Relieving the ATM Headache

As ATMs evolve from cash dispensing machines to computer-driven virtual tellers, they get harder and more expensive to maintain. At economy-minded CUs, the cost of keeping these machines up to speed has reached the financial tipping point: Managers there are adopting an outsourcing strategy—shedding burdensome ATMs and having third parties own and operate machines at the same locations and provide the same surcharge-free transactions to the CU’s members. There’s no downside for members; the CU’s footprint is unchanged, and a third party now has all the responsibility for replacing or upgrading out-of-date equipment and taking care of maintenance and servicing. Third-party providers can install a basic ATM, custom brand it for the CU and provide needed member service—all for a third of the cost to a CU for a traditional ATM, reports Tim Bergman, ATM industry veteran and associate advisor at Cornerstone Advisors Inc., Scottsdale, Ariz., a CUES Supplier member and strategic provider.

“The economics of operating ATMs has changed,” notes CUES member Kevin Randall, VP/electronic systems at $850 million USAlliance Federal Credit Union, Rye, N.Y. “We had a couple machines that were separate from our branches and that were too old to be upgraded to comply with ADA (the Americans With Disabilities Act). We wanted to maintain ATM service for our members at these locations, which meant either buying new equipment or changing tactics in favor of outsourcing.”

The solution: USAlliance FCU outsourced eight of its 40 ATMs to Welch ATM, Peoria, Ill., and Cardtronics, Houston.

Making the Switch

Here’s how it works: USAlliance FCU contracts with Welch or Cardtronics to manage an ATM at its existing site. The original equipment is removed by the CU for disposal if it is outdated, or reassigned to another location. The CU usually takes the ATM offline the night before the new ATM arrives, and hires a contractor to remove the old equipment. Welch installs a new ATM in the same spot, and adds it to its network. The ATM typically is down for a day, Randall explains.

Once the switch has been made, members might notice the equipment is new or smaller, but it still carries the USAlliance FCU logo, and they can still do transactions just as they did before, still at no charge. USAlliance FCU pays Welch a monthly fee to waive any surcharge for its members.

Welch reports that CUs can save up to 30 percent of overall ATM costs by outsourcing. See the company’s related infographic.

How can Welch make money on ATMs that CUs lose money on?

“For a CU, ATMs are a sideline that supports their business,” says Rebecca Hellmann, marketing manager at Welch. “For us, ATMs are our business. We invest in the technical staff, spread the expense and negotiate lower prices with manufacturers so that it costs us much less to upgrade and operate each ATM. If a CU wants the unit to stay with NCR or Diebold, we’ll work with them, but if they are looking to cut expenses, we will include their machines in our competitive bidding process and pass the savings on.”

For USAlliance FCU, outsourcing has been a matter of triage and first aid. “We started slow, based on need,” Randall reports. “We did three in our first round.

“That number could grow,” he adds. “We have another compliance concern with Microsoft’s support of the Windows XP operating system expiring. We’ll have to face more upgrades, and a third-party partner for ATM operations may continue to be a prudent alternative.” Additionally, deadlines for ATMs to be able to read EMV chip cards are just around the corner in 2015.

Notably, the CU generally has shed remote ATMs and kept those directly connected to branches. “An ATM can be an extension of a branch,” Randall explains. “It can be a critical component of full-service branches, taking deposits as well as dispensing cash. We want to maintain the latest technology with these branch machines.”

There’s also a volume consideration. “Most of the ATMs we outsourced had low transaction volumes,” he points out.

Avoiding the capital expense of buying new ATMs is the biggest benefit, but there also are data communication, service, and cash replenishment cost savings. “The operational costs now are theirs, not ours,” Randall points out. “They get and we lose most of the surcharge income from foreign transactions, but they charge a reasonable market rate.”

Similarly, $212 million UT Federal Credit Union, Knoxville, Tenn., outsources all of its non-branch ATMs and keeps the branch machines, says CUES member Debbie H. Jones, CSE, president/CEO. Seven ATMs are now owned and operated by First Regents Bancservices, Brentwood, Tenn., and seven are still UT FCU’s property and responsibility. That arrangement is the result of an across-the-board cost-cutting campaign that started with the economic downturn in 2007, she explains.

“We contacted First Regents, which came in and installed new, smaller Triton machines at all the locations that we wanted to outsource,” Jones reports. “We pay First Regents a co-branding fee, but we figure we’re saving between $6,000 and $8,000 per year, plus tying up fewer in-house resources.”

Smaller, Simpler Machines

First Regents uses “basic, but reliable machines,” Jones says. “Those machines don’t take deposits; they don’t sell stamps. Our machines were more expensive and a little more versatile, but members have not complained.”

Splitting remote ATMs from branch ATMs makes sense. “Our staff can service the machines that are on our premises just fine,” Jones says. “We don’t need a third party for that.”

One branch ATM is in a drive-through lane, “so we do use Loomis to replenish the cash due to security concerns,” she says. The others are attached to the branch and serviced from inside.

First Regents also sells ATMs. “We’ll consider them as a vendor when we replace any of our branch ATMs. But we’re done adding ATMs,” she states. When a business approaches UT FCU about putting an ATM on its premises, “we refer them to First Regents,” she says.

First Regents now has approximately 100 ATMs that it operates for CU partners. “We can manage a large portfolio of ATMs more efficiently than a lot of CUs can manage just a few,” reports Mike Powell, founder and CEO of the 14-year-old firm, which uses machines from Nautilus Hyosung, Genmega and Hantle.

“They’re more dependable, easier to operate and cost just a fraction” of what other machines on the market cost, Powell reports. Plus, “the user experience usually is better,” he insists.

“The new machines have larger, brighter LED screens. Graphically, they are more appealing, easier to use, and touch screens are available.”

Depending on ATM transaction history and revenue projections, a CU may receive some or all of the surcharge revenue, but pay First Regents a monthly fee to brand the machine and provide free transactions for its members, he explains. Contracts usually cover a group of ATMs and run for up to five years, longer if the ATMs involved are on-premises and more sophisticated.

Outsourcing starts as expense reduction, but it doesn’t have to stop there, Powell says. “If they like the way it’s working, CU managers may decide to increase the CU’s portfolio of outsourced ATMs as part of a growth or expansion strategy. We get involved in marketing projects where credit unions add ATMs to reach members that are not currently well served or to expand their footprint into markets they’d like to enter.”

Richard H. Gamble is freelance writer based in Colorado.