inancial institutions (FIs) evaluating whether they want to drive their own ATMs or outsource that function to a third party tend to focus on two 'C's'-cost and control.

But a third 'C'-confusion-could play more of a role in the decision-making process.

FIs are faced with meeting regulatory requirements-including a move to Triple DES and a pending change to the Americans with Disabilities Act that will mandate audio ATMs-and deciding whether to incorporate new ATM technologies such as check imaging.

Will these trends favor outsourcing, or will more FIs consider bringing their processing in-house? There is no industry consensus.

"Transaction processing technology is undergoing a meaningful upgrade," said Bill Raymond, President of ATM Solutions for Genpass, which drives some 25,000 ATMs for both FIs and ISOs.

"Financial institutions with in-house systems must make a change, either investing in an upgrade of the existing infrastructure or looking at outsourcing. The opportunity to continue what they've been doing for the past several years just isn't there anymore." Time For a Change

Alan Falconer, Senior Vice President of Consulting Firm Paragon Data Services, said that most FIs re-evaluate their ATM driving strategies every five to seven years-not coincidentally, the length of most processing contracts.

One exception: FIs that are trying to make their balance sheets as attractive as possible in hopes of being acquired. "Some of them are eight years into a five-year cycle," he said.

Because they have been preoccupied with regulatory whammies like Y2K and Triple DES for nearly five years, Falconer said many FIs opted to outsource ATM driving.

"Their budgets were chewed up just on keeping their ATMs running. They were focused on what they had to do, not on anything new or fun," he said. "A lot of them just decided they'd rather have someone else deal with it."

But with the regulatory environment easing somewhat, Falconer foresees an increased interest in ATM technology-and more interest in moving processing in-house.

"It all comes down to where technology fits into your business strategy. For the past few years, I think we've seen FIs focusing more on their core fundamentals, and not as much on controlling and managing their ATMs," he said. "Now I think we're going to see more of a move toward product differentiation."

How Much Is That Transaction?

Differentiation can be costly in an outsourced scenario, said Chris Klein, Executive Vice President of Marketing for Mosaic Software, provider of the Postilion processing platform.

"Even something as simple as making changes to screens can be expensive, if you can get (transaction processors) to do it," Klein said. "Introducing a new transaction costs the same whether it's for 50 ATMs or for 500, so it's difficult to cost justify trying out something new on a limited number of machines."

Klein said a shift from mainframe to server technology-with high performance, fault tolerant servers available for as little as $30,000, compared to a cost of as much as $500,000 for a mainframe computer-has made it possible for even small FIs to consider driving their own ATMs. Thirty of 42 Mosaic clients that purchased Postilion in 2003 are using it for ATM driving.

Cost was a consideration in Honda Federal Credit Union's decision to purchase a Postilion switch but "not the overriding factor," said Jim Updike, President of Honda Federal, which has eight branches and 30 ATMs in four different states.

'If you're outsourcing, it's difficult to have them tailor their programs for you. We may want to cut off ATM deposit times in Timmonsville, South Carolina at a certain time and do something different in Maysville, Ohio," Updike said.

Updike said Honda Federal is interested in adding Japanese to ATMs at Honda plants in three states, and also in broadening a program called Honda Cash, which allows Honda employees to pay for purchases at plants using identification badges equipped with a magnetic stripe.

"Unless some other credit unions say they want a Japanese language option, it would cost us a lot of money to get it done," Updike said.

Honda's ATMs are currently still part of the CO-OP Network, with eFunds providing processing. Honda Federal purchased Postilion in July but has been focusing its efforts on Triple DES compliance.

Updike expects all 30 ATMs will move to the Postilion platform next month. "We're in no rush; we want to make sure we do it right," he said.

After moving to the Postilion platform, Updike said Honda Federal will save about four cents per 'on-us' transaction-with such transactions accounting for nearly 90% of its total ATM volume. Honda Federal made an upfront investment of $250,000 in the Mosaic system.

Software licensing fees for Postilion vary, based on the number of transactions and other factors. As with most software, users also pay an annual maintenance fee. While Klein did not give a figure for the annual fee, Falconer said 10-20% of upfront licensing costs is an accurate industry rule of thumb.

In addition to transaction volumes, Falconer said processing costs are impacted by the number of EFT networks and the number of hosts that will communicate with the system. Technical requirements, such as multiple terminal handlers for different makes and models of ATMs, also will increase the costs, he said.

Tony Catalfano, President and Chief Operating Officer of Fiserv EFT/CNS, which drives 16,500 ATMs, said FIs often do not consider the total cost of bringing processing in-house.

"They're going to have to add people and additional monitoring and telecommunications systems in addition to the software-or accept downtime. We have people monitoring ATMs 24/7; not all financial institutions can make that kind of an investment," he said.

Walt Fillmore, Chief Operating Officer of Select Bank, a $73 million FI with three branches and two ATMs, said he "did some serious economic analysis" and concluded Select would save some 30% by outsourcing its ATM program-including ATM driving-to Genpass.

Tipping the Technology Scales

More importantly, Fillmore said, "at our size, I like the idea of having their expertise." Fillmore believes Genpass will quickly respond to industry trends such as check imaging. "That's going to impact all of their clients, not just me," he said.

The complexity of newer technologies such as check imaging, which may involve linking ATMs, branches and back offices, is one reason that some FIs may prefer to outsource, said Frank D'Angelo, Executive Vice President of Metavante's electronic funds group.

"They can leverage our intellect, our technology and our relationships with vendors," he said, noting that large processors like Metavante enjoy the advantages of scale.

"Conversions to a Windows operating system and all of the implications haven't been a part of their ATM and debit card programs for most financial institutions," said Genpass' Raymond, mentioning another technology shift. "OS/2 hasn't changed much in the last 20 years, but I don't think that's going to be the case with Windows. We're going to see a need for more frequent updates."

More Than One Way to Drive an ATM

Some technology plays simply make more sense with an in-house processing platform, said Jeffrey Hale, Chief Marketing Officer for ACI Worldwide, a provider of transaction processing software.

"A lot of financial institutions are looking at channel integration; that's going to be inherently harder to do with a third party in the middle of the stream," he said, noting that one ACI client is configuring its processing platform so that a card and PIN are used to authenticate customers at both teller stations and ATMs.

Hale believes the industry will see more FIs selecting processing options that are neither truly in-house nor outsourced. For instance, one ACI customer is considering letting an outside firm drive its ATMs-using its existing processing platform.

"It's all about division of labor," he said. "The major vendors have systems that allow you to do application work without actually driving your ATMs-so a financial institution can control the personality of its ATMs without worrying about things like transaction feeds and network delivery."

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