Jan 23 - 29, 20

Automated Teller Machine (ATM) has emerged as one of the most preferred e-banking channels. A bank can reap the true benefits from the ATMs if they provide uninterrupted services to the consumers and keep it operational round the clock. Any interruption could create a reputational risk for the bank.

ATM, one of the key components of e-banking infrastructure, is a communication device that provides financial and non-financial services to consumers. ATMs locations have been segregated as on-site and off-site. On-site locations comprise those places, which are either inside or near the bank branch. Rest of the locations is treated as off-site locations such as shopping centers, universities, petrol pumps etc.

The banks offer various e-banking services including the ATMs with the purpose to minimize cost, improve customer convenience, attract new customers, and amplify the concept of 'anytime anywhere' banking.

According to the prevailing practice, ATMs are deployed, monitored and managed including the cash replenishment by commercial banks. The state bank of Pakistan (SBP) has also mandated commercial banks for keeping their ATMs in working condition especially during the weekends and long Eid holidays, which implies that the responsibility of safeguarding, managing and maintaining the ATMs and associated network lies with the commercial banks including Islamic and the microfinance banks.

The deployment of ATMs, their management, safety, security, maintenance and cash replenishment require cost, time, people and a very specialized knowhow and expertise.

Considering these requirements, few banks have not developed ATM network. In addition, few banks have also delayed ATM deployment program and the replacement of outdated or old machines with state of the art smart ATMs. On the performance side, the consumer displeasure is also on the rise.

In this scenario, a turnkey ATM solution, under a bilateral shared responsibility concept, could provide an effective solution in not only increasing the quantity of ATMs and providing uninterrupted e-banking service to the consumers but also minimizing the misuse of ATMs. A turnkey ATM can substantially reduce the cost and efforts require maintaining ATMs and associated network.

Advisably, one of the biggest advantages associated with the turnkey ATM solution is the development of a level playing field wherein the small and microfinance banks will also be able to offer e-banking products and services to the consumers on a large scale which otherwise may not be possible.

Small and microfinance banks will be able to catch up with the large banks, which have been providing the most efficient, state of the art and safe e-banking facilities along with innovative e-products to the consumers thereby reaping the benefits, attracting new consumers and making huge profits.

According to the JS Research Report, the five big commercial banks earned more than 90 per cent of the industry profit. The domination of big banks seems unchallengeable, as their share has been expanding despite presence of several top foreign banks and other medium sized local banks.

By signing a turnkey ATM deal with an independent 3rd party, a banking company can reap the benefits of having ATMs without worrying about their maintenance and security and thereby improving their profitability and market share. A turnkey solutions provider can provide:

* Service and Repair
* Monitoring and Diagnostic Services
* Manage Cash Replenishment
* Security of the ATMs

Form the legal perspective, the Payment Systems & Electronic Fund Transfer Act 2007 (Act), enacted by the parliament and implemented by the SBP, has provided certain guidelines in this regard.

The role of SBP occupies a vital position. The SBP is required to develop necessary regulatory framework through a consultative process thereby allowing the banks to venture into this new mode of outsourcing and risk management. Considering the local e-banking environmental, following two scenarios can help the banks and the regulators in considering turnkey ATMs solutions:

Scenario-I: Huge retail outlets such as Hyper store, Cash & Carry, Metro and big industrial concerns such as Pakistan Oil Refinery, Coca Cola, Pepsi Co, Indus Motor Corporation etc may be allowed to purchase and deploy ATMs at their premises for their huge workforce and visiting consumers for conducting electronic transactions. Like the case with prepaid debit cards, the SBP should also issue necessary approvals to banks in this regard on case to case basis.

Under this scenario, the outlets or the corporate entity called the "ATM Deployer" shall be at a minimum responsible for the deployment, security and maintenance (including repair and service) of the device. The cash replenishment should, however, rests with the bank. The banks in order to set the performance benchmark will enter into a Service Level Agreement with the ATM deployer for providing uninterrupted ATM services and resolving disputes among the stakeholders.

One of the major disadvantages associated with this scenario is the ownership of the ATM. Since the outlets or the organizations will incur the cost of the machine, its ownership shall rest with them and not the bank. In addition, due to its location, the ATM services may not be available in the evening and after office or working hours.

Scenario-II: Under this scenario, the SBP may prepare and issue regulations on 3rd party or Turnkey ATMs for the industry thereby allowing the vendors and service providers to enter into this venture. This scenario will open new investment and employment opportunities besides substantially increasing the quantity of ATMs in the country.

In order to safeguard the consumer interest and provide safe & secure e-banking facilities to consumers in Pakistan, the central bank prior to issuing regulations on 3rd party ATM deployment and maintenance shall invoke Section 4 and Section 12 of the Act which defines the "designation criteria".

Under Section-4, the state bank is required to designate a payment system as a 'designated payment system' by a written order with an objective to safeguard the consumer interest and minimizing payment systemic risk by bringing the 3rd parties under its supervisory portfolio.

The ATM infrastructure is comprised of different stakeholders including commercial banks, microfinance institutions, and services providers such as 1-Link, MNET, TPS, Avanza to name a few.

Except for the commercial and microfinance banks, the rest of the entities are regulated and supervised by the securities and exchange commission of Pakistan (SECP). 1-Link Guarantee Limited and MNET Services Pvt. Limited have been proving critical transaction routing facility to their respective member banks for facilitating inter-bank and inter-switch electronic transactions among all the banks nationwide.

Likewise, TPS Pakistan Pvt. Limited and Avanza Solutions have developed and deployed financial transactions processing middleware/switch such as IRIS and Rendezvous respectively in different banks for facilitating e-transactions. In this situation, it will not be difficult to understand the role played by service providers in facilitating, supporting, and promoting the e-banking culture in the country.

Section-4 of the Act describes the need for designating these and similar vendors and service providers as a 'designated payment system'. The designation title will automatically bring these entities under the supervisory control of the central bank thereby substantially reducing the payment systems risk.

Section-12, describes the designation criteria for "payment instruments". For example, it may not be necessary to designated the TPS Pakistan Pvt. Limited as a 'designated payment systems' but instead under section-12, the IRIS shall be designated as a 'designated payment instrument'. This provides several benefits to the central bank as it will not be required by the central bank to inspect premise, machinery, equipment, books and other documents of the whole designated entity but rather only the documents and books pertaining to the instrument such as IRIS.

Scenario-II will, therefore, comprehensively promote the turnkey ATM culture in the country and will also ensure an effective implementation of Payment Systems & Electronic Fund Transfer Act 2007 in the country.