December 31, 2003

Year in ATM World

Nice wrap by Ann All on 2003 and ATMs

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2003: The year in ATMs
by Ann All, editor 23 Dec, 2003

Looking back at ATMmarketplace's annual Year in Review for 2002, some of the biggest stories included a worldwide escalation of card fraud, new regulatory requirements such as Triple DES, a slow uptake of advanced functionality at the ATM and continued consolidation in several sectors of the industry.

Oddly -- or not, given the ATM industry's reputation for moving at less than lightning speed -- the year's biggest stories didn't change much in 2003. In many ways, it was a virtual replay of '02.

Skimming scams

Card fraud continued to bedevil the ATM business. Incidents of skimming, in which thieves install devices at the ATM to harvest card data -- usually in combination with pinhole cameras that capture PINs -- were reported around the globe.

Canada was one of the hardest hit countries in '03. Despite the late December 2002 arrest of five Russians who orchestrated a sophisticated $1.2 million (U.S. $790,460) skimming scam in the Vancouver area, Canada continued to experience skimming losses in 2003. In September, Canadian police arrested nine men they said were stealing card information and PINs at drive-through ATMs.

Illegal withdrawals were made from some 200 accounts during a $700,000 Russian skimming spree. Moscow police in April arrested Alexei Menshov, a student at the Moscow Automobile Institute. Menshov fingered two accomplices, Yury Kazakov, the holder of a Ph.D. in technical science, and Sergei Levitsky, an economics graduate.

Banks in the United Arab Emirates slashed daily withdrawal limits at ATMs after skimming incidents were discovered in late May. Though details were sketchy, a report in the Arab Times estimated losses as high as 50 million dirhams ($13.7 million U.S.) The UAE's Central Bank in June recommended that the 985 ATMs in the UAE be replaced or upgraded with smart card readers.

In Taiwan, police in October arrested Soong Jen-chao and Chou Shi-hsuan, two men who reportedly headed up a skimming gang responsible for losses of NT$30 million (U.S. $884,173) from 257 accounts. Following the arrests, Minister of Finance Lin Chuan asked banks to remove card-swipe entry systems on doors to lobbies, which had been targeted by the gang. He then asked banks to convert the more than 600 million magnetic stripe cards currently in circulation to chip by June of 2004, a project which experts estimate will cost about NT$15 billion (U.S. $430 million)

Legislation in the loop

Reports of skimming came in from across the United States, including Chicago, Boston and New York. In Manhattan, three men in December were indicted in connection with an incident in which they installed an ATM equipped with a skimming device in a deli, then stole more than $200,000 in a single day after using the data to create bogus cards.

Inspired by that incident, Sen. Charles Schumer (D-N.Y.), a member of the Senate Banking Committee, announced his intent to introduce legislation requiring background checks and federal licensing of independent ATM operators.

Three California Assembly members introduced similar legislation in their state following the airing of a "Dateline NBC" report that featured one of 2002's biggest skimming cases, in which thieves purchased more than 50 ATMs and used them to steal more than $3.5 million after compromising some 21,000 accounts. Ironically, U.S. Secret Service agents and Wixom, Mich., police on Dec. 4 arrested Iljmija Frljuckica, an Eastern European man they say was the leader of that gang.

The industry has already felt the impact of the case referenced by "Dateline." EFT networks increased their oversight of member financial institutions which sponsor ISOs into networks, asking them to increase their due diligence by obtaining detailed financials, among other information, from their ISOs.

At least one result of skimming incidents seems to be a growing mistrust between financial institutions and their customers. The Los Angeles Times reported that consumer complaints to the Office of the Comptroller of the Currency (OCC) about how banks handle unauthorized ATM transfers grew from 251 in 1999 to 711 in 2002.

"The actual number of problems is certainly far higher," OCC spokesman Bob Garsson told the Times, noting that few bank customers are aware of the agency's consumer complaint division.

According to the Times, the OCC advised banks in late 2001 that it was concerned that some were rejecting claims of ATM fraud because customers could not provide evidence that their debit cards or PINs had been "misappropriated."

Triple DES trials

Triple DES continued to be a major issue for U.S. ATM deployers even as deadlines for compliance were modified. As some deployers began upgrading their machines to meet MasterCard's April 1, 2005 deadline, several networks including Pulse and Star obtained variances from MasterCard on behalf of their members that extended the deadlines to Dec. 31, 2005.

Visa in early summer finally weighed in with a date, posting a notice on its Web site stating that: "Effective July 1, 2007, all ATMs should support TDES."

Alan Falconer, senior vice president of Paragon Data Services, an information technology and management consulting firm that is working with Pulse, Pacific Capital Bancorp and several other clients on Triple DES compliance and other issues, said it's not surprising that Visa would "soft pedal" at this point. "Everybody's already three-quarters of the way down the road," he said.

At the same time, Falconer said, Visa's extended date may be a "viable marketing ploy" for early-model ATMs, which some deployers may hesitate to upgrade or replace until a better business case comes along.

Visa also announced a new requirement: EPPs (Encrypting PIN pads) on all new ATMs must be evaluated by a Visa-recognized laboratory and approved by Visa, beginning in July of 2004.
While most in the industry lauded Visa's move to provide testing, some ATM manufacturers expressed concern that only three labs -- in California, Germany and the Netherlands -- had been approved. Visa was reportedly evaluating several other labs, including facilities in Canada, Singapore and Australia.

Several companies, including The ATM Exchange, Pi Systems, WRG Services and GTI, introduced products designed to make such popular ATM models as Triton's 9500, NCR's 5000 series and Diebold's 1060 and early 1000 series capable of running Triple DES. The companies said deployers were looking for alternatives after vendors announced they wouldn't provide upgrades for these early ATM models.

Feeling the functionality

Much of the activity to offer advanced functionality, as in 2002, occurred at non-bank ATMs. A number of ISOs offered CashWorks check cashing -- which involves approving a check cashing transaction at a point-of-sale terminal and dispensing the funds from an ATM. Ken Rees, president of CashWorks, said in August that the service was being offered at more than 500 retail locations.

Tidel, Triton, Tranax Technologies and NexTran all have signed agreements to offer CashWorks. The majority of "live" CashWorks ATMs in 2003 were Tidels, Rees said.

Ron Ferguson, executive vice president of transaction provider Euronet Worldwide, said PaySpot prepaid phone top-ups were offered on about 50 Triton ATMs in August, with more transaction processors and ATM manufacturers certifying the service. Euronet had signed contracts with 25 ISOs, with some 25,000 machines between them, to offer PaySpot top-ups.

Prepaid phone top-ups provided by bcgi were available on another 250 ATMs in August. The company provided the service for E*Trade Access and for deployers participating in NCR's iATMglobal program. James Anderson, bcgi's vice president of Payment Services, predicted in October that prepaid top-ups would begin to really take off when financial institutions began offering them.

Prepaid customers are more likely to seek out services if they know they can find them at "any Bank X" ATM, Anderson said. In contrast, few if any ISOs have the necessary scope of coverage with a single retail chain. He said bcgi's deal to integrate its ATM Recharge interface with ACI Worldwide's BASE24 software will bring more banks on board.

Eight deployers, including one financial institution, offered iATMglobal services in August, according to Robb Straub, head of iATMglobal. In addition to prepaid phone top-ups through bcgi, the services included prepaid long distance through Radiant Technologies and MCI WorldCom; online movie tickets through; online flower sales through Flowers USA; and sales of CDs, gift certificates and other products through Sony Music.

Straub expected to sign contracts with two more ATM deployers, including another bank, by the end of the summer.

Retail chain 7-Eleven expanded its network of Vcom kiosks to 1,000 machines and added several new transactions, including online shopping from companies including;; TopWeb, which sells books and video games; and Universal Tickets Inc., which sells golf outing packages.

Not quiet on the bank front

All was not quiet on the advanced functionality front when it came to financial institutions. By 2003's third quarter, FleetBoston Financial offered bill payment on 75 ATMs in New York and Boston. Jim D'Aprile, Fleet's vice president of Self-Service/ATM Banking, said Fleet planned to eventually expand the service to more of its 3,600 ATMs, after it got a better sense of customer usage.

Facilitated by NCR's APTRA Edge software, Fleet ran the application on both NCR and Diebold machines. The use of XFS-based software -- such as APTRA, Diebold's Agilis, Wincor Nixdorf's ProTopas and Fujitsu's Prism -- combined with an increased migration from the OS/2 operating system to Microsoft's Windows, will make it easier for deployers to offer non-traditional ATM transactions.

Some financial institutions appeared interested in adopting check imaging technologies at ATMs, particularly after the October passage of Check 21, a piece of legislation that will allow "substitute" checks created with digital images to be substituted for the real thing.

Several institutions conducted imaging pilots. Perhaps most ambitious, Bank One in 2003's first quarter linked a handful of ATMs equipped with imaging technology to a back-office check processing system.

Bank One cited gains in efficiency, as back office workers could use images to begin processing checks rather than waiting for them to be gathered from ATMs. They also used the images to begin reviewing checks for fraud indicators, such as unusually large deposits or suspicious accounts.

Nova Savings Bank in August installed a Fujitsu ATM on the Villanova University campus that offers automated dispensation of basketball tickets to students. Using a software application called Prism 1:1, Nova also plans to allow students to create personalized banking transactions, selecting preferred withdrawal amounts, paper or e-mail receipts and other options.

Brian Hartline, the bank's president and chief executive, said advanced ATM technology offered an effective way for his $330 million financial institution to compete with bigger banks.

What's your sign? For sale

Merger and acquisition activity, fairly heated in 2002, got even hotter in 2003. With organic growth on the decline, a number of ISO-managed ATM portfolios changed hands. One of 2002's biggest buyers, eFunds, abstained from any deals this year. Yet several others -- notably Cardtronics, E*Trade and Innovus -- opened their checkbooks.

E*Trade purchased 4,000 ATM contracts from XtraCash ATM in February when that once-dominant ISO dissolved its business.

Cardtronics, an acquirer in 2001 and 2002, also purchased some 900 ATM contracts from XtraCash in February. Cardtronics' buying spree also included 22 shopping mall locations from CenterCourt Cash, 1,100 sites from National Bank Equipment and -- its largest acquisition yet -- 1,704 ATMs and related contracts from American Express.

Innovus purchased the businesses of Momentum Cash Systems in January and Heartland Cash Network earlier this month. Innovus also entered into a partnership with a major Northeastern bank to take over some of its contracts in shopping malls across the country.

< _IMAGE _ >

< _IMAGE _ >The best decision ATMIA made was to initiate the formation of the Global ATM Security Alliance. GASA has already made an impact by producing international cardholder security tips, as well as draft best practice manuals for ATM physical and transactional security and PIN and encryption security.< _IMAGE _ >

-- Mike Lee,
International Director,
ATM Industry Association

Internet bank NetBank in October purchased FTI in a deal that both parties said would help NetBank win more commercial bank accounts.

"Tommy (Glenn, FTI's CEO) can provide one of the most attractive components for a small business owner, an ATM. Along with that, they can get credit and debit card acceptance, pre-paid cards and any number of other neat things," said Douglas Freeman, NetBank's chairman and chief executive. "We'll be able to offer them anything they can get through their local bank or anything they can dream up, within reason."

International acquisition activity

ISO merger activity was not confined to the U.S. UK independent Cardpoint purchased the ATM businesses of two rivals, Green Machine and Securicor, paying a combined total of some 11.2 million, with possible future payments of up to 5 million. Cardpoint in 2002 raised 2.5 million through an institutional placement and also listed its shares on the UK's Alternative Investment Market (AIM), which allowed it to use a 3 million debt facility from its lender, Halifax Bank of Scotland.

In Australia, Bank of Queensland (BOQ) in June purchased the remaining 90 percent stake in independent ATM Solutions Australasia for $16.2 million (U.S. $11.9 million). According to an Asian Banker report, the deal will allow BOQ to better compete with Australia's big four banks -- Commonwealth Bank of Australia, Westpac, ANZ and National Australia Bank -- which dominate the country's ATM landscape.

Cashcard, the country's largest ATM deployer with some 5,000 machines, in June inked a deal to buy rival Direct Cash for $30 million (U.S. $22.1 million). Cashcard in late 2002 paid $32 million (U.S. $23.6 million) for another deployer, Electronic Banking Systems. Earlier this month, Cashcard itself became an acquisition target for global payments company First Data.

Most dramatic deal

Without a doubt, the most dramatic deal of 2003 was First Data's bid to buy rival transaction processor Concord EFS. Shortly after First Data announced its intentions in April, the proposed acquisition earned the attention of the Department of Justice, which expressed concern over the merged company's share of the PIN-based debit market, which industry analysts estimated at about 70 percent.

Though First Data had expected the deal to close in the second half of 2003, the DOJ had other ideas. In October, the DOJ sued to block the merger, contending the deal would substantially reduce competition in the EFT industry. Of particular concern was the possible combination of Star, owned by Concord, and First Data's 64 percent stake in NYCE.

"If allowed to proceed, this merger of two of the three largest PIN debit networks will lead to higher prices to merchants, forcing them to pass on those price increases to many consumers throughout the United States in the form of higher prices for general merchandise," said R. Hewitt Pate, assistant attorney general for the Justice Department's antitrust division, in a statement.

Eight states and the District of Columbia joined the DOJ in the suit.

U.S. District Court Judge Rosemary Collyer in late October fast tracked the case, ruling that a hearing on the government's motion for a preliminary injunction would be consolidated with a trial on the merits. According to published reports, the DOJ on Dec. 11 -- just three days before the trial was to begin -- rejected First Data's offer to divest part of its stake in NYCE.

First Data and Concord on Dec. 15 announced a deal that would allow the merger to move forward. A key part of the proposed agreement called for First Data to totally divest its 64 percent ownership of NYCE. First Data agreed to hold NYCE as a separate unit pending the divestiture.

The financial terms also changed. The two companies agreed to a new, slightly lower value of approximately $6.9 billion, based on First Data's closing price of $39.30 on Dec. 12. The revised agreement also extended the original Jan. 31, 2004 end date to April 30, 2004 to allow sufficient time to obtain the necessary shareholder approvals of the revised terms.

With the First Data/Concord deal back on track, it's bound to become one of the biggest stories of 2004. What else does the future hold? Stay tuned.

More decisions

When ATMmarketplace asked industry movers and shakers to share their best decisions of 2003, we got some interesting responses:

eFunds Corporation: "Hands-down the best decision I made in 2003 was structuring the
organization to create greater focus on key retailers and financial institutions. Through hiring direct reports with expertise in both the banking and ISO industries, as well as putting key sales people in place, we built a foundation for a new organization: an ATM management company." Kevin Reager, SVP and Division Executive, ATM Division

Hanco ATM Systems: "The best decision that I made in 2003 was both personal and professional -- deciding to join the (Hanco) earlier in the year. Having worked in sales throughout my career, I was privileged to join the Hanco team and experience the fascinating and challenging ATM market which has gripped the UK." Rob Grouse, managing director

Innobeta: "My best business decision in 2003 was to launch our Master Distributor program. When you're a young company like we are, the temptation is to develop as many channels as possible. But the cost of maintaining those channels is pretty substantial. We decided to cut back and help develop our core strategic partners who could grow with us. Our key strategic partners have helped us move product into all major markets. We reduced distribution costs and increased our market penetration." Eric Park, chief financial officer

ATM Solutions Australasia: "To create a good business you need to make a profit every day, have happy customers and have contented staff." Tim Wildash, managing director

Posted by Craig at December 31, 2003 04:26 PM