inancial institutions are facing the seeming inevitability of IBM's eventual withdrawal of support for its OS/2 ATM operating system and the need to comply with regulatory mandates for Triple DES and audio capabilities for ATMs.

At the same time, vendors are offering them the ability to introduce personalized transactions, check imaging and other new, customer-friendly features.

Yet many FIs appear to be taking a fairly conservative approach to updating their ATM channel, boosting their normal attrition rates, but frequently opting for upgrades rather than brand new machines.

Cost vs. Benefit

"As long as the machines I have can keep me compliant, I'm content," said W.R. Holman, Vice President of Electronic Banking for Louisiana-based Iberia Bank. "I've got some good machines; they work fine. There just aren't enough reasons right now for me to swap them all out."

Holman expects to complete his network's Triple DES upgrade by the end of 2004, with the possible exception of machines added during the recent acquisitions of two FIs.

Iberia replaced 10 machines "flat out not capable of running Triple DES," purchased an additional seven new ATMs to deploy in sites that generate the highest transaction volumes, and upgraded the remainder of its 42-machine fleet. Iberia wanted to maximize its investment by putting the new machines, and introducing new transactions, where the most people would use them, Holman said. "Customers in our lower volume sites just want to get their money, get their balance and go."

The new machines all feature Windows-based operating systems and will utilize TCP/IP communications, which Holman said will "set the stage" for future added functionality. Advanced transactions will likely be added to all of Iberia's ATMs as it continues to update its network.

Holman said he "only put what I had to" in upgrades of existing machines. "It didn't make sense to spend a lot of money on machines I'll want to replace in two to three years."

Ohio-based Fifth Third Bank expects to upgrade 1,400 of its 1,873 machines and replace the rest, some of which were incapable of running Triple DES and others where upgrades would have cost almost as much as a new machine. Curt Tiettmeyer, the bank's Vice President of ATM Operations, said Fifth Third will likely complete its Triple DES upgrade by summer of 2005. Some 250 of the new machines will be on a Windows platform.

The primary consideration when it came to upgrades was processing power, Tiettmeyer said. He wanted to make sure that machines could support Triple DES, remote injection of encryption keys, audio capability and an eventual move to Windows. In many cases, Fifth Third is also adding Ethernet cards to move its machines to IP communications.

Tiettmeyer is evaluating introducing new options such as check imaging on Fifth Third's ATMs, but doesn't expect to do so in the near future. "If I can incorporate it at the right cost, I'll do it. But I have to weigh the benefit against the cost: Is it going to make me money or save me money?"

If It Ain't Broke ...

Connecticut-based Peoples Bank just completed the migration of its 240-machine fleet to Triple DES, replacing eight machines (the "really oldie moldies," said Ted Josephson, Vice President of Direct Banking and Operations) and upgrading the rest. Total cost, including hardware, software and service, was in "the high six figures."

Josephson expects to boost his normal annual replacement rate of approximately 10% over the next few years, but only slightly.

"I've got a bunch of machines that are working just fine," he said. "In a perfect world, with no budget constraints, I'd buy more new machines. But I know I can get at least another couple of years out of the machines I upgrade."

New machines will have at least a Pentium III processor and 256 megabytes of RAM. Peoples' entire network already uses IP communications.

About a quarter of Peoples' fleet is currently capable of running Windows, said Josephson, who plans to pilot some Windows-based machines in 2005. "I'm not going to rush. I'm still a little nervous about some of the service and maintenance issues.

"I think we're going to see more technology changes in the next two to three years," he said, and he is still developing business models for offering new services such as imaging checks at ATMs or targeted advertising. "I want to see more studies with hard data that shows this stuff works."

Both imaging and targeted advertising would require Peoples to make substantial investments in its back office as well as its ATMs, Josephson said.

Show Me the Money

But FIs are spending more now on their ATMs than they have in recent years, and they are purchasing machines with new technology platforms.

In a recent TowerGroup report titled "Advanced ATM Technology: Too Fast, Too Furious?" the Boston-based consulting firm estimates that large U.S. FIs will spend $1.8 billion on their ATM programs in 2004, 12% more than they spent in 2003.

Year-over-year ATM expenditures normally grow at a more tepid pace of 3% - 5%, said Jerry Silva, author of the report. Because maintenance costs have remained stable, he said, much of the spending is on new machines and software development. In its most recent earnings report, Diebold cited "record order levels" for ATMs in 2004's third quarter. It also said it expects earnings per share to grow 18% - 20% in 2005, driven largely by sales of ATMs and related services.

NCR said it anticipates EPS of at least $0.40 in 2004's third quarter, at least doubling its earnings of $0.19 EPS in 2003's third quarter. NCR cited growth in both its Financial Self-Service and Teradata Data Ware-housing divisions.

Loaded and Ready

Silva, TowerGroup's Senior Analyst of Delivery Groups, said that 70% of ATM shipments by vendors serving the FI market in 2004 will go out loaded with Windows as the default operating system.

That number has risen dramatically from 10% or so of ATMs shipped with Windows in 2001. Silva estimates that approximately 20% of the current global installed base is running Windows; by 2006, he expects that number will rise to 30%.

"We'll finally start to see a decline of machines with OS/2," he said. "We're getting to the point in the replacement cycle where it makes sense for (FIs) to get machines with new technology."

While regulatory mandates are a major driver of spending increases, Silva believes FIs are more bullish than ever before about offering new features at ATMs, a process facilitated by moves to Windows and IP communications. In a recent presentation at the Thomson ATM & Debit Forum in Baltimore, Lori Murray, Huntington Bank's Senior Vice President of ATM and Cash Position Management, said Huntington began preparing itself for a major ATM technology refresh in 2002. The bank developed a broad plan in 2003 after discussions with its vendors and created more specific strategies this year.

The Ohio-based bank is currently piloting its first Windows-based machine at a site where it is used by Huntington associates only. It plans a broader test of 25 Windows-based ATMs, five of them new, in this year's final quarter. Murray told ATM & Debit Forum attendees that Huntington wants to ensure the new platform works as expected before implementing customer-facing features at ATMs in 2005.

Huntington intends to replace 135 of its 700 ATMs and will likely upgrade many of the rest, Murray said, although it has not yet reached a decision on the fate of some 300 machines. While they can be upgraded, replacing them would make it easier to offer image capture or other new features.

The Big Bang

Ohio-based National City is upgrading 600 ATMs but replacing the remainder of its 2,000-machine fleet, at a total cost of some $30 million. Matthew Burns, the bank's Senior Vice President of Electronic Banking, said the bank hopes to complete the project in the first half of 2005.

"When I passed the hat to get the funding, the first comment I heard was 'we won't have to have this conversation again in a couple of years, will we?'" Burns said. To minimize that possibility, all of National City's machines, whether new or upgrades, will run Windows and have at least a Pentium III processor. Burns said his main aim was to "create a consistent baseline from which we could evaluate any future enhancements."

National City has already introduced a service called My ATM Choices, which allows customers to pre-select their preferred language, withdrawal amount and receipt options, at 100 ATMs. The feature "helps factor a lot of the 'noise' out of repetitive prompts at the ATM," Burns said.

Burns, who helped roll out National City's online banking program, is excited about the prospect of using knowledge gleaned from the Web at ATMs. "With Windows, we can leverage some of what we've already learned about introducing new technology. I think the learning curve for ATMs will be a lot more compressed," he said.

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