ATM channel capabilities and features are of most value to the institution. In Figure 1 below, we depict these needs across a value chain that includes core capabilities, advanced services, and overall retail banking strategies.

However, in talking to institutions, we found that even those organizations that claimed to be “100% self-managed”, in reality outsource more ATM services than they even realized themselves, including most commonly, hardware maintenance, device monitoring, physical security, and cash management. Additionally, we found that 100% of the survey’s participants outsource management of their off-premise fleet, while virtually all institutions manage business continuity in-house.

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Figure 1: ATM Channel Services and Strategy Value Chain

Compliance Upgrades

Competitive Market

Response

Cost Management

Feature Upgrades

Service Response

Times

Retail Banking Strategy

More likely to outsource Less likely to outsource

ATM Managementand Servicing

What’s driving outsourcing strategies today includes nuts and bolts considerations such as cost of upkeep and compliance, as well as effectively managing the potential servicing and reputation liabilities of maintaining an “always-on” channel. However, increasingly we found institutions concerned about the resources it takes to manage all this complexity, along with the ability to strategically place ATMs in desirable geographies where maintaining a branch isn’t viable.

Keeping services in-house often represented a cultural preference to owning technology assets and ATMs were just one more technology that fell under this rubric. An important driver of in-house managed devices was the ability of the institution to respond quickly and more efficiently to servicing issues. This finding underscores the reputational importance of the ATM channel and its central position in servicing an account holder’s basic cash and account management needs.

As a result, we found that the unbundling of managed ATM services was a common practice among all sizes of institutions – enabling them to choose which services to outsource and which to control in-house. For example, ensuring account holders’ problems with an ATM were resolved on the spot was very important, as was the ability to decrease dependence on a third party to respond to more difficult hardware- or software-related servicing issues. Institutions see ATMs as having a unique reputational risk since the user expectation of 100% availability is very high. And as the feature functionality of these devices becomes more sophisticated and more directly in the path of retail banking delivery strategies, the ability for an institution to maintain an error-free experience becomes even more important.

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100%Users expect

ATM availability

Yet, the emerging driver for outsourcing ATM services is the need for institutions to more efficiently deploy their retail banking resources. The ATM channel is perhaps the single most expensive channel for a bank or credit union to operate. As retail banking divisions are under increasing pressure to improve efficiencies and resources are required to take on more highly skilled banking activities, the ATM device is acknowledged to be a key component to solving these problems, but also recognized as one that requires more vendors and more internal skill to effectively manage.

These dynamics mean that for smaller institutions, we found a potential for increased interest in selling off the channel in its entirety to a third party to manage while for larger institutions, even those culturally adapted to self-servicing their ATM channel, admitted that some form of outsourcing strategy would inevitably be a part of their future operational structure.

Finally, these findings point to a key trend in ATM channel management – the preference for working with a service provider expert in this segment.

If outsourcing strategies are commonplace then, how does this affect the way an institution evaluates a potential third-party partner? Our survey found that the top two evaluation criteria for assessing an outsourcing partner for the ATM channel were:

1. Uptime 2. How quickly a vendor responds to a servicing issue

These findings are not surprising based on the attitudes and preferences to ATM channel management we found in the previous segment of the survey. However, the story doesn’t end here. Instead we found that as institutions evolve the ATM channel into a critical component of retail banking delivery strategies, their service provider evaluations evolve along with it.

Now, as we dug deeper into vendor selection practices, we found that all institutions, even very small ones, had a deep interest in the vendor’s ability to demonstrate knowledge of

Best Practices inVendor Selection

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Just as we found in our discussion around general ATM servicing issues, the topic of resource allocation has taken on new importance in vendor evaluation as well. Staff productivity, rather than simply staff allocation or reduction, was top of mind for many institutions we spoke to during the survey.

As part of vendor assessment, institutions are also considering the increased number of vendors it takes to deploy, manage, and service an ATM, as well as their ability to respond to business interruptions such as natural disasters.

At the start of this paper, we stated that the era of the ATM as a utility service is over, an opinion well-supported in this segment of the study. When asked what the single most important question is to ask of a potential service provider, two examples illustrate this point.

• Do you feel that ATMs have more marketing value than cash value? • How are you going to make our members’ experience the best it can be?

Figure 2: ROI Components of Vendor Selection

SLA

Customer Service

Compliance

Resource Allocation

Cost

Fraud

ROI

the inner workings of the ATM channel. This was assessed by considering not just thought leadership, but also capital investments in the channel and vendors’ deep understanding of how the ATM eco-system that lives within a retail banking division actually operates.

In Figure 2 below, we depict the common components of the ROI analysis of vendor selection, which contains many elements one would expect to find including expense, compliance, and risk management.

Institutions recognize that their ATM channel has a key role to play in retail delivery strategy. Therefore, they need to understand how their servicing partner will support the unique roadmap of each bank and credit union served. This kind of value construct is only possible when the vendor has a primary focus on the ATM market.

While solution providers must be cost-competitive, the real decision criteria lies in their ability to improve the value of an institution’s ATM channel. We found that institutions are realizing that an efficient outsourcing partnership can have a positive and lasting impact on critical areas of their operation, including staff productivity, account holder or member experience, and brand management.

Bank branches are in the midst of evolving into a hybrid service channel consisting of Universal Bankers combined with self-service technologies where the ATM plays a central role. However, the innovation conundrum faced by participants we spoke to is the multi-purpose nature of the ATM. On one hand, it remains an important utility service and on the other, it is rapidly evolving into a device that replaces or augments physical branch and digital interactions. The key takeaway is that for an individual institution to build a competitive, cost-effective ATM channel, it will only evolve as fast as feature functionality/technology improvements can be moved into production. Recently, EMV upgrades have shifted attention away from some innovation activities, but these efforts are drawing to a close and we found participants eager to begin making modifications to their ATM fleet in support of their more strategic retail delivery objectives.

ATM ChannelInnovation

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Participants acknowledged that the footprint of the future ATM will include its ability to aggregate services across multiple account types and financial services relationships. The bank of the future is one where aggregation and coordination of financial information will become the norm and these activities will replace the depository account as the sole indicator of what is a consumer’s primary financial institution. This study showed that future thinking about the ATM channel includes enabling a wide variety of access applications including the “Pays” (ApplePay, etc.), business account activities, and external bank transfers. It is presumed among this cohort that these features will become commonplace and interest is high in developing a roadmap to implement them.

This drive to expand an ATM’s borders will also result in the device’s increased integration and usage as a marketing channel for the institution not just in terms of a general cross-sell, but instead, leveraging account holder data and usage patterns to enable highly targeted offers. Considering the opinion among this group that upwards of 75% of all account acquisition takes place in the branch and presuming that the ATM becomes the branch of the future, this kind of personalized marketing will almost certainly become a de facto standard as well.

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According to our survey’s findings, the ATM of the future will become an access point, not just to a single institution’s accounts, but to a range of financial services and account management functions personalized to the individual or small business. According to the survey’s participants, the must-have features of the next generation ATMs will include:

• Cardless access including mobile and NFC • Digital receipts • Bank to bank transfers • Targeted marketing

Our survey results clearly show that the future of the ATM channel is as a fully integrated component of a multi-faceted retail banking strategy that includes physical and virtual experiences. This will be the new normal for providing competitive ATM services, as well as enabling new banking models that include such strategies as universal banking. However, the path to this future state will be institution-specific and will reflect the strategic objectives of each individual organization.

Institution ROI and vendor selection criteria echo these dynamics, which is driving the market away from generalist, bundled providers towards ATM services organizations that are able to demonstrate a keen understanding of the dynamics of the channel. This is illustrated by their thought leadership and capital investments in expanding services and developing features to improve the ATM market.

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