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Staying Current – ATMs in the Era of Non-cash Payments

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WHITEPAPER

Transforming the World Through Quality

Authors: Sudha Kiran Pentela Principal Consultant

V.S. Subrahmaniyan Senior Functional Analyst

Raji Thanigaivasan Project Manager

SQS India BFSI Ltd.

Published: September 2016

http://www.sqs.com

Staying Current – ATMs in the Era of Non-cash Payments 2

SUDHA KIRAN PENTELA Principal Consultant [email protected]

Sudha Kiran Pentela has been with SQS since 2001. He is the Principal Consultant in the Cards and Payments practice, handling various aspects of functional consulting, delivery and pre-sales. He has supported global 500 majors in cards and payment processing such as Barclays, Lloyds Banking Group, Morgan Stanley, GE Money (Germany, Denmark, Switzerland, Russia, UK and Singapore), First Data (Singapore, Australia, Europe and Americas) and TSYS. Sudha Kiran is based out of Chennai and holds a bachelor’s degree in Mechanical Engineering from JNTU College of Engineering, Hyderabad.

V.S. SUBRAHMANIYANSenior Functional [email protected]

Subrahmaniyan is a competent professional with more than 14 years of extensive experience in business analysis, quality assurance, software testing, project management and team management. Senior Functional Analyst in the Cards and Payments practice, he handles various aspects of delivery and pre-sales. He has spearheaded various system integration, user acceptance and data migration testing projects for global 500 majors in the area of Cards and Payments. Prior to joining SQS he worked with global banks including American Express. Subrahmaniyan is based out of Chennai and holds a bachelor’s degree in Mathematics from Madras University.


RAJI THANIGAIVASANProject [email protected]

Raji Thanigaivasan holds a master’s degree in Computer Appliances and has been with SQS since 2002. Project Manager in the Cards and Payments practice, her core competencies include test management consulting, pre-sales, strategising and implementing innovative solutions for faster, better and smarter testing. She works with global clients including Morgan Stanley (UK), GE (India and UK), State Bank of India, Lloyds Bank, NewDay (UK), Citibank (UK), SAIC (US) and leading payment processors First Data, TSYS (Europe) and WorldPay SecureNet payment system (US).

The authors would like to thank Smitha Rao VN

for her support in preparing this paper.


Contents

Management summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Keywords. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Introduction – to cash or not to cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Market analysis – ATM evolution and market trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Evolution of ATMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Trends in the ATM market place . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Innovations, emerging risks and risk mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ATM innovations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Emerging technological risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

ATM testing: integral to risk mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Conclusion and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

What does the future hold for ATMs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14


Management summary

Even as the Automated Teller Machine (ATM) celebrates its 50th anniversary in 2017, its future is called into question with numerous initiatives across the globe encouraging non-cash payments and a growing vision of ‘cashless’ societies. Not-withstanding the predictions of cash doomsayers, trends still point towards the persistence of cash, and cash transactions still dwarf non-cash trans-actions. Plus, the ATM market is firmly poised for growth.

Affected by digital transformation and disruption, the ATM manufacturers are looking at redesigning and reinventing themselves to stay relevant in the era of non-cash payments. Thus today’s ATMs not only dispense cash but also offer numerous value-added services (one count puts these at 200), some of which appear interesting and unusual.

With the architectural transformation from being a fat client to being a smart client/channel manager and with the innovative offerings available, ATM manufacturers are moving away from hardware-centric to software- and services-centric models. These changes in turn give rise to certain techno-logical risks that need to be adequately addressed. Given such a transformational churn, ATM testing assumes a particular significance due to its com-plexity and its emergence as an important channel.

This whitepaper aims to discuss

• ATM Evolution and Market Trends

• Innovations and Emerging Technology Risks

• ATM Testing Considerations

Keywords

DIGITAL TRANSFORMATION CASH PAYMENTS

ATM MARKET ATM TRENDS


Introduction – to cash or not to cash

Time present and time past Are both perhaps present in time future And time future contained in time past

TS Eliot

The year 2017 marks the 50th anniversary of the Automated Teller Machine or ATM. With the growing vision in many countries of a future ‘cashless society’, questions invariably arise about the future of the ATM. The World Payment Report 2015 indicated that global non-cash payments reached a growth rate of 7.6 % in 2013 with the

fastest rate recorded in emerging Asia at 21.6 %. Non-cash payments consistently grew across all markets.

Even as the global volume of non-cash payments continues to grow, transactions conducted in cash still dwarf non-cash transactions. This is true of even the most mature economies like the USA and the Euro zone. United States Federal Reserve data finds cash to be the most used retail payment instrument, at 40 % of all con-sumer transaction activity [1]. Figure 1 depicts consumer expenditure (year 2014) by payment type – card, cash and others.

Figure 1: Consumer expenditure by payment type – 2014 [2]

Share of total expenditure

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Globally it is estimated that $ 21 trillion, or 43 %, of consumer payment transactions are still conducted with cash, and an estimated 357 billion banknotes are in circulation [3], with about 150 billion notes being printed every year to replace those taken out of circulation. The average annual growth rate of cash in circulation is more than three times higher than the average global economic growth; that is, cash demand is increasing more than three times faster than economic growth rates [4]. ATM cash withdrawals are expected to grow by 50 %, increasing from 92 billion in 2014 to 128 billion by 2020 [5]. Without a doubt, cash continues to persist in the world of payments.

By 2020, another million ATMs will be installed, raising the total to 4 million. The ATM market is projected [6] to see 37 % growth in ATM installations between 2014 and 2020. With the

persistence of cash, the ATM remains a vital touch point between banks and their customers. While banks in emerging markets spread their networks and add features, advanced ATMs are seen as a cheaper alternative to branches in developed markets. Thus ATM as a delivery channel is assuming greater significance. The ATM industry is also affected by digital disruption and is undergoing a churn. The ATM manufacturers are looking at redesigning and reinventing themselves to stay relevant in the era of non-cash payments.

Given the significant transformation of the ATM, no other channel is able to match the breadth of services it can offer. As user experience and security of transactions and data take centre stage, it becomes critical for us to understand the ATM market trends and the emerging threats in order to mitigate the potential quality risks.

Market analysis – ATM evolution and market trends

Evolution of ATMs

From originally being a purely cash-dispensing service, ATMs have significantly evolved to offer a wide range of financial services – depositing cash and cheques, paying bills, mobile phone top-ups, dispensing postage stamps, ticketing, loans, investments, IPOs, purchase of insurance premiums, amongst others.

Some interesting services available at ATMs include offering sacrificial goats (Indonesia), dispensing gold (UAE), funeral plans (South Africa) and even cashing in / cashing out virtual currency Bitcoin.

The number of ATM value-added services around the world is estimated to be 200 [6].

The evolution of ATMs over the last fifty years is depicted in Figure 2.


Figure 2: Evolution of ATMs

Number of ATMs 2009 – 2020 [7]

4 millions

3 millions

2 millions

1 million

02009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

• ‘Envelope-free’ deposits• Mini-statements• Bill payments

• Revised ADA requirements• Condition monitoring• Diagnostic capabilities

• Multi-channel capabilities• Convergence with mobile solutions & channels• Increased access to pre-paid cards• Prestaging of ATM withdrawals with QR codes• P2P, A2A, EMV, iBeacon, NFC etc.• MonRo (Money Robot): currency exchange;

vending machine; safe deposit boxes; storage and retrieval services; and coin and gold bullion

2005 – 2009Early intelligent deposit ATMs

2010 – 2013Advanced intelligent deposit ATMs

2014 – 2018Next generation ATMs

• Cash withdrawal • Account balance • Envelope based deposits

1960s – 1980sFirst generation ATMs • Dispense transit tickets

• Mobile phone top-off• Increased features with

ADA (American with Disabilities Act)

1990s – 2004Second generation ATMs


Trends in the ATM market place

With their evolution and ability to offer wide-ranging services, plus their pre-eminence as a key customer facing channel, ATMs are now witnessing an archi-tectural transition from once being a fat client to becoming a smart client. In this context, it is vital to understand the market trends in terms of its growth, key players, their strategies and the key factors influencing the market and its transition.

Deployment growth

The ‘Global ATM Market and Forecasts to 2018’ by the London-based firm RBR, indicates the following trends in the growth of ATMs across regions:

• Asia-Pacific: 13 % China has now overtaken the U.S. as the world’s largest market with an installed base surpassing 400,000, while the Indian market expanded by a huge 44 %.

• Middle East & Africa: 12 %

• Central and Eastern Europe: 11 %

• Latin America: 5 % (driven mainly by Brazil)

• Even in the mature markets like Western Europe and North America, which registered low growth, there is still a significant demand for new ATMs – primarily as replacements for existing terminals

• A new ATM is added to the global installed base virtually every three minutes [8]

ATM market players and their share

The ATM market place has been dominated by the ‘Big Three’ – NCR, Diebold and Wincor – for a long time. Together they hold 61 % of the market share,

but that is changing. Despite strong shipment figures, U.S. firms NCR and Diebold and Germany’s Wincor Nixdorf are gradually losing installed base market share to their Asian rivals – Nautilus Hyosung (South Korea), Hitachi-Omron and OKI (Japan) and GRG (China). These challengers are focusing on specific segments such as low cost cash dispensers, and specific functions including cash recycling and domestic markets (Figure 3).

Figure 3: Manufacturers’ share of global ATM installed base as of 12/31/14 [9]

Moving away from hardware-centric strategies

The recent past saw NCR taking up a series of acquisitions:

• Transoft (enterprise cash management software solution)

• UGenius Technology (video banking software)

• Alaric Systems (transaction switching and fraud prevention software for $ 84 million), and

• Digital Insight (online and mobile banking solution, for $ 1.65 billion)

NCR

27 %16 %

17 %

17 %

9 %

6 %3.0 m ATMs

Diebold

Wincor Nixdorf

Nautilus Hyosung

Hitachi- Omron

GRG (4 %)

Others

OKI (5 %)


On the other hand, Diebold agreed to buy German rival Wincor Nixdorf AG for around € 1.8 billion, thus creating the largest manufacturer of cash machines.

These acquisitions should be seen as part of the ATM industry’s shift from hardware-centric into the software-and services-centric [10] fields.

ATMs and branch transformation

The ATM market is also influenced by branch transformation initiatives by the banks. The ATM is now considered to be an integral part of the omni-channel strategy. ATMs and other self-service devices play a key role in empowering the reinvented branch. Deposit automation is a key example of this transformation. New machines deployed by UBS in Switzerland allow people to open bank accounts, and also give out brand new debit cards. These new machines can do 95 % of what a human teller can do.

Multi-vendor ATM software

Until a decade ago, ATM hardware and software were delivered as a package. That is now changing with banks looking to bring down operational costs through multivendor software (software that can run ATMs from different manufacturers). Multivendor software was running on 28 % of ATMs worldwide in 2012 (RBR). Between 2007 and 2012, the market for multivendor software more than doubled and RBR forecasts it will grow another 75 % by 2017. All regions are seeing a huge growth in demand for multivendor ATM software.

EMV deployment

As the payment infrastructure in the USA moves towards EMV, MasterCard and VISA have announced ATM liability shift timelines as at October 2016 and October 2017 respectively. As the second largest ATM market with more than 360,000 ATMs the EMV upgrade costs are estimated to be significant. Fiserv estimates the upgrade cost to vary from $ 2000 to $ 5000 per device; Javelin projected the ATM upgrade cost at $ 500 million. In India, the fast growing market for ATMs, the central bank has issued a bulletin advising the banks to enable their ATM fleets for EMV chip and pin cards before Oct 2017.

ATM outsourcing & pooling

As the ATM is a capital intensive channel, operating ATMs becomes an expensive proposition for banks. The total cost of operating a high-transacting full function ATM can reach € 20,000 per annum per ATM according to First Data. Financial crisis and digital disruption are forcing banks to optimise costs through outsourcing. It is estimated that the banks in the US could save almost 20 % on their direct costs per month per ATM by outsourcing to a third-party managed services provider. Thus the ATM market is witnessing a growing trend towards outsourcing. The concept of ATM Pooling, where two or more banks share their ATM infrastructure, is also gaining ground in Northern and Central Europe.


Innovations, emerging risks and risk mitigation

ATM innovations

The world of ATM banking is undergoing huge changes, with mobile payment methods and card-less technologies taking charge. Leading players like NCR and Diebold are redesigning their ATMs to keep pace with the changing needs and services. NCR has come up with innovations such as the screen free Cash Barrel for cash withdrawal, Tower with no interface console and Motion Sensor which offers a touchless interface. Not to be outdone, Diebold has unveiled its Janus dual-sided self-service channel.

Other innovations in the ATMs include:

• Cash recycling: This enables an ATM to accept, validate, sort and store banknotes. It is estimated that banks can save 40 to 66 % on cash-handling costs through cash-recycling ATMs. Cash recy-cling is fast becoming a norm across markets.

• Talking ATMs: Speech capability for visually challenged customers.

• Video ATMs enable customers to interact visu-ally on an ATM with ‘live’ bank tellers in remote locations.

• Smart ATMs provide cardless access to ATM services and could use biometric authentication. These ATMs can also memorise consumer preferences based on past transactions and behaviour, and thus tailor their services.

• Multi-channel solutions like NCR Connections which is based on modern web technology and can be easily integrated into a variety of physical and digital channels (ATM, Kiosk, Tablet, Web etc.).

• ATMs with cloud-based machine learning services and tools help organisations trans-form their connected assets and the data they produce into business intelligence, for example, Diebold has partnered with Microsoft to use the Cortana Analytics Suite.

• Automated bank branch ATMs: There are on-going efforts to integrate robotics and artificial intelligence systems into self-service banking. MonRo (money robot), a self-service robotic system, provides an imaginative hybrid of an ATM – currency exchange, vending machine, safe deposit boxes, storage and retrieval ser-vices, and coin and gold bullion [11].

• Beacon-enabled ATMs allow customers to access ATM lobbies without the need for a card. The beacons are also used to send personalised, location-based messages to customers.

Emerging technological risks

While the technological advancements are innovative and user-friendly, they also bring numerous risks and challenges.

• The cardless ATMs make it easy for hackers to disrupt the process and leave users vulnerable to data theft.

• The growing trend for mobile payment methods at ATMs increases the risk of fraud, as it is common for users to lose or misplace their phones.

• Biometric technologies raise the issue of accuracy, resulting in annoyance and difficulty for customers.


• Security concerns are increasing with the rise of ATM crime involving physical, logical and fraud attacks. ‘Black Box ATM attacks’ and ATM ‘malware’ attacks are increasing whilst ATM skimming remains a bigger issue still.

◦ In a Black Box attack, criminals cut holes into the fascia or top of the ATM to gain access to its internal infrastructure. From there, the ATM’s cash dispenser is disconnected and attached to an external electronic device - the so-called black box. The box then sends commands to dispense cash.

◦ ATM malware (examples Skimer, Ploutus, Padpin, Suceful, GreenDispenser, NeoPocket, Tyupkin) allows criminals to identify the amount in each cash cassette and manipulate the machine to dispense it.

On 15 May 2016, around $ 13 million was reportedly stolen from 1400 ATMs in Japan, involving 14,000 withdrawals and 1600 counter- feit cards and affecting a South African Bank. The heist was carried out in just 3 hours. In a similar incident, thieves stole $ 9.4 million from the US payment processing wing of a UK bank. This involved 2100 ATMs in 280 cities in eight countries — and took just 12 hours.

ATM testing: integral to risk mitigation

As ATMs evolve into an important channel and a vital touch point between financial institutions and customers, ATM testing assumes a greater significance. According to ATM Marketplace, financial institutions can gain up to 80 % in cost- and time-savings through effective ATM testing.

Apart from the features and services offered by the ATM, the integration of ATMs with Switch, payment gateways and banking applications needs to be thoroughly tested at different levels. This will involve ATM application configurations, test data and test plastics, ATMs and peripherals, device simulations, host connections, network and terminal integration certifications and security controls similar to the live environment where they are deployed.

Typical ATM application functional testing needs to consider:

• ATM screen navigations from screen to screen based on menu selection

• Communications with the host, messages sent to and received from the host

• Communication with the other servers used for management of the ATM network, process-ing cheques, advertisement management and personalisation

• Screens for correct placement of graphics including the text

• Voice guidance for each screen as well as the voice guidance help function, including the instructions that change for each ATM model

• Transactions coverage with and without receipts

• Verification of receipts

• ATM internal logs, journals

• All activities used to service the ATM tasks such as adding cash and settling

• Application response to possible hardware or communication errors

• Handling of errors such as inserting wrong media, incorrect PIN entry or insufficient funds, insertion of fake or torn currency notes, etc.

• Negative tests involving failures at ATM device level, network level and host level


As banks deploy ATMs from different vendors and ATMs with varying capabilities (standalone, two-in-one and three-in-one ATMs), these tests will need to be repeated numerous times across different machines involving multiple vendors. While ATM emulators and simulators reduce the dependency on physical ATM devices for testing to a large extent, certain tests still need to be performed with physical devices. With the abundance of complexities and challenges involved in the deployment and addition of new features and functionalities, industrialised ATM testing is a pressing need. User experience and security testing will now assume a greater significance in the ATM testing strategy. With the mandated EMV implementation in key markets like the US and India, EMV certification testing will be necessary for deployment.

A snapshot of SQS’ track record in ATM testing is depicted in Figure 4.

• 2-in-1 ATMs• 3-in-1 ATMs• Configuration file and screen flows• Network management tests• ATM driving and device behaviour• ATM behavior for various transaction types • EMV offline and online tests• Error handling and recovery• ATM monitoring• Receipts and reports

Terminals• NCR• Diebold• Wincor• Hitachi

Types of testing• Functional• Certification

(TIP, ADVT)• Performance

Networks• MasterCard• VISA• AMEX• UAE Switch,

OmanNet

Tools used• ASSET• LEXCEL• FinSim• Paragon• Simplicity• ASTREX

• 4 leading banks in UAE• A financial service provider in Oman• One of the largest banks in India• Leading issuer and acquirer in Middle East• Global payments processor in Australia• A leading bank in South Africa

Key functions

Track record

Figure 4: SQS’ track record in ATM testing


Conclusion and outlook

What does the future hold for ATMs?

As the question of the future of ATMs is being dis-cussed, we are reminded of Arnold Schwarzenegger’s words in Terminator Genisys: “I’m old, not obsolete.” ATMs are evolving, adapting and reinventing them-selves to meet the requirements of financial services in a digital environment. Notwithstanding the predictions of cash doomsayers, ATMs are going to remain an important channel. Furthermore they needn’t necessarily be dispensing cash at all times. To paraphrase Mike Lee, CEO of ATM Industry Association, ATM devices will be:

• Where digital money meets cash

• Where high tech meets high touch

• Where bank meets customer

• Where high tech meets high street

• Where banking channels meet and converge; and finally

• Where past meets future [12]

The ATM market is marching towards software- and services-centric strategies, a multivendor environment, technological innovations and a role as a self-service channel amidst the digital transformation. An effective ATM testing strategy should not only look at the omni-channel user experience as the focal point, but should also consider security features to safeguard against increasing fraud. The addition of newer functionalities and services and newer fleet should be adequately tested, without an exponential rise in costs. Testing should also take into account the emerging technological risks. Thus, industrialised ATM testing should now become an integral part of the risk mitigation and quality assurance process.

References

[1] Barbara Bennett, Douglas Conover, Shaun O’Brien, Ross Advincula. Cash Continues to Play a Key Role in Consumer Spending: Evidence from the Diary of Consumer Payment Choice, April 2014.

[2] Euromonitor, Merchant Segment Study (9th Edition); 2014 forecast, based upon partial year data

[3] Perspectives on Accelerating Global Payment Acceptance, VISA Report, 2016

[4] Recent Global Cash Demand, October 2015, ATM Industry Association (ATMIA)

[5] http://www.atmmarketplace.com/articles/atmia-2016-the-evolving-future-of-the-atm/

[6] Ibid

[7] http://www.atmmarketplace.com/news/global-atm-count-forecast-to-reach-4m-within-5-years/

[8] 50th ATM Anniversary Fact Sheet - ATMIA

[9] Global ATM Market and Forecasts to 2020 (RBR)

[10] http://www.atmmarketplace.com/articles/how-does-the-diebold-wincor-deal-look-to-ncr/

[11] http://www.atmmarketplace.com/articles/meet-monro-the-money-robot/

[12] http://www.atmmarketplace.com/articles/atmia-2016-the-evolving-future-of-the-atm/


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