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ATM management outsourcing at US banks

Datamonitor : 01 May, 2009  (New Product)
Datamonitor examines the growing requirement from the US banking sector for outsourcing the ownership and management of their technology assets including ATM hardware
In the current economic environment, banks in the US should carefully analyze the current and future total cost of ownership of their technology assets, and evaluate the outsourcing alternative, says independent market analyst Datamonitor. With a widespread lack of capital for costly upfront investments, renting ATM hardware and associated services becomes an attractive, and in some cases the only feasible, option to struggling banks.

IT outsourcing services are already prevalent within many business functions. For example, areas such as core systems are already widely outsourced to service bureaus among lower tier US banking institutions, and banks are becoming more and more interested in outsourcing overall IT management and further development of their technology stack. It is also nothing new within the US banking industry to lease equipment such as ATMs or self-service kiosks. Overall ATM management goes well beyond the simple purchase/renting of hardware and the maintenance involved. It also includes management of hardware installation, cash handling, communication, occupancy, and processing.

While many innovations are appealing to technology buyers, new products are also typically relatively expensive at the early stage of the product lifecycle. Many banks are suffering extensively during the current financial crisis, and have been forced to adopt increasingly aggressive cost-cutting strategies. A survey of 200 IT decision makers in North America, Europe and Australasia from within retail banks, conducted by Datamonitor in the fourth quarter of 2008, shows that cost-cutting is the most important objective driving banks' IT strategy in 2009.

While banks in the US are under strong budget scrutiny, many find that they have additionally increased operational expenditures caused by increases in insurance premiums payable to institutions such as The Federal Deposit Insurance Corporation or the National Credit Union Association. These institutions are under considerable pressure to quickly build up the necessary capital base that would cushion against possible additional financial turbulence.

That said, many US banks still need to compete for new clients or improve service levels within distribution channels. While navigating the stormy seas of the crisis, banks are increasingly looking at reducing their upfront capital expenditure on new investments and shrinking current IT budgets. Consequently, these days many banks focus on engagements based on outcome-based pricing, which is quickly replacing time and materials costing methods. In addition, the demand that technology vendors share the project risk is on the rise. Some vendors have responded to this demand, but also charge a premium on the risk, although in conjunction with convenient payment terms.

ATM management outsourcing is a growing area and is being considered by many US banking executives these days, especially by those who struggle to get capital for their investments but still have to tackle their aging technology assets. The idea of not owning the equipment but renting it together with associated services is a pain-reliever for many. In addition, it is worth pointing out that ATM location, functionality and usability is considered an important competitive differentiation, while the underlying technology or back office processing is simply a commodity.

Many IT executives from the banking sector in the US are currently faced with the dilemma of whether to outsource or not. Traditionally, among the large banks, the issue of maintaining control appears to be a key inhibitor to widespread uptake of ATM outsourcing offerings. This can also be the case with smaller US banks, notably those that are family-owned and thus have a strongly defined internal culture. Vendor credibility is therefore essential, and the larger institutions in particular will also seek reassurance that both their customer service levels and their overall delivery strategy will not be compromised.

For many executives in the US who may not have the necessary skills in-house, or simply do not have the capital required for investment and are under strong pressure to reduce their current IT budget, the idea of full ATM management outsourcing is becoming an attractive, or in some cases the only feasible, alternative. Banks need to carefully analyze the total cost of ownership that is associated with the overall fleet management of ATMs, and benchmark it against vendors' rates for outsourcing services, and if possible against peers.

Many smaller and medium-seized US banks should consider such alternatives, as various outsourcing services are prevalent in the industry already. Financially struggling banks of all sizes should consider the outsourcing alternative as a necessity going forward, or even selling their fleet to a vendor and renting it instead, in order to increase their capital base in the short term. Banks entering new markets should evaluate short-term ATM outsourcing agreements, in order to mitigate the risk of uncertainty of a projected business development.
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