Equity Building Society ATM Network Review
Identifying the need
• EBS are growing rapidly (circa 230,000 existing customers) • Target of up to 1 million customers in next 5 years • Costs of branches high from a capital and operating cost perspective Requirement to handle existing customers at lowest possible cost and provide the most cost effective growth path possible
ATM Touchpoints
“The branch the never sleeps”
• Breaking away from the old idea of the ATM as only a Cash Dispenser • Customer convenience • Creating customer touchpoints that extend service reach
– – – – – Deposits Payments Money Transfer Enquiries Value added transactions
ATM Opportunity
• Increasing customer acquisition and retention
– Creating a ubiquitous brand presence across the market – Serving customers convenience needs – Some banks are deploying ATM:Branch ratios of 5:1
• Allows them to attain market growth of competitors with many more time the number of branches
ATM Opportunity
• Reducing teller cost
– ATMs can provide more efficient transaction processing and increased convenience
• Increased flexibility
– Able to design smaller, more nimble retail outlets – Some banks have offloaded the majority of their transactions to the ATM
Cost & Efficiency
Cheque
5.0
Cash Dispensing
4.50
4.0
Transaction Cost USD
3.0
2.0
1.60
1.0
0.40
0.0 Cheque Branch Teller
Source: Booz-Allen Hamilton
ATM
ATM Opportunity
• Cost reduction
– Need to optimize product and pricing design to reinforce desired behaviour and discourage costly behaviours.
Simple Maths
• Capital cost of new branch
– Ksh 13 million
• Capital cost of ATM
– Ksh 2,1 million
Naturally there are other considerations but this justifies serious examination
Similar examples CABS Zimbabwe
• Started with 750,000 accounts with 70 branches country wide • Low income customer base • Implemented ATM’s / Cards in the early 90’s • Currently have 71 ATM’s and 750 EFTPOS devices • One of the most profitable FI’s in Zimbabwe CABS believe their drive to electronic banking has significantly enhanced profits and assisted in delivering new products and services
The argument for Equity Rapid conversion
• Total withdrawals in Nairobi per month – 46,000 (before Mama Ngina) • Total Deposits in Nairobi – 24,000 (before Mama Ngina) • It is likely these volumes will double at the minimum with the added convenience of ATM’s resulting in smaller and more frequent withdrawals for security reasons This will convert to card / ATM use very rapidly (3 months) and deliver immediate volumes and subsequent benefits
The Argument for Equity Medium Conversion
• Thika, Nakuru • Total withdrawals per month – 20,000 • Total deposits per month – 8,000
This may take a little longer to convert the full complement to Cards / ATM’s. Estimate 9 months.
The Argument for Equity Up country branches
• Kangema, Karatina, Kangari, Kerugoya, Nyeri and Meru would all ultimately justify ATM’s • Murandia and Othaya might be marginal There is no local data to show the potential conversion rates, however the CABS experience would suggest this is faster than you might expect
Reviewed by Paynet
• ATM Network Models
– Market alternatives
• Full outsourcing • Partial outsourcing • Equity owned and managed
– Operational impact – Financial models – Risk assessment
• Switch review • ATM review • Recommendations
Option 1 - Fully Outsourced Model
Outsourced services, supplier owns switch and ATM’s. Equity makes no capital investment. Vendors include
Paynet Kenya Kenswitch (Cashnet)
Assumptions for all Options
• • • • All models are like-for-like 200,000 ATM cards to 400,000 over 5 years 50,000 ATM trans to 400,000 over 5 years 10 ATMs to 40 ATMs over 5 years
• Income from transaction fees and interest on deposits at current bank lending rates
Supplier Provides Full Infrastructure and Services
Option 1 - Fully Outsourced Model Impact on Operations
• Easiest of all the models from an operations perspective • Will require daily reconciliations • Outsourcer will handle
– – – – Vendor management Cash management Network management Card issuing
Option 1 - Fully Outsourced Model Financial Modeling
OPTIONS CAPITAL Cost per Transaction At Start - At End NET PROFIT OVER FIVE YEARS Ks 311m
Kenswitch (K/S owns ATMs)
Ks 13m
Ks 83 - Ks 41
Paynet (Paynet owns ATMs)
Ks 55m
Ks 85 - Ks 32
Ks 371m
Option 1 - Fully Outsourced Model Financials
• All growth assumptions, revenue drivers etc standard across both models • Least attractive option profit wise • Lower capital investment • Kenswitch per transaction fee is punitive as volumes increase
Option 1 - Fully Outsourced Model Risks
• Difficult to change suppliers • Lower profits • Perceived loss of control (this can be partly mitigated by a strong SLA) • Less control over ATM models ordered and features
Option 2 - Partial Outsourcing
• Technology partner provides switch and services • Equity provides ATM’s • Potential Vendors
– Paynet Kenya – Kenswitch
Supplier Provides Switch and Services
Option 2 - Partial Outsourcing Impact on Operations
• Different levels of services offered
– Paynet
• Full vendor management
– – – – Communications ATM Cash management Card suppliers
• • • •
Reconciliations Full card management PIN management Switch management and reporting
– Easy to integrate into existing operations
Option 2 - Partial Outsourcing Impact on Operations
• Easy model from an operations perspective, same as full Outsourced but banks owns ATMs • Will require daily reconciliations • Outsourcer will handle
– – – – Vendor management Cash management Network management Card issuing
Option 2 - Partial Outsourcing Financial Modeling
OPTIONS CAPITAL Cost per Transaction At Start - At End Ks 82 - Ks 36 NET PROFIT OVER FIVE YEARS Ks 345m
Kenswitch (K/S owns ATMs)
Ks 163m
Paynet (Paynet owns ATMs)
Ks 169m
Ks 76 - Ks 26
Ks 463m
Option 2 - Partial Outsourcing Financials
• All growth assumptions, revenue drivers etc standard across both models • High capital investment outlay • Most attractive financial model for profitability (Paynet) • Kenswitch per transaction fee is punitive as volumes increase
Option 2 - Partial Outsourcing Risks
• Partner needs to demonstrate ability to achieve service levels as required • Ability to provide future product development needs to be assessed • Partner selection is essential
Paynet Kenya
• Have successfully launched NIC / Move • Experienced in implementing CABS Zimbabwe • Have recruited highly experienced operations team • Replicated systems and sites • Model supports volumes
Kenswitch
• Launched in 2003 • Currently have a number of small bank customers + CBA • Focus is initially on interconnection • Partly owned by Fintech and founding member banks • No replication either hardware or site at present
Option 3 - Own and operate
• Switch vendors
Oasis – Paynet
Large regional installation and high impact site with NIC / Move launch
CR/2 – London based
Used by most of the large banks. Perceived to be inflexible.
Opus – Computerpoint
Used by CFC bank. Appears to be a competitively priced.
Postillion – Fintech
Large number of sites in Africa. Good technology, Windows based O/S
Option 3 - Own and operate Impact on Operations
• Significant impact on operations
• Full vendor management
– – – – Communications ATM Cash management Card suppliers
• • • •
Reconciliations Full card management Vital to have experienced team Switch management and reporting
Option 3 - Own and operate Financial Modeling
OPTIONS CAPITAL Cost per Transaction At Start - At End NET PROFIT OVER FIVE YEARS
Equity owns switch and ATMs
Ks 178m
Ks 70 - Ks 25
Ks 493m
Option 3 - Own and operate Financials
• All growth assumptions, revenue drivers etc standard across all models • More attractive financially than full outsourcing and part outsourcing but more capital required and more risk
Option 3 - Own and operate Risks
• Significant operational change • Recruitment, integration and retention of skilled technical staff • Management of all staff and operations • Vendor management skills required • Increased capital investment • Ability to develop and launch new products
Model Matrix
Flexibility
Own Switch Own ATM’s Outsource switch Own ATM’s Outsource Switch Outsource ATM’s
Expertise Available Low
Capital Cost High
Risk High
Profitability Medium
Medium
Medium
High
Medium
Low
High
Low
High
Low
Medium
Low
Interconnection Options
Data
EBS Branch Network
EBS Central Server
Cloud
EBS Switch EBS ATM’s
Card Networks
Other networks
Barclays Standard Chartered Stanbic KCB CBA
Kenswitch
CBA Akiba I&M Chase Consolidated
Which ATM vendors?
Paynet has a fully up to date ATM comparative matrix for EABS
Key locally represented vendors Full functionality comparisons Price comparisons Delivery lead times Support infrastructure
ATM vendor and model selection is also based upon the functionality required, the location and the estimated transaction volumes
Cards
• EBS have existing ‘useable’ cards • Need to weigh the collection and encoding of these against issuing new cards • Smart cards not necessary for the foreseeable future
– Expensive – Lack of infrastructure – Visa / Mastercard will slowly change this
Project Deliverables
• Significant skills required to implement and operate a successful network
– – – – – – – – – Design (DRP etc) Vendor selection and contract Support services contracts Cash management process Card and Pin Mailer process Product development and marketing Integration with host system Implementation and testing Operations
• • • • Vendor management 24 x 7 x 365 monitoring Reconciliations Reporting
– New product development and implementation
• Sample project plan provided to Equity
Paynet recommendations
• Partially Outsource
Find the most cost effective over 5 years Review the experience of the vendor Review the DRP Review the ability to introduce new services Look for a complete end to end service including vendor management – Cost any services not provided by the vendor into business model – – – – –
Paynet recommendations
• Partner where EBS do not have critical mass, plan to interconnect to
– Kenswitch / other banks – Cashnet or other micro finance organisations – VISA in the future?