CGAP IT Innovation Series

Automated Teller Machines

Steve Whelan, with contributions from CGAP Staff and eChange, LLC

Automated Teller Machines (ATMs) conduct many How Do ATMs Work? transactions that would otherwise require staff Typical ATMs have two input devices (a card read- attention: they furnish account information, er and keypad) and four output devices (display accept deposits, draw down on pre-approved screen, cash dispenser, receipt printer, and speak- loans, and transfer funds. The use of ATMs frees er). Not visible to the client is a communications loan officers to focus on personalized services, mechanism that links the ATM directly to an ATM and the machines can potentially deliver a broader host network. The ATM functions much like a PC; range of services. ATMs are most effective for it comes with an operating system (usually OS/2) microfinance institutions (MFIs) that accept sav- and specific application software for the user ings and want to serve customers in multiple interface and communications. Whereas most locations and/or during non-business hours. But ATMs use magnetic strip cards and personal iden- since a single machine can cost as much as US$ tification numbers (PINs) to identify account hold- 35,000 and requires reliable electric and commu- ers, other systems may use smart cards with fin- nications connections, ATM technology may not gerprint validation. (See the Biometrics be the first choice for all MFIs. Technology and Smart Card articles in CGAP’s IT Innovation Series for more information.) Who Should Consider ATMs? The ATM forwards information read from the MFIs generally consider ATMs when high transac- client’s card and the client’s request to a host tion volumes put pressure on staff, traditional processor, which routes the request to the client’s operating hours do not suit client needs, and reg- financial institution. If the cardholder is requesting ulations permit MFIs to offer a range of financial cash, the host processor signals for an electronic services. The technology only becomes attractive funds transfer (EFT) from the customer’s bank if an institution accepts savings, since the up-front account to the host processor’s account. Once investment in an ATM network is too high to justi- the funds have been transferred, the ATM fy using it only for loan disbursements. Some receives an approval code authorizing it to dis- MFIs may want to consider ATMs or other simple pense the cash. This communication, verification, card-reading and balance-reporting networks to and authorization can be delivered several ways. reach rural customers or a dispersed population. Leased line, dial-up, or wireless data links may be For these institutions, locating an ATM in a mar- used to connect to the host system, depending ket center may be more cost effective than open- on the cost and reliability of infrastructure. The ing a branch there. host systems can reside at the client’s institution or be part of an EFT network. The EFT network

Consultative Group to Assist the Poor may support debit card transactions using PINs, • Monthly or annual service fee for support or credit card transactions using a signature. • Communications charges for dial-up, leased Point-of-sale services that use PINs are also pos- lines, or wireless data links sible. EFTs often have a regional scope, such as A Toda Hora (ATH) in Puerto Rico, which focuses on Initial costs are high, particularly if the institution the Caribbean and Central America. is establishing a self-supported network. Individual ATM purchase prices are US$ 20,000–$ 35,000. Magnetic cards cost US$ 0.25 to US$ 0.50 each, Requirements for ATMs and smart cards usually run US$ 6–$ 10 each. • Reliable electrical power and communications ATMs that use smart cards do not require a real- infrastructure time Internet connection, since the ATM can obtain •Affordable dial-up or leased line rates for the some client financial data from the microchip on ATM to send and receive data the smart card. The microchip or wireless internet •A central database where client data must be service may be required where communications stored for balance verification systems are expensive or unreliable. • Reliable after-sales servicing and support from the vendor or third-party • Solid operational procedures and resources to Microfinance Implementations distribute cards and control PINs Prodem FFP in Bolivia, Banco Ademi in the • Supply of correctly denominated currency Dominican Republic, and MEB Kosovo have each • Systems to securely transfer cash to ATMs introduced ATMs in different ways to meet the • Adaptations for effective usage, such as build- needs of their unique client populations, commu- ing-in verbal instructions to guide illiterate users nications infrastructures, and costs of participating in ATM networks. In-depth impact studies of the benefits of ATM technology are not available, but Benefits and Costs of ATMs two major benefits may be identified.

Benefits Prodem FFP (Bolivia) • Flexible account access allows clients to access their accounts at their convenience. Serving 43,000 clients who live mostly in rural or • MFI personnel are not required to be present semi-urban settings, Prodem FFP has installed 20 for transactions and have more time to serve Smart Automatic Teller Machines (SATMs) inside clients. its branches. These SATMs are unusual in that • Increased hours of operation fit client schedules. they incorporate fingerprint readers for client veri- • More clients can be reached beyond the branch fication rather than use PIN technology. They also network, such as in smaller population centers. use voice instructions in three languages to assist • More low-cost funds are available because ATMs illiterate or semi-literate users. (Details of Prodem make it easier for clients to deposit savings. FFP’s smart card and biometric security imple- mentations are available in the Smart Cards and Biometrics Technology articles of the CGAP IT Costs Innovation Series.) Costs differ depending on the technology provider and how the ATM network is operated. If an MFI One year after deploying smart cards, Prodem FFP can partner with an existing ATM network and/or offered clients the option of conducting cash network operating company, the MFI’s operating transactions through an ATM. Because the smart expenses will be less. card’s chip contains all essential client financial • Up-front equipment acquisition cost or network information, transactions are immediately reflected participation fee on the card, and the ATM only updates data to the • Set-up fee to install and network the ATMs central processing site twice a day. Prodem FFP • Usage fee, either per transaction or on a has saved about US$ 800,000 per year in Internet monthly basis access charges by using Smart Cards instead of

Consultative Group to Assist the Poor ATM technology cost Banco Ademi less than US$ 70,000, and it purchased and installed a single ATM in its largest office to learn more about ATM operations.

ATM technology has enabled Banco Ademi to give its 28,000 clients more convenient service by providing 24-hour access to funds via a wide net- work of locations. The institution’s staff was also free to handle more personalized customer inter- actions, rather than routine deposit-taking and bal- ance-checking. cards with magnetic strips, which require real-time connection. Smart Cards also reduce the risk of MEB Kosovo (Kosovo) fraud at Prodem’s central office because only the cards carry the client’s latest financial data. With more than 110,000 customers after only Prodem FFP used Innova Empresarial, a local firm, four years of operation, MEB Kosovo turned to to integrate the Smart Card, biometric reader, ATMs to help its overburdened network of seven screen, and cash dispenser, and kept the price for branches. With little time to conduct research, it each machine below US$ 20,000. The organization contracted a system integrator, Compass Plus of plans to increase its ATM network to 36 machines Russia, to design and implement an ATM network by the end of 2003 and to install ATMs in all 54 to support its rocketing client demand and provide branches by June 2004. 24-hour service. Since regional communications infrastructure was unreliable, MEB elected to use For Prodem FFP, the primary benefit of the ATM wireless connections to its central processing network was greater convenience for customers servers. It also installed ATM wall units rather and increased deposit mobilization. Customers than stand-alone models for greater security. used the ATMs for many transactions that previ- Compass Plus provided the ATM management ously required staff attention, and were able to software to govern and monitor transactions. conduct business in many locations. In turn, this makes it more convenient for clients to save, Although MEB Kosovo’s investment in the first 17 which increased the volume of deposit funds ATMs cost US$ 1.5 million, the technology fit the available to the institution. mission of its parent company, the IMI invest- ment group. IMI’s philosophy is to create “green- field banks” that can furnish complete banking Banco Ademi (Dominican Republic) services from inception. It considered ATMs the best approach to managing MEB Kosovo’s client Banco Ademi took a different approach by part- growth, and is leveraging the MFI’s experience to nering with A Toda Hora (ATH), an EFT service benefit other subsidiaries. MEB Kosovo is furnish- provider that operates a network of 1000 ATMs. ing ATM management services for a sister institu- Other banks own the ATMs supported by ATH, tion in Albania, FEFAD Bank. It is also broadening but cardholders of Banco Ademi’s ADEMI+ debit its own network by placing point-of-sale terminals card can use any ATM in the system. Clients pay in supermarkets and shops. a charge of about US$ 0.20 per transaction, which is shared by the ATM owner and ATH. Lessons for Implementation Participating in a third-party network was attrac- tive to Banco Ademi because the entry fee was Identify a provider committed to reasonable, and the ATM locations closely your market matched the institution’s service area. ATH charged an initial fee of US$ 10,000 and an annual Prodem FFP found that the price quoted by global membership fee of US$ 2,400. Implementing manufacturers of ATM equipment to add biomet-

Consultative Group to Assist the Poor ric or voice applications was prohibitively high. An • Cash replenishment requires security, set substantial order was needed to attract compa- schedules, and correctly-denominated currency. nies that usually serve the commercial banking • Options to help illiterate clients need to be sector. Locally, Prodem FFP found a system inte- designed. grator to design a solution for under US$ 20,000 • Networking options and costs may include dial- per ATM that used resources best suited to up, leased line, or wireless Internet connections. Prodem FFP’s clientele. Although a local provider • Existing processing and management reporting may have more familiarity and commitment to the systems need to interface with each other. MFI’s market, not all such providers are stable •Hardware, software, and communications companies or able to provide reliable technical require support and ongoing upgrades. support. In many countries, MFIs may not find the necessary expertise to implement home- grown systems. To Learn More

ATM technology providers Leverage existing resources Fujitsu, http://www.fujitsu.com Banco Ademi was able to partner with an existing NCR, http://www.ncr.com ATM network and operating company to avoid the Diebold, http://www.diebold.com full capital investment and operating burden of Olivetti, http://www.olivetti.com/ self-supported ATMs.

Systems integrators Test feasibility with a pilot or phased Innova Empresarial, implementation http://www.innovaempresarial.com Acquiring a single machine for its busiest branch Compass Plus, http://www.compassplus.com/ helped Banco Ademi’s management introduce ATMs gradually. Installing one ATM to test the feasibility of this technology can help an MFI Network operators measure management’s commitment, ease of A Toda Hora, http://www.ath.com.do/ client adoption, and adequacy of physical infra- GM Group, structure. http://www.gmgroup.com/index.htm

CGAP has not reviewed their products nor does it General guidance endorse them in any way. ATMs introduce a further level of complexity for operations staff although it saves staff time over- all. Even in areas where infrastructure is reliable, Organizations surveyed many practical challenges must be addressed as Prodem FFP, Eduardo Bazoberry, demonstrated by the mainstream banking sector. [email protected], 591 2 214 7580 • Buildings may have to be modified to accom- Banco Ademi, Levis Cenac, modate ATMs. [email protected], 809 683 0203 •ATMs need to be protected physically, particu- MEB Kosovo, Luca Foresti, lforesti@mebkoso- larly for 24-hour availability. vo.com, 381 38 248 778 • Cards and PINs need secure administrative pro- cedure to protect against internal and external fraud. Other resources •ATMs require maintenance and trouble-shoot- World Resources Institute’s Digital Dividend ing services by reliable third-party support com- Project, www.digitaldividend.org panies.

Consultative Group to Assist the Poor