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TORONTO -- ATMs apparently know no boundaries. Like migrating birds pausing on a northward journey, they tend to perch where food--and cash-hungry consumers--abound.
Privately-owned ATMs, dubbed “white labels” by Canadians, appear as endemic as their American counterparts. Their installation in c-stores, g-stores and other retail locations in Canada mimics the early stages of off-premise deployment in the U.S. a few years ago.
In hopes of harvesting an eventual cash crop from their machines, independent owners brave a market plagued by high start-up costs and strong competition. No major cost-cutting breakthroughs seem imminent for at least a few years until demand for ATM services increases. Forecasters think this will draw the attention of American ATM management companies, manufacturers, servicers, and vault cash suppliers.
In the meantime, however, consumers, c-stores, manufacturers and parts suppliers will all enjoy the benefits of an open marketplace, albeit an expensive one.
"Currently there is a great deal of competition for the independent market," said Patrick Foster, vice president of business development and electronic commerce solutions at CGI, a network services provider in Canada.
Originally, most people believed competition would make things more convenient for consumers and might have an impact on bank service charges, Foster said.
"There are more machines in interesting locations, however the price for these machines carries a surcharge and therefore the cost to the consumer goes up," he said.
Deregulation promises to revitalize an industry whose growth rate peaked several years ago, said Frank Helt, president of ABM Direct. ATM manufacturers, contracting firms and supply and parts distributors will all see an immediate windfall as the bravest independent ATM owners jump into the market.
An open market
Automated banking machines, or ABMs, first appeared in Canada in 1972. Eight years later they began spreading when financial institutions started developing their own retail delivery networks.
In 1984, five of Canada’s largest banks combined their ATM networks to forge a national system called the Interac Association. Since most of Canada’s financial institutions served customers across the country, this new allegiance gave consumers easy access to their money at any ATM bearing an Interac logo. By 1986, the association had grown to ten members.
“During the past 13 years, the system grew to include institutions of all sizes and encompassed 97% of Canadian ATMs,” said Vincent Bordenca, executive vice president for strategic planning with Meta-4, a business networks solutions company. Many of the smaller institutions joined in order to offer their services on a national level. A small bank with one branch could now use the shared services to allow its cardholders access to all ATMs and POS terminals in the Interac network.
According to Mary Beggan, Interac’s marketing manager, the association now includes 20,354 units and is one of the world's most successful point-of-sale networks.
In a separate statement provided by the association, Interac’s 330,000 debit terminals conduct over 1 billion transactions annually, and in five years Interac’s Direct Payment transactions have reached and should soon surpass the combined volume of Visa and MasterCard in Canada.
Members pay no service access or license fees when they join. They pay only a per transaction fee, which is the same for all members regardless of transaction volume.
Interac members originally ruled that only financial institutions could be members, and this lock-out existed until November of 1996, when the Bureau of Competition Policy and Interac negotiated an agreement and jointly presented it to an independent tribunal body for ratification and approval. A consent order was declared that opened the network to other types of organizations who wanted to join or affiliate with Interac. Independent ATM owners could now freely pursue the Canadian market.
According to Ginny Dennehy, a spokesperson for IBM, "The major limiting factor now is the ability to provide settlement systems, access and liability. Members without these factors typically sub to a major financial institution."
Since then, Canadian casinos, bars and retail stores have attracted widespread ATM deployment, bearing out the symbiotic relationship of location convenience and transaction volume. But it also brought in surcharges, which the original Interac members did not allow.
"This led financial institutions to deploy more off-premise ABMs and allow internal charges where appropriate," Foster said. "In return, there was an interchange fee that was charged amongst the members that each could pass along to their customers as they saw fit."
To date, only one institution--a credit union serving the Toronto Transit Union workers--openly surcharges its customers.
But since independent ATM owners generate most of their operating revenue form the surcharge, the fee should continue to proliferate as white label networks expand. Beggan reports a handful of third-party processors have joined the Interac association.
Consumer impact
It’s too early to gauge the independent owners’ real success, but their revenue streams should grow with the industry’s deployment momentum, Foster said.
"Because the market is so immature, where the profit will go--and how much is available--is still not known," he said. "As well, the consumer has not reacted to surcharging because it is not very prevalent and they still have significant options to avoid this charge."
U.S. consumer groups and politicians like Senator D’Amato continue to resist surcharging, but independent owners have attempted to blunt the surcharge’s impact on consumers’ wallets by offering coupons for other services and discounts. This added-value tactic is already catching on in Canada.
The market itself is changing rapidly, especially in the private sector, IBM’s Dennehy said.
"There is a major transition happening in the ATM marketplace that is spreading to our country," Dennehy said. "It is shifting from the traditional bank-based electronic ATM delivery to private label ATMs providing either stand-alone cash services or non-financial retail banking services.”
Dennehy stressed that Canadian consumers realize they can access their cash in an increasing number of locations. "Soon the consumer will benefit further through more advanced functions such as greater content, targeted marketing and links to other services such as ticket purchases."
ABM Direct’s Helt said consumers will have better access in locales where financial institutions would never consider placing an ATM, including convenience stores, restaurants and night clubs--even school cafeterias.
"This convenience, not unlike the introduction of the pay telephone, will directly benefit the consumers and allow the industry to thrive," Helt said.
Many deployers who fear an approaching ATM saturation point in the United States need only look to the north. This new land of opportunity offers thousands of potential ATM sites, but the frontier, warned Helt, won’t remain uncharted for too much longer. ••
Care to comment on this story? Or would you like more information on the Canadian ATM market? Click here to go to the message boards. Any questions will be answered in this open-forum area.
Rodica Tessier is president of Advanced Computer Parts Services, located in Ontario, Canada. Her company provides training, parts, and whole unit support for NCR and Diebold/IBM/Interbold ATMs. She can be reached by phone at (905) 415-8481, fax (905) 415-8634, or via e-mail at rodicat@idirect.ca.
Sources:
> Patrick Foster can be reached at CGI, phone (905) 821-2252, fax (905) 858-7171, e-mail patrick.foster@cgi.ca.
> Ginny Dennehy can be reached at IBM Customer Service headquarters, phone (604) 938-3110, fax (604) 938-1553, e-mail gdennehy@ca.ibm.com.
> Vincent Bordenca can be reached at Meta-4, phone (905) 709-2446 ext 230, fax (905) 709-4294, Web site www.expresscashteller.com.
> Frank Helt can be reached at ABM Direct, phone (905) 627-5757, fax (905) 525-9602, Web site at www.abmdirect.com.
> Mary Beggan, Interac’s marketing manager, can be reached at (416) 362-8550, fax (416) 869-5080, Web site www.Interac.org.
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November 30, 2004 at 09:24 PM in Financial Services | Permalink | TrackBack (83) | Top of page | Blog Home
ast Updated Mon May 27 15:19:35 2002
OTTAWA-- No-name, or white-label banking machines, may be charging even more per transaction after July 1. The federal government plans to levy the GST on all transaction fees at privately owned automated banking machines (ABMs).
"The Interchange Fee is a financial transaction, it's supposed to be GST-exempt," Mischa Weisz, president of TNS Smart Network, told CBC News Online. TNS is the largest white-label company in Canada.
"(The) interchange, like surcharges, should be exempt from any taxation."
* MARKETPLACE: ATM Fees
* MARKETPLACE: White Label ATMs
The Interchange fee is the amount a bank pays out to allow their cardholder to use a machine that's not their own. In other words, the banks pay 75 cents per transaction to the white-label companies and that's the amount the GST will be charged on.
Weisz predicts consumers will be hit by higher surcharges by the banks for their transactions.
"The consumer will pay more for access to funds from their own banking accounts."
White-label machines came on the market in 1996, when the federal government lifted restrictions on who could provide ABM service. Some are even owned by chartered banks.
* FROM MARCH 5, 2002: Watchdog warns of high fees at independent bank machines
White-label ABMs constitute a third of the 35,000 bank machines in Canada. They charge anywhere from 95 cents to several dollars per withdrawal. Many exist in gas bars or convenience stores.
With white-label machines consumers actually pay twice: an Interac fee that goes to the bank and then another fee, typically $1.50, shared by the retailer and the machine provider.
Bar owners and retailers like ABMs not only because they get a cut of the surcharge, but the machines draw customers and encourage spending.
* FROM NOV. 19, 2001: Debit machines charging extra fees
White-label machines are unregulated. Some of them have signs saying "Use At Your Own Risk."
Consumer groups have been lobbying to have more restrictions put on white-label machines. They'd like to see Interac involved.
Interac operates and regulates the network that connects ABMs to the banks, but it doesn't require the white-label operators to be Interac members.
Michael Janigan of the Public Interest Advocacy Centre says the no-name machines are gouging consumers.
Written by CBC News Online staff
Copyright 2004 Canadian Broadcasting Corporation - All Rights Reserved
November 30, 2004 at 09:23 PM in Financial Services | Permalink | TrackBack (21) | Top of page | Blog Home
Response to Finance Canada's Large Bank Mergers in Canada
December 2003
Introduction
Interac Association is pleased to provide this submission in response to the government’s invitation to comment on the financial sector issues identified in its response to the Parliamentary committees that studied large bank mergers and the public interest. While the government’s June 2003 consultation paper discussed several issues relating to the competitive landscape, our submission focuses on the issue of full functionality of automated banking machines (ABMs), in light of the significance of this issue to the Association and our members. As detailed in the government’s June report, the aim of full functionality would be to enable individuals and small businesses "to conduct the full range of banking activities (e.g. deposits, withdrawals, bill payments, etc.) at any banking machine of their choice, regardless of institution or location."
As a starting point, we would like to note that Interac Association does not maintain a position of support or opposition to the concept of full functionality at ABMs. Rather, we believe there are important issues of which the government should be aware. Taking consumer and business demand and costs into consideration, this submission will first look at whether a business case for full functionality exists. It will then examine the framework for new service development at ABMs, and whether there are public policy issues that the government needs to address.
Interac Association and the INTERAC® Shared Services
Interac Association is responsible for the development and operation of a Canada-wide network of two shared electronic financial services, Shared Cash Dispensing (SCD) at ABMs, and INTERAC Direct Payment (IDP) at the point of sale. Shared Cash Dispensing allows cardholders to make cash withdrawals from ABMs not belonging to their own financial institution, and INTERAC Direct Payment is Canada’s national debit service.
Founded in 1984 by five Canadian financial institutions, the Association currently has more than 100 member organizations. While the membership includes banks and other financial institutions traditionally associated with payment services, it also includes a broad array of non-financial enterprises, including technology and payment-related companies as well as one retailer. Striking the right balance between inter-member competition and network-level cooperation has helped make Canada a recognized world leader in consumer payment services.
As an organization that must continually balance the needs and interests of multiple stakeholders, Interac Association is in a unique position to address complex issues in the marketplace, including the issue of full functionality. We hope our comments will be helpful to the government as it considers issues affecting the competitiveness of the financial sector in Canada.
Key Issues
In examining the issue of ABM full functionality, it is important to determine whether the absence of full functionality represents a significant impediment to competition in Canada’s financial sector. In so doing, it is necessary to establish whether or not there is a business case justifying a move to full functionality and whether any such move would have a positive or negative impact on growth and innovation in the financial sector in Canada.
The issue of full functionality was examined by The Task Force on the Future of the Canadian Financial Services Sector headed by Harold MacKay, which stated the following in its recommendations:
The members of Interac should take the necessary steps so that the Interac network is fully functional to permit the network to be used for as many functions as the technology permits, including the making of deposits through any ATM to any participating deposit-taking institution.
The recommendation from the MacKay Task Force calls on the members of Interac Association, not government, to take steps to increase the functionality of the network. Importantly, while the House Finance Committee agreed with the Mackay Report’s recommendation in principle, the Committee expressed concern that full functionality would encourage greater use of paper transactions, thereby compromising the efficiency of the electronic payment system.
During the time of the MacKay Task Force’s work, Interac Association was actively examining whether there was a business case for the Association to offer expanded services, including a shared deposits service at ABMs. As reported to the Parliamentary committees that examined the MacKay Report’s recommendations, Interac Association did not find a business case that would justify adding these services. The reasons for this are explained below.
The Absence of a Viable Business Case
The potential market for shared deposits is small and shrinking. Paper-based payments are declining as Web banking and other alternative channels continue to grow. Further advances in the electronic delivery of financial services provide customers with greater convenience and more options in managing their finances, in turn reducing reliance on paper-based transactions. The growth of Web banking removes some of the competitive advantage that financial institutions with larger ABM networks might have over those with smaller networks by reducing the need for large investments in ABMs and the ongoing costs to service them.
The potential market for shared deposits is small and shrinking, as advances in electronic delivery channels provide consumers with greater convenience and reduce reliance on paper-based transactions.
This is illustrated by the example of ING Bank of Canada. In his opening statement to the Senate Banking Committee’s hearings into bank mergers and the public interest, Paul Bedbrook, President and Chief Executive Officer of ING Bank of Canada, noted that:
ING Bank of Canada is doing extremely well. We now have over 600,000 customers in Canada. We have over $8.5 billion in deposits. So far this year, we have over $3 billion in new deposits, second only to Bank of Montreal for growth of deposits in Canada this year. We feel that you can be competitive in this market and grow.
Later in his presentation, Mr. Bedbrook discussed ING’s decision to exit the ABM market:
We used to have a network of about 230 bank machines. We have just got out of that bank machine business…The economics of ABMs is deteriorating over time, as most bankers would know…We make the point in our submission that there is excess capacity, and this leads to inefficiencies, creating a larger infrastructure than is necessary, and a higher cost structure, which the public ends up paying for through bank fees and what have you.
If ABM full functionality was essential to the ability of smaller institutions to compete, it would be difficult to explain ING’s strong financial performance, including the rapid growth in its deposits.
Cardholder Demand for Enhanced ABM Services
Another factor that would bolster the case for providing enhanced functionality through the ABM network would be clear evidence of any unfulfilled consumer demand. Interac Association’s 2003 Benchmark Tracking Study, an annual telephone survey commissioned by the Association and conducted by the market research firm The Strategic Counsel, provides some useful information on cardholders’ attitudes towards enhanced functionality of ABMs.
There is no obvious consumer interest in enhanced shared ABM services. A viable business case in support of greater functionality would need to rest on higher levels of consumer demand.
The study reveals that there is no obvious interest among consumers for enhanced shared ABM services. A viable business case in support of greater functionality would need to rest on higher levels of consumer demand in order to justify the investments and ongoing operating costs associated with providing shared deposits and other services.
The chart below illustrates cardholders’ modest interest in shared services beyond the shared cash dispensing service that is presently offered.
Cardholder Interest in New Shared Services at ABMs % Among ABM Cardbholders
It should be noted that the fee for a shared deposits service would also have an impact on cardholder demand. In the U.S., where a number of networks offer shared deposits services, interchange fees for these transactions tend to be between US$2.00 and US$3.00, according to a recent report published by ATM & Debit News, a leading industry publication. In comparison, interchange fees for cash withdrawals tend to fall between US$0.40 and US$0.60.
The substantially higher interchange fees for shared deposits reflect the fact that shared deposits are significantly more costly to process than shared withdrawals. It can reasonably be assumed that the costs to cardholders for shared deposits will also be significantly greater than the costs of shared withdrawals.
Despite the high per-transaction revenue for shared deposits transactions, some U.S. institutions that provided a shared deposits service have decided to discontinue it, citing the weak demand and high costs of providing the service. The NYCE network, one of the largest in the U.S., has made accepting deposits an optional service and now allows its members to levy surcharges to recover their costs. With further innovation in electronic options to handle deposits, demand for shared deposits services at ABMs will likely continue to decline. This may spur more U.S. financial institutions to withdraw from offering shared deposits services.
Small Business Demand for Enhanced ABM Services
The absence of a viable business case for full functionality is further underscored by a lack of interest in shared deposits and other services among small businesses. In a recent survey conducted by the Canadian Federation of Independent Business (CFIB), CFIB members expressed little interest in expanding ABMs as a banking channel to service small and medium-sized businesses, primarily because they do not find them well-suited to meeting many of their business banking needs. According to the survey, a full-service local branch is the preferred way for these businesses to access banking services, with 74 per cent indicating branch access was very important to their business. By contrast, only 30 per cent indicated that access to ABMs was very important, while 43 per cent said such access was not important. According to the CFIB survey,
Business owners’ preference in how they want to conduct their banking is straightforward: through a branch that is conveniently located and offers the full range of services essential to operating their business…There is little importance given to alternative banking methods, such as ATMs, the telephone and the Internet.
The Additional Costs of Providing Enhanced ABM Services
Providing full functionality at ABMs through the INTERAC network would require both common investment by the members of Interac Association as well as individual investment by participating financial institutions. Costs would include the technical changes required to update the INTERAC software and network to recognize and handle these new transactions, and the costs of updating members’ own processing infrastructures.
The costs of operating a shared deposits service would also be considerably higher than the existing cash withdrawal service. The additional costs arise partly from the requirement that deposit machines be emptied daily, versus re-stocking cash dispensing terminals in many cases only once or twice per week, or as cash is depleted. This is of particular significance in the case of ABMs located in remote locations, where transportation costs may be high. Further, to limit risk, each ABM deposit must be handled, opened and verified by two employees, contributing significant additional administrative expense to processing transactions.
Finally, providing a shared deposits service would require careful consideration of the risk controls needed to ensure the security of cardholders. ABM deposits are, as a general rule, riskier than in-person deposits. This is because while the deposit rests in the machine, there is a period of time where the transaction is unverified. Therefore, increasing the number of deposit transactions at ABMs has the potential to increase the amount of risk present in the system.
ABM deposits are, as a general rule, riskier than in-person deposits. Careful consideration of appropriate risk controls would be needed to ensure the security of cardholders.
Further, while most large financial institutions have highly sophisticated systems to monitor the activity of their cardholders and ABMs in order to detect potentially fraudulent transactions in real or near-real time, there is a limited ability to do so in the shared transaction environment. What this means is that a fraudulent deposit on a cardholder account that would be quickly identified by an individual institution may not be detected until the next day or later if that deposit was made at another institution’s banking machine.
In order to mitigate this kind of risk, it might be necessary for institutions to impose holds on deposits made at other ABMs. Further, the relative risk of these transactions would likely be reflected in the fees charged to cardholders for use of the service. In conclusion, the cost of operating a shared deposits service safely and efficiently could necessitate pricing and terms of service that would simply not be attractive to cardholders.
The Competitive Framework for New Services
We believe that consumers benefit most when markets are permitted to operate freely. When that is the case, market participants develop new products and services and make investment decisions based on demand and supply considerations.
The absence of ABM full functionality on a broad scale in Canada is not the result of impediments to competition or innovation, either in the Canadian financial industry broadly or within the INTERAC network in particular. Rather, as highlighted above, it is simply the case that no group of market participants has yet built a positive business case to justify the upfront investment and ongoing operating costs of providing additional ABM services using the INTERAC infrastructure.
However, should Interac Association’s members or a group of members identify such a business case, there are many avenues available as the framework for new service development within the INTERAC environment is quite open and flexible. In fact, there are ways to lever the INTERAC infrastructure to offer new services that do not require the approval of the Association’s Board of Directors, nor that of its major players or large groups of members.
The framework for new service development within the INTERAC environment is quite open and flexible. Should a business case be identified, there are many avenues to bring a new service to market.
Within the Association, new shared services can be adopted by the Association’s Board of Directors. These new services would operate exactly as the existing INTERAC services do today. That is, they would be managed and operated by the Association, and participation would be open to all members on a voluntary basis. No member would be obliged to participate, and none would be excluded.
Where there is no impetus to proceed at an Association level, market participants may create bilateral or multilateral services that take advantage of the INTERAC network and infrastructure. Interac Association’s rules provide for any group of two or more members to collaborate to develop a new service that the entire membership may not be interested in pursuing, provided it meets a set of minimum criteria. The members that participate in the new service are jointly responsible for its operation and management, provided that the Association’s general technical and security standards are satisfied. Approval from the Association’s Board of Directors or from the membership at large is not required to implement a new bilateral or multilateral service.
Finally, when neither of the above options proves viable, a group of market participants may still negotiate to bring a new service to market using the INTERAC network under a flexible arrangement we have developed called proprietary use. Under this option, the participants may enter into an agreement to use the INTERAC software and network for a reasonable fee, and may take advantage of the efficiencies offered by the existing technological infrastructure. One proprietary use application is presently in operation, and we anticipate that additional applications will be added in the future.
What these options allow for is pairs or groups of market participants – large or small – to use the Association’s national network to offer new and innovative services, relying on their own funding, management and operations and setting their own terms of access.
Innovation and Efficiency in the Financial Sector
In its presentation to the Parliamentary committees a few years ago, Interac Association argued that a shared deposits service might hinder innovation in the financial system. Electronic transactions generally provide customers with greater convenience and control over their accounts, while at the same time reducing the cost of providing many services. The introduction of a shared deposits service may be a regressive move, as it would serve to encourage consumers to continue to rely on inefficient paper-based transactions, rather than embracing the new services that technology provides.
The introduction of a shared deposits service could encourage consumers to continue to rely on inefficient paper-based transactions. The financial services sector should be focused on promoting services that are cost-effective and convenient to consumers.
The financial services sector should be focused on promoting services that are cost-effective and convenient to consumers. Members of Interac Association have been actively pursuing such innovation. This is exemplified by an arrangement the Association entered into recently with the owners of CertaPay in order to launch a new INTERAC Email Money Transfer Service for Canadians.
INTERAC Email Money Transfer is a good example of a new service that provides greater convenience and reduces the processing costs associated with a similar paper-based alternative. Using Email Money Transfer, customers of financial institutions can send money via email to other individuals. After establishing that they are entitled to receive the payment, individuals can deposit it to their own account, even if the account is with another financial institution. This service has the potential to replace the comparatively inefficient and costly alternative of sending personal cheques and can provide considerable convenience to the increasing number of consumers using Web banking.
The launch of INTERAC Email Money Transfer demonstrates that the members of Interac Association are committed to pursuing innovative payment solutions for Canadians. It also demonstrates that, where a business case exists, new services will be brought to market.
Conclusions
There is little evidence that the absence of full functionality on a broad basis in Canada is a significant barrier to competition in the financial system, or is preventing smaller institutions from offering services to their customers at a reasonable cost. Neither consumers nor small businesses express a strong desire for enhanced ABM functionality as a solution to their everyday banking needs. The potential market for services such as shared deposits is small and shrinking, given advances in banking technology and the resulting shifts in the way consumers interact with their financial institutions.
Innovation and the electronic delivery of banking services have provided Canadians with many enhanced services, including new ways to send money to one another that do not rely on traditional paper-based payments. Electronic banking offers Canadians greater convenience and provides a more level playing field for competing financial institutions by eliminating the need to make large capital investments in physical infrastructure. The introduction of a shared deposits service without a sound business case might slow the progress of electronic banking by encouraging consumers to continue using paper-based transactions.
In a study conducted several years ago, Interac Association was unable to generate a positive business case for expanding its shared services to include deposits. Given continuing innovation in the payments landscape since that time, we believe that the business rationale for offering shared deposits on a broad basis may be even weaker today than it was a few years ago. In the U.S., where a number of networks offer shared deposits services, fees have been rising and the number of institutions offering these services has been on the decline.
However, should a group of market participants determine that enhanced ABM services would be worthwhile to pursue, the INTERAC framework provides significant flexibility to bring these services to Canadians. Action is not needed on the part of government to remove structural or competitive barriers to new service development. Rather, when the business case is proven, the market will respond. This has been the case with services like INTERAC Email Money Transfer, which offers benefits to Canadian consumers and at the same time improves the efficiency of Canada’s financial system.
In conclusion, we believe these issues must be carefully examined and analyzed before any policy action is taken to expand the services provided through the ABM network. We believe the government should mandate full functionality at ABMs only if there is clear evidence that its absence is anti-competitive and that greater functionality, and shared deposits services in particular, would remedy this without adding significant new regulatory costs or harming innovation and investment in the ABM network in Canada.
® Trade-mark of Interac Inc. Used with permission. [Return]
November 30, 2004 at 09:21 PM in Financial Services | Permalink | TrackBack (6) | Top of page | Blog Home
Response to Finance Canada's Large Bank Mergers in Canada
Submission by the Canadian Bankers Association
to Department of Finance Canada
December 2003
Submission by the Canadian Bankers Association
to Department of Finance Canada
December 2003
Executive Summary
1. Introduction
a) No Increased Regulation
b) ABM Networks Differ From Interac
c) Need to Define "Full Functionality"
d) Enhancement of Competition
2. Competition in the Marketplace
a) Differing Strategic Approaches
b) Market Differentiation
3. Customer Service
a) Innovation
b) Future Deployment of ABMs
c) Costs
4. Risk Management
a) Fraud and Money Laundering
b) Operational Risk Considerations
5. Institutional Operations
a) Operational Issues
b) Commercial Account Implications
c) Bill Payments
6. The International Experience
a) Australia
b) The United Kingdom
c) The United States
7. Approaches to Achieving "Shared Functionality"
a) Sector-Wide Approaches
b) Selective Approach
8. Other Policy Considerations
a) Investment
b) Precedential Implications
c) Voluntary vs. Mandatory
9. Conclusion
Executive Summary
This submission by the Canadian Bankers Association is in response to the Government of Canada’s June 23, 2003 Consultation Paper, specifically regarding the issue of expanding the functionality of automated banking machines. This submission canvasses a wide range of issues the banking industry believes policy makers should take into account as they consider the implications of broadening the shared functionality of ABMs. These issues are examined in light of the possible impact on competition in the marketplace, customer service, risk management, and institutional operations (including a discussion of important differences between individual and commercial accounts). This submission also surveys relevant developments in other leading countries and canvasses the operational and public policy implications of expanding functionality. Further, the submission stresses the need to define what is meant by "full functionality", particularly since the Consultation Paper describes full functionality as "deposits, withdrawals, bill payments, etc.", leaving its parameters seemingly open-ended and undefined and including functions (e.g., bill payments) that are qualitatively different than other financial services transactions.
In the detailed discussion of these matters in this submission, three key considerations stand out:
No Mandatory Functionality: The threshold public policy issue raised by the Consultation Paper is whether ABM functionality should continue to be a voluntary matter for individual institutions to consider in response to customer demand, competitive pressures, marketplace conditions, and their individual business plans or whether the Government should mandate expanded shared functionality. While individual bank financial groups may have different views on the merits and feasibility of expanding functionality, they share the common position that increased regulation and government imposition of mandatory shared functionality would not be in the public interest. Shared ABM functionality is already available to Canadians today through two different networks – Interac (for shared cash dispensing) and The Exchange Network (for shared cash dispensing, deposits, account transfers, and balance inquiries). It is important to note in this regard that other leading jurisdictions – such as Australia and the UK – do not mandate shared functionality, and that the clear trend in the US is away from mandated shared functionality in favour of allowing the marketplace to respond to competitive pressures.
Effect on Competition, Customer Service, and Innovation: It is not clear that mandating expanded functionality would achieve the government’s stated objective of enhancing competition. While it is the view of some institutions that expanding ABM functionality could have a positive impact on competition by expanding the number of delivery channels available to smaller players, other institutions take a very different view. They believe that mandatory expanded functionality could have a range of negative effects, including a decline in the number of ABMs, reduced customer service levels and investment in ABM technology, and reduced innovation because institutions would face disincentives to enhancing their networks. These banks view their proprietary ABM networks as one important way to differentiate themselves from each other and from their non-bank competitors in the financial services marketplace, and as such a source of competitive advantage that has merited significant investment in innovation and expansion.
If mandated shared functionality is intended to effectively increase competition, there should be clear evidence that it would be widely adopted by consumers and small business. The industry in unaware of any such evidence and survey results included in this submission indicate the opposite may be the case. In addition, an issue that would need to be seriously considered is whether holds on ABM deposits, a customer concern today, would increase under a shared deposit arrangement.
Operating Considerations and Costs of Shared Functionality: Another key consideration is the extent to which expanding functionality would reduce operational efficiency and increase costs. The consequences of grafting manual processing requirements onto a largely electronic system would be significant. In The Exchange Network, shared deposit taking involves a number of manual steps including: reconciling the contents of the deposit envelopes to the amounts of the deposit transactions; notifying the Issuer of discrepancies; endorsing cheques in the deposit envelopes; and photocopying the fronts and banks of cheques over $5000 and faxing the copies to the Issuer.
At current volume levels (e.g., one large Exchange Network member reports an average of 60 shared deposits per month), the Exchange processes for deposit reconciliation appear to require little, if any, additional staffing resources to verify and reconcile deposits. However, this would not be the case if larger banks with their much larger transaction volumes (nearly one million deposits per month across the system) were required to provide shared deposit functionality using processes similar to that the Exchange Network. If some or all of the above processes had to be put in place, the staffing requirements and impacts on operational efficiency would be significant. These impacts would be compounded considerably if commercial accounts – which typically have much larger volumes and larger dollar amounts than retail accounts – were included in mandatory shared deposit taking. Given the possible extent of the costs, full recovery of the costs applied at the transaction level would likely be unattractive to customers. Further research and consideration would be needed to fully assess the impacts and changes that would be needed in this area, and what the resulting costs to consumers would be.
These and other issues addressed in the submission make clear that a shift in current policy would have significant implications for the future direction of the Canadian banking industry, non-bank competitors, competing ABM networks, and for consumers of financial products and services. Policy makers should give careful consideration to each of the issues and questions the banking industry identifies in this canvass of the possible impact of expanded shared ABM functionality.
1. Introduction
The Canadian Bankers Association welcomes the opportunity to comment on the Government of Canada’s June 23, 2003 response to the reports of the House of Commons Standing Committee on Finance and the Standing Senate Committee on Banking, Trade and Commerce regarding large bank mergers and the public interest. Specifically, this submission responds to the public policy issues raised in the government’s paper regarding expanding the functionality of automated banking machines ("ABMs").
Our submission canvasses a wide range of issues we believe policy makers should take into account as they consider the implications of broadening the shared functionality of ABMs. These issues are examined in light of the possible impact of expanded functionality on competition in the marketplace, customer service, risk management, and institutional operations (including a discussion of important differences between individual and commercial accounts). In addition, this submission surveys relevant developments in other leading countries and canvasses the operational and public policy implications of expanding functionality. In developing this paper, the CBA conducted a detailed study of the Exchange Network, a national network consisting of over 1,300 ABMs sharing four services over the proprietary networks of its 68 participating financial institutions, and some of the observations in this paper are drawn from our analysis of that network.
The following key points preface our submission.
a) No Increased Regulation
Canadians have access to a wide range of competitive and innovative ABM networks in Canada – both shared and proprietary – established by competing deposit-taking institutions, and indeed are the highest per capita users of ABM services in the world with 47.8 ABM transactions per Canadian in 2001. The growth and development of these networks has been driven primarily by institutions’ competitive responses to market forces and consumer demand. As the issue of expanding functionality is reviewed, it is critical that policy-makers fully take into account the importance of these drivers of continuing innovation. Any mandatory imposition of expanded functionality would not be a positive or welcome development.
b) ABM Networks Differ From Interac
Bank ABM delivery channels should not be equated with Interac’s shared cash dispensing service. While banks have voluntarily agreed to offer shared cash dispensing to their customers through Interac, a significant majority of transactions performed by customers on a bank ABM are not related to Interac’s services. For example, in the case of cash withdrawals, only those from an ABM not belonging to a cardholder’s financial institution are Interac transactions. Having regard to the largest banks, approximately 70 percent of cash withdrawals are ‘on us’ withdrawals (i.e., non-Interac). Moreover, other functions offered to bank customers at proprietary ABMs such as deposit taking, account updating, cheque ordering, account transfers, and bill payments are non-Interac transactions. In other words, while Interac is a shared system that institutions use for certain services (and while some deposit-taking institutions, including some Interac members, have joined together to offer a range of additional shared services through the Exchange Network), proprietary ABMs are considered by many deposit-taking institutions to primarily be competitive delivery channels for their own customers.
c) Need to Define "Full Functionality"
It is essential to understand what is meant by "full functionality" before considering the appropriate policy responses to the question. Testimony on this issue before the two parliamentary committees referred only to shared deposits and withdrawals in the context of expanding functionality. The government’s response paper, however, suggests a broader meaning, describing full functionality as "deposits, withdrawals, bill payments, etc.", leaving its parameters seemingly open-ended and undefined. It bears noting that the shared functionality offered by the Exchange Network (a voluntary shared ABM network currently operating in Canada that serves as a competitive response for some deposit-taking institutions to larger players in the market) consists of deposits, withdrawals, transfers and balance inquiries. A more precise understanding of the intended breadth of expanded ABM functionality is necessary to assess all of the potential implications of a policy change in this area. For the purposes of this submission, when considering the public policy and operational implications of broadening or expanding the shared functionality of ABMs, we refer, not to "full functionality", but to "expanded" or "shared" functionality.
Further, a more precise understanding is also needed of which providers would be affected if policy changes were to be made by the federal government in this area. For instance, would provincially-regulated credit unions and caisses populaires be included? Further, would "white-label" ABM providers be included, and if so, would these providers be required to convert their machines to become deposit-takers? Similarly, would regulated financial institutions whose mix of ABMs include machines that only dispense cash, be required to reconfigure these machines to provide services not currently available even to the provider’s own customers?
d) Enhancement of Competition
It is not clear that mandating expanded functionality would achieve the government’s stated objective of enhancing competition. While it has been suggested by some financial institutions, as discussed in more detail below, that expanding ABM functionality would have a positive impact on competition, other institutions take a very different view. They believe that mandatory expanded functionality would have a negative effect on the market, particularly regarding innovation and expansion of the ABM network. For instance, they note that there is no evidence in the ABM marketplace of consumer demand for expanded functionality. To the contrary, a 2003 survey, conducted by The Strategic Counsel for Interac, shows a small and declining support over the past three years for expanding functionality beyond shared cash dispensing. Indeed, only 12% of respondents were interested in making deposits at an ABM belonging to another financial institution, while only 6% were interested in shared balance inquiries and 3% in shared account transfers. Similarly, as discussed in greater detail below, it does not appear that small business would desire expanded functionality. Thus, in the absence of any apparent customer demand for expanded functionality, and with clear evidence of strong differences of view regarding impacts on competition, careful study would be required before implementing the fundamental changes to present ABM systems that expanded functionality would require.
2. Competition in the Marketplace
The questions posed by the government in its response to the parliamentary committee reports focus on the possible competitive impacts of broadening the shared functionality of ABMs. Indeed, some deposit-taking institutions believe that expanding the functionality of ABMs would add a new element of competition in the financial services sector by expanding the number of delivery channels available to these institutions, and thereby strengthening their offer to customers. Others see expanded functionality leading to a decline in the number of ABMs, reduced service levels and investment in ABM technology because institutions face disincentives to enhancing their networks. Accordingly, we canvass first the possible effects of changes in this area on competition in the financial services marketplace.
When considering the possible competitive implications of expanding shared ABM functionality, one important observation needs to be made at the outset. Shared ABM functionality is available to Canadians today through two different networks. The members of Interac have agreed voluntarily to provide access to non-customers at their respective ABMs networks for certain services. Interac makes its services available to members, but it is important to note that its members retain the choice to decide which of these services (e.g., cash dispensing or point-of-sale services or both) to offer, and also whether to be an Acquirer, an Issuer, or both. The second shared network is (as noted above) the Exchange Network. Provided that they meet the Exchange’s membership criteria, any bank or other deposit-taking institution can become a member of this network. The existence of Interac and the Exchange Network demonstrate the capacity of the Canadian financial services marketplace to respond in its own way to competitive needs driven by consumer demand.
The following two issues arose in our canvass of the competitive impact of broadening shared ABM functionality that should be taken into account by policy makers.
a) Differing Strategic Approaches
ABMs are one of many delivery channels that financial institutions have developed for use by their customers. Individual bank investments in their respective ABM delivery channels are a direct result of strategic business planning. While some deposit taking institutions, mainly large banks, have chosen to invest extensively in proprietary ABMs, some smaller institutions have decided to have relatively fewer machines and rely more heavily on sharing services with other parties with whom they contract (e.g., through the Exchange Network), while still others have chosen to focus primarily on non-ABM delivery channels and use the consequent savings to attract clients with lower service fees and/or higher interest rates on savings products. Indeed, some banks have made a strategic decision to provide services without branches.
These choices in the marketplace exemplify competition and provide consumers with considerable flexibility to have their individual needs met by their preferred financial services provider or providers. It would be important to consider, therefore, whether requiring institutions to expand functionality would give rise to cross-subsidization that would blunt this strategic differentiation and the competition it gives rise to.
b) Market Differentiation
Some banks take the view that ABMs represent one important way to differentiate themselves from each other and from their non-bank competitors in the financial services marketplace. They identify the following market differentiators:
* Size of the Delivery Channels
– Each bank has taken its own strategic decision regarding the mix of branch/ABM/EFT/Internet and other delivery channels appropriate to meet the needs and demands of its clients and to attract new clients. As noted, some banks have invested more than others in building and expanding an ABM delivery channel because they have determined that having more ABMs available to clients is what will make their bank more attractive and competitive in the market.
* Functionality of ABMs
– Many banks have made distinctive choices and introduced different innovations into their respective ABM delivery channels. While all ABMs dispense cash and most accept proprietary deposits, other functions differ from bank to bank depending on the bank’s competitive strategy and the capabilities of its system architecture. Functions available at some bank ABM delivery channels and not others include cheque ordering, accessing $USD accounts and dispensing $US dollars, updating pass books, making mortgage inquiries, ordering tickets, and various methods of making bill payments.
* Location of ABMs
– Where ABMs are located raises two observations. First, the majority of ABMs, approximately 70 percent, are located on branch premises. Historically, most clients demonstrate a strong preference for the flexibility and convenience offered by access both to in-branch and ABM services. Many banks have responded by making ABMs an extension of their respective branch networks, enabling clients to conduct as much of their banking at an ABM or in a branch as suits their individual needs and preferences. Second, banks have made competitive decisions regarding the location of their off-premises ABMs. This is generally done through negotiations with third parties, each of which has made a strategic decision to partner with a particular bank in permitting that bank’s ABMs on its premises. For its part, a bank chooses its third party partners on the basis of client convenience and what it believes will provide competitive advantage.
Other deposit-taking institutions, notably those with fewer ABMs and smaller investments in ABM technology, state that market differentiation represented by ABM networks is no longer as important as it may once have been. They take the view that ABMs represent, in effect, a commodity, and that in their experience there is no evidence that consumers’ choice of a financial service provider is based on the number, location or functionality of ABMs. The experience and views of these deposit taking institutions with smaller investments in ABMs is significantly different from those with substantial investments.
It is clear that there are differing views amongst banks – based to a large extent on the differing strategic visions of individual institutions – regarding the role ABM networks play in relation to an institution’s business planning and to the competitive landscape. Policy makers will need to carefully assess whether or not market differentiation through proprietary ABM networks is an ongoing factor affecting competition in the marketplace. More specifically, policymakers will need to consider the implications of requiring a broadening of ABM functionality for those deposit institutions that view their ABM network as a proprietary source of competitive advantage.
3. Customer Service
ABMs represent an important financial service delivery channel for Canadians. In fact, they have become the primary means of conducting financial transactions for over 40 percent of bank customers. Accordingly, the CBA believes it will be important to assess the potential impact of broadening the shared functionality of ABMs on customer interests.
On one level, expanding ABM functionality would provide customers with more ABMs in the short run through which to conduct their banking services, and some observers point to this aspect of consumer convenience as a benefit that would arise from policy changes in this area. Others, however, believe this short run phenomenon will be reversed in the long run as forced commoditization results in a disincentive to investment and innovation. As well, there are other factors and potential implications for customer service that policy makers should also consider, and these are set out below.
a) Innovation
Canada’s financial services marketplace is notable for introducing new technologies that provide greater convenience, choice and service for customers. These technologies stimulate innovation, enhance competition, improve business efficiency, and create new delivery channels and product offerings for the benefit of Canadians.
ABMs illustrate improved service and convenience through innovation. The number of services available to customers through ABMs has increased significantly since ABMs were first introduced over two decades ago. Innovations include bill payment services, obtaining information about mutual fund investments, ticket ordering functions, making mortgage inquiries, and special technologies improving accessibility to ABMs for disabled Canadians. The installation of ABMs at branches and the subsequent development of the Interac network for shared cash dispensing was a cornerstone to further development of new alternative delivery channels for banking services. With consumers quickly accepting access to cash at thousands of locations across the country, banks were able to build technology such as telephone banking and Internet banking that allowed their customers the ability to do their banking using other technologies at a time and place that was convenient to their customers.
In light of the importance of innovation, some deposit institutions have expressed concerns about the impact that mandating expanded functionality may have on innovation and have raised a number of questions. Policy makers may wish, therefore, to consider the potential impact of mandating shared ABM functionality on the incentive of financial services providers to invest not only in existing system but also future innovations. For example:
* Would providers of ABMs add innovative new functions or accessibility features to their respective networks if the benefits of those investments were to be shared with non-customers? Would there be an incentive for a provider not to innovate, if that provider could simply choose to wait for other players in the market to innovate and then take advantage of that other provider’s development?
* If mandating expanded functionality did result in disincentives to innovation, could pricing of shared services be used to offset or mitigate those disincentives? In other words, would sufficient flexibility be allowed for providers to set prices in accordance with their individual assessment of costs and market conditions? It is useful to note in this regard that surcharging and convenience fees are not permitted in the Exchange Network. But, as noted below in our discussion of costs, increased costs would be proportionally greater if larger networks were to be required to expand functionality. The question arises what impact increased costs would have on innovation particularly where there would be no profit incentive to innovate?
Other observers, however, suggest a different approach to encouraging innovation. The Exchange Network, for example, distinguishes between common shared services (i.e., withdrawals, deposits, transfers between accounts, and account balance inquiries) and what it views as "competitive services" (e.g., bill payments), with the implication that individual institutions would continue to have competitive incentives to pursue their individual strategies and innovations in these latter areas.
b) Future Deployment of ABMs
Related to the question of future innovation is consideration of the effect of broadened shared functionality on incentives to expand deployment of ABMs. The primary issue to consider is whether the net effect of broader shared functionality would be to expand or contract the number of ABMs available to customers (or if it would have a neutral effect). Questions to consider include:
* Would older machines be upgraded to incorporate added functionality or would they be eliminated and not replaced because customers could rely on the availability of others’ ABM networks?
* Would ABM providers have an incentive to remove, or conversely to expand, their own ABMs from off-premises locations in cases where customers of competitors became the major users?
* Given the close linkage noted above between ABMs and bank branches, would off-site ABMs be particularly affected by decisions to expand or contract ABM networks? If so, what impact would this have on third parties involved in contractual arrangements regarding the deployment of ABMs on their premises?
c) Costs
It will also be important to consider whether expanding shared ABM functionality would have an impact on costs to consumers. As noted, members of the Exchange Network have decided to make its various shared services available to consumers without surcharging/convenience fees. Nonetheless, any cost increases associated with mandating shared functionality would have to be paid for, whether directly or indirectly. Indeed, there are a range of costs associated with ABMs, including the cost of installing, operating, and maintaining the machines; costs of upgrading software; and costs associated with location (e.g., are new machines being added to existing ABM locations, or is a new facility, requiring enclosures etc., being developed?) that need to be taken into consideration. These costs vary among institutions, and indeed, the ability to contain and manage the costs of providing ABM services is considered a source of competitive advantage by individual institutions. Moreover, plans to alter the size of an ABM network or to expand the functionality of a proprietary network would differ from bank to bank and would depend in large measure on the strategic business objectives of each bank. Thus, if shared functionality were to be mandated, each bank would need to assess its own proprietary costs associated with fitting within such a network.
If banks were required to add expanded shared services, they would almost certainly face additional costs associated with new software required to deliver services on a shared basis. Moreover, shared deposit taking would lead to large and/or unpredictable volumes of cheque and cash deposits being received in ABMs from non-customers. Accordingly, banks with extensive ABM networks would have to increase staffing levels or contract with third party providers to handle the increased volume of paper. Although many Exchange members report that they have not experienced the need to add staff to address this problem, volume levels in the Exchange are fairly low (e.g., one member indicated that only 60 shared deposits per month are received). Volumes are considerably larger, however, in the networks of larger banks and the impacts on staffing requirements correspondingly greater (see below for a further discussion of the implications of shared deposit-taking in this regard).
Additional revenues generated from surcharge fees might offset a portion of the added costs. But it is not certain that additional revenues would offset all of the costs associated with broadening shared functionality. Surcharges, on a full recovery basis, applied at the transaction level would likely be unattractive to customers. Thus each bank would have to assess the extent to which adding shared functionality might require cross-subsidization from its customers of other services and delivery channels.
4. Risk Management
a) Fraud and Money Laundering
It will be important to consider whether expanding shared ABM functionality may have implications for the financial sector’s fight against fraud and money laundering. Fraud is an increasingly serious challenge to the financial services industry, and indeed the number of banking fraud cases has increased considerably in recent years. It is open to question whether permitting persons to use all ABM machines for deposits would lead to an increase in the number of empty envelope ‘deposits’ and other fraudulent activity across the system. It is interesting to note in this regard that, during the CBA’s research into the operations of the Exchange Network, while some members interviewed did not experience an increase in fraudulent activity or perceive a concern one member of that network did note that fraud could definitely increase as a result of the expansion of shared services. Further analysis is needed in this area and, if the analysis demonstrates an increased risk of fraud, it would also be important to examine the steps that may be taken to mitigate fraud and their implications for customer service. For example, impacts on hold policies, an area of considerable customer concern, would have to be considered, as would operational efficiencies (e.g., disputes between banks with respect to loss allocation), and increased loss experience (a bank’s own "know-your-customer" diligence would not protect it against customers of other Issuers that might have different customer acceptance standards).
Furthermore, the possible impact of broadening shared ABM functionality on money laundering activity requires careful consideration. Increasing the number of access points might facilitate the ease with each money laundering could occur. Therefore, the implications for, and the roles and responsibilities of, banks for reporting suspicious transactions would have to be thought through. In the Exchange Network, responsibility for reporting any transactions under the Proceeds of Crime (Money Laundering) and Terrorism Funding Act lies with the bank that issued the access card to the customer involved in the suspicious transaction.
b) Operational Risk Considerations
A related issue to consider is whether a requirement to offer shared deposit taking among competitors’ ABM networks would alter the operational risk of participants so as to require additional capital charges to address incremental risk of unexpected losses.
A first step is to assess what operational challenges may impact Issuers (institutions that issue cards to consumers) and Acquirers (institutions that accept deposits on behalf of Issuers’ cardholders) if functionality is expanded. In most cases, card Issuers would bear the preponderance of liability for ABM network transactions. However, Issuers would also be in a position to control the level of risk they wish to assume for "on-us" deposits (through their own ABMs) and "not-on-us" deposits (by their cardholders at another institution’s ABMs) for shared deposit transactions. If Issuers assume greater risk, to the extent that such risks are predictable and quantifiable, the risk/reward parameters could be addressed through pricing and acceptance limits. However, this calculation would be problematic if pricing or access parameters were regulated, thereby constraining the pricing for risk options available to Issuers. Issuers might also place time and dollar constraints on new customers and perhaps delay issuance of debit cards until a customer has developed a verifiable and trustworthy credit history.
To a lesser degree, Acquirers may face incremental risks to the extent that they cannot limit or obtain Issuer indemnification for loss or default (although it should be noted that the Exchange Network has protocols similar to the Canadian Payments Association to address this issue). Operational risks of expanded functionality may include greater possibility of fraud, unpredictable volumes, and therefore staffing requirements, as well as uncontrolled exposure to high-risk customers of other Issuers
If we assume that, in aggregate, the potential for fraud, breakdowns or disputes under a shared functionality regime may increase the operational risk faced by an institution, would more capital be required? To the extent that anticipated or expected losses are built into an institution’s profitability model, it may be that no additional capital charges would be necessary. It would only be the extent to which there are, or might be, unexpected losses that additional capital might need to be set aside. The question of the impact of this on capital would be dependent on the business and risk model, and, as such, cannot be quantified in the abstract.
More broadly, another consideration may be the potential for loss of brand or franchise value that might occur if reputation or competitive advantages of an institution’s ABM network were undermined in the manner discussed above. The definition of "significant operations" and "significant risk" in CDIC’s Standards refers to anything that can create an exposure to or influence an institution’s earnings, liquidity, funding, reputation or brand value – and in turn bear on its sound business and financial practices for capital management.
By contrast, the Basel II rules now in development would seem less likely to come into play under this scenario because they deal with direct losses that have or will impact the income statement. Under Basel, capital requirements are revenue generated, hence the more significant losses, the greater the capital requirements. However, unless significant losses are expected to be incurred as a result of shared deposit arrangements, the potential for significant capital implications (if any) under the Basel II regime would be difficult to quantify at this time.
On balance, even if a shared functionality regime gave rise to greater operational risk and the possibility of material unexpected losses that would have capital implications, presumably these could be addressed through an Issuer’s fee structure. However, to the extent that pricing might be regulated or limited, this risk mitigant would not be available.
5. Institutional Operations
Broadening shared ABM functionality would necessarily involve operational changes at participating banks. It will be important to assess the cost and efficiency implications of these operational issues. Set out below is a discussion of these matters in the context of account transfers, balance inquiries, and shared deposits. In addition, this section reviews the different considerations that come into play when considering commercial (as opposed to individual retail) accounts. Finally, this section also includes a discussion of the operational issues related to bill payment, which appear to be qualitatively different than other possible shared ABM services.
The CBA drew on its research into the operations of the Exchange Network for the discussion below. It is important to note, however, that while the Exchange is useful as a guide to the types of operational considerations that would be involved in expanding shared functionality, the volume of shared transactions in the Exchange is very small, in comparison to the volume of shared transactions across the entire banking and deposit-taking industry. In addition, while the Exchange does have some large members, most of its members are regionally focussed and considerably smaller and less complex than the five largest banks in the country. In short, expanding the functionality of ABM networks across the banking industry would be, by orders of magnitude, a much more complex and complicated undertaking than the operations of the Exchange.
a) Operational Issues
A key consideration is the extent to which expanding functionality will impact operational efficiency and impose increased manual processing requirements. The key area of the review in this regard is shared deposits. While there would be system changes in order for an institution to participate in a shared network (e.g., changing transaction formats and proprietary systems for deposit acceptance and processing, modifying settlement and reconciliation applications, etc.), the more significant implication is the extent to which shared deposits would require manual processing. In this area, the Exchange Network’s experience is useful to consider:
* Every business day, the depository in an Exchange ABM is emptied of all deposit envelopes and the Acquirer (or an Acquirer’s third party service provider) reconciles the contents of the deposit envelopes to the amounts of the deposit transactions. If there are any discrepancies in the amounts in the envelopes compared to the deposit transactions, Exchange rules require that the Acquirer contact the Issuer to advise of the discrepancy and the transaction is reversed. The Acquirer endorses any cheques in the deposit envelopes and clears these items with all other cheques through normal clearing processes. The endorsement stamp on the back of the cheque is necessary as it indicates that should the cheque be dishonoured, the cheque is to be returned to the Issuer institution. Also included in the endorsement is the name and routing information of the Issuer institution, along with the card number of the card that was used to make the deposit. If shared deposit taking were mandated, each Acquirer, or its agent, would require an endorsement stamp for each institution whose customers might deposit "not-on-us" cheques with the Acquirer. Where Acquirers received large volumes of "not-on-us" deposits in an expanded functionality regime the risk of clerical error, leading to disputes and losses, would increase substantially.
* When a deposited cheque is for an amount of $5,000 or greater, but less than $10,000, the Acquirer must photocopy the front and back of the cheque, and fax it to the Issuer. Where the total amount of the deposit is greater than $10,000 the Acquirer must photocopy the front and back of all cheques contained in the deposit and fax this information to the Issuer.
* The Issuer is also responsible for any reporting of transactions under the Proceeds of Crime (Money Laundering) and Terrorism Funding Act.
* If a cheque that was endorsed by an Acquirer on behalf of an Issuer's customer is returned (e.g., NSF, stale/post-dated, body/figures differ, etc.), the Acquirer must also photocopy the front and back of the item, fax it to the Issuer and advise them that the item has been returned. This must be done on the day, or no later than the next business day after the returned item is received by the Acquirer through the clearing system, to ensure recourse is not lost.
At current volume levels, the Exchange processes for deposit reconciliation appear to require little, if any, additional staffing resources to verify and reconcile deposits. However, this would not likely be the case if all banks were required to provide shared deposit functionality using processes similar to that the Exchange Network. As noted above, Exchange volumes are relatively small, with one Exchange member indicating that the average number of shared deposits per ABM is 60 deposits per month. Extrapolating this across the entire CBA member ABM network could equate to approximately 998,000 shared deposits per month (although the actual number would depend on specific customer behaviour and willingness to use another institution’s ABMs). If some or all of the above processes had to be put in place across the industry, the staffing requirements and impacts on operational efficiency could be significant. In effect, shared deposits would essentially graft a paper-based system to what is largely an electronic system. Further research and consideration would be needed to fully assess the impacts and changes that would be needed in this area.
By contrast, account transfers and balance inquiries in a shared network are primarily electronic, and would require only system changes (e.g., transaction formats, settlement and reconciliation applications, etc.) by institutions to be able to participate in a shared network and to "recognize", accept, and process transactions from other institutions in the network. Although there would be costs and operational impacts associated with these changes, they would not likely be as significant as those noted above. Depending on the network that would provide the shared services, there may also be costs related to system changes to the network to allow for additional shared functionality – further study would be required to determine what these costs would be, and, as noted above, this would depend in large measure on what the definition of expanded functionality would be.
b) Commercial Account Implications
Consideration of expanding ABM functionality gives rise to the question of whether the expanded functionality would apply to individual retail accounts only or to commercial accounts (i.e., small/medium-sized businesses). As noted below, commercial accounts would give rise to a range of additional issues that would need to be addressed.
At the outset, it is important to note that many banks in the normal course of business do not provide ABM service to their commercial accounts. In point of fact, members of the Exchange Network do not typically provide access to the shared services of the Network to their small business customers. This is due to the operational and risk issues set out in the sub-bullet points below. Moreover, it is open to question whether small business owners would choose to leave their deposits in the ABM of a financial institution that they do not deal with in the normal course of their business.
Mandating that commercial accounts share ABM functionality would raise numerous issues, including:
* The potential for greater operating risk faced by Acquirers due to increased chance of errors and missing cut-off times due to heavier commercial volumes:
Current Exchange Network processes can accommodate manual handling on small retail deposits, for example the deposit of one cheque to a retail account. Handling multiple cheques deposited to a commercial account would require extensive and costly manual handling, including reconciliation of deposits to keyed-in amounts and the notification by the Acquirer to the Issuer of discrepancies. By way of example, and as noted above, the Exchange Network rules require photocopying and faxing of cheques over $5,000 from the Acquirer to the Issuer. The potential for receiving cheques over $5,000 would be increased considerably if commercial deposits were permitted. In this regard, one bank reports the average deposit for a commercial deposit is $7,100 as compared to $502 for consumer accounts. Similar cost issues arise in the context of reporting under the Proceeds of Crime (Money Laundering) and Terrorism Funding Act.
* The potential risks of turning an ABM into a night depository for businesses, and requests by non-customers of the Acquiring institution for additional business services (e.g. small denomination bills, coin, remittances, etc.):
Although banks now accept cash deposits in their proprietary ABMs, the trend is away from such use by consumers for security reasons. The problems would be considerably magnified in light of the often-large volumes of cash that small businesses would need to deposit on a daily basis – in effect, ABMs are not a substitute for night depositories, which are specifically designed and built to accommodate commercial deposits.
* In a related consideration, the physical size of commercial deposits relative to the deposit slot in an ABM:
The standard size of deposit slots in ABMs would restrict deposits to a thickness of no more than 20-30 items per deposit. Although some very small businesses may have deposits of this size, many commercial accounts would have regular deposits of considerably larger volumes.
c) Bill Payments
As noted, bill payments are qualitatively different than many other types of transactions that may be considered under expanded functionality and warrant a separate discussion. It is instructive to note in this regard that the Exchange Network does not include bill payments as part of its shared functions because members consider it to be a "competitive" function outside the scope of the four core shared functions. The government’s June response paper, however, mentions the possibility of including bill payment as a component of broadening shared functionality. Therefore, some of the operational issues that might arise are set out below.
The processing of bill payments has evolved from the method where customers selected the bill payment option at the ABM, and inserted an envelope into the ABM with the bill payment stub for remittance. The system is now a fully electronic process completed on the ABM screen, eliminating the need to submit paper stubs. In effect, the ABM is one alternate delivery channel that customers can use to pay their bills, with others being telephone banking and Internet banking (along with paying a bill at a bank branch).
The number, mix, and geographic location of billers will be unique to each customer and this creates a greater challenge to incorporate bill payments into shared functionality (and a correspondingly greater challenge in adapting systems to incorporate this function). In a shared environment, when a customer selects the bill payment function, the request would have to be sent to the Issuer and the customer's bill payment portfolio would be sent to the Acquirer's ABM for the customer to select the appropriate bill(s) for payment. Current ABM hardware technology usually limits the number of bills that can be displayed to the customer to a maximum of ten companies at one time. If the bill to be paid were not in the first ten bills that the customer had registered, then another request would be sent to the Issuer for the next ten bills (and so on) until the customer found the appropriate bill(s) to be paid. This type of transaction adds time and network "overhead" to each bill payment transaction, and is considerably more complex than, for example, a shared balance inquiry where the customer identifies the specific account he or she wishes to access.
6. The International Experience
Other leading countries also have experience with shared ABM functionality. Although not an exhaustive survey, set out below is a summary of the experiences of other key jurisdictions often used as comparisons for the financial sector and the public policy framework in Canada (i.e., Australia, the UK, and the U.S.)
As is noted in more detail below, in neither Australia nor the U.K. is expanded or shared functionality mandated. While there has been a measure of mandated shared functionality in some states in the U.S., increasingly it is being superseded by efforts to foster competition in payment service systems as a preferred outcome.
a) Australia
Australian banks generally offer shared ABM functionality along the lines provided by the Exchange Network in Canada. Similar to the Exchange Network, this shared functionality was a market driven response rather than a legislated requirement. Individual banks have made an independent commercial decision to participate in a shared ABM network and have entered into bilateral and multilateral agreements to bring this into effect. The process followed in Australia for achieving expanded functionality is described by Australia’s ATM Industry Steering Group (an industry stakeholder group) as follows: "Non-banks, because their own ATM networks were small, led the way in expanding the numbers of ATMs their cardholders could access by negotiating access to other institutions’ ATMs." (Discussion Paper: Direct Charging for ‘Foreign’ Automatic Teller Machine (ATM) Transactions in Australia, October 2000)
b) The United Kingdom
The scope of shared functions appears to be more limited in the UK than in Australia. Similar to the Australian experience, these shared functions were not mandated by government. Until recently, the only shared functions of the UK system were legacy shared cash dispensing and balance enquiry functionality resulting from the absorption by LINK (the ABM system in the UK owned by banks and building societies) of other networks that provided these shared functionalities. More recently, in connection with a banking industry initiative to replace UK credit and debit cards with chip cards, the banking industry has put forward a new shared functionality – a pilot project allowing customers to change their PIN numbers at any UK ABM.
The UK payments system has been subject to considerable scrutiny in recent years, most notably through the Cruickshank Report of 2000. Despite the scrutiny, however, neither the Cruickshank Report nor the government’s response to that report has proposed mandating shared functionality on the ABM network.
c) The United States
Mandated shared ABM functionality has been a feature in some U.S. states. A key factor behind mandating was the highly fragmented nature of the U.S. banking market, in contrast to the experience in Canada with large banks offering services nation-wide. Increasingly, however, state governments have been moving away from a mandating approach. Set out below is a summary of rationales for the early requirements for shared functionality, as well as reasons for the recent changes.
When ABMs were introduced in the U.S., they were proprietary machines used exclusively by a bank’s own customers. By the mid-1970s banks had started to share ABMs on a voluntary basis, allowing other banks’ customers access to their machines. At that time, a number of state governments instituted mandatory sharing laws that required any ABM-owning institution to share their machines for a "reasonable fee" with any other financial institution in the state that wanted to share. The rationales for such laws were ensuring access for customers and concern for smaller banks’ ability to compete with larger institutions.
The experience of Illinois with shared ABM functionality is illustrative. Illinois mandated shared deposit taking from 1979 until the mid-1990s, when it made shared deposit taking optional. The context of Illinois banking in the 1970s suggests the original reason for mandatory shared deposit taking: when ABMs made their debut in the 1970s, Illinois law only permitted a bank to have one main office and two satellite locations at which the bank could take deposits and dispense cash. Therefore, to gain network effects Illinois law required banks to share ABMs, including the taking of shared deposits.
In the 1990s, however, Illinois dropped its restrictions on branch banking. By that time, a number of ABM networks had been introduced and the number of ABMs had increased substantially. With the proliferation of ABMs and competing networks, Illinois’ rationale for mandating shared deposit taking had disappeared and the state made shared deposit taking optional. Once deposit sharing became optional, practical concerns and market considerations (discussed in more detail below) led to a reduction in the number of institutions willing to participate in shared deposit taking.
The CBA has been able to identify only a handful of states that mandate shared deposit taking today: Iowa, Michigan, Indiana and Wisconsin. While our review of state requirements has not been exhaustive, and while there may be states that we have not identified that mandate shared deposit taking, it appears that mandated shared deposit taking in the U.S. is on the decline.
As state governments enacted their own ABM network laws, the U.S. Congress sought a national response to the impact of ABM technology on banking and consumers. Congress created the National Commission on Electronic Fund Transfers in 1974, directing the Commission to advise what form of regulation, if any, was necessary to ensure a safe, fair and predictable EFT platform in the United States. One of the most contentious issues considered by the EFT Commission was state mandatory sharing statutes. While the Federal Reserve proposed mandatory sharing, the Justice Department opposed it, concerned that banks would be deterred from forming networks because they would have allow others to use the networks that they had invested in developing.
The debate centred around two views of competition policy: Are ABM networks a natural monopoly that should be regulated like public utilities? Or, should numerous networks be allowed to compete with little or with light regulation, and let market forces determine the range of services? The EFT Commission concluded that ABM networks were not natural monopolies and that the competing network model was the preferred policy option. Although Congress considered legislation to pre-empt state sharing statutes, it did not enact it. Rather, what unfolded was vigorous inter-network competition. Furthermore, the Justice Department’s concerns about the anti-competitive effects of mandatory sharing appear to have been realized. In states that mandated ABM sharing, deployment of ATMs and card usage were lower than in states that did not mandate ABM sharing.
Today, mandatory shared deposit taking in the United States appears to be coming to an end, both for policy and operational reasons:
* Policy Considerations
– Iowa, a state that continues to mandate shared deposit taking, extends the sharing requirement to off-premises machines only. On-premises machines are viewed as part of the branch delivery channel and not subject to mandatory sharing. Moreover, in asserting the paramountcy of federal jurisdiction over state banking law with respect to nationally regulated banks, the courts have entered the shared functionality debate. As part of its shared functionality law, Iowa prohibited banks from surcharging non-customers who used their machines. In 2002, five nationally chartered banks, with the support of the United State Office of the Comptroller of the Currency, succeeded in overturning Iowa’s 24 year-old surcharge ban. The court affirmed the paramountcy of U.S. federal banking law that does not require shared functionality.
* Operational Considerations
– With the end of mandatory shared deposit taking in Illinois, Bank One stopped taking shared deposits in its Chicago area ABMs. The reasons cited by Bank One were:
* Increased costs of shared deposits.
* Transaction adjustment and settlement issues.
* Increased fraud.
More recently ABM networks have changed their contractual sharing rules pertaining to shared deposit taking. On September 1, 2002 the NYCE network permitted its member banks to surcharge non-customers for deposits up to US$2.25 per deposit. NYCE network fees are similar in amount to other networks that offer shared deposit taking. Commentators note that higher interchange fees for shared deposits better reflect the cost of supporting deposit taking ABMs. On July 1, 2003 the NYCE network went further, making shared deposit taking optional for its participating banks. Networks and their bank members cite declining demand for shared deposits as their reason for no longer mandating shared deposit taking. Falling demand is attributed to:
* Lengthy clearing times of up to five days for ‘not-on-us’ deposits.
* The high cost to financial institutions of handling ‘not-on-us’ deposits and resultant customer avoidance of surcharge fees levied by financial institutions to recoup high operating costs.
* General reluctance of customers to place deposits in foreign machines.
* A decline in demand for shared deposit taking attributable to the increase of direct deposits by employers, health and dental insurers, and government.
7. Approaches to Achieving "Shared Functionality"
If, after its consideration of all the issues, the government were to decide to mandate expanded ABM functionality, this could be done on either a sector-wide basis or a selective basis. Both possible approaches, and their respective policy implications, are examined below.
a) Sector-Wide Approaches
The federal government could mandate shared functionality in two ways. First, Parliament could pass legislation directing federally regulated deposit taking institutions offering ABM services to expand shared ABM functionality. Second, the Minister of Finance could use the powers under The Canadian Payments Act to designate a payments system and issue a directive that the designated system must adopt shared functionality.
Mandating broader shared functionality across the financial sector would be a significant break from previous practice and would introduce a public utility mind-set that could have important ramifications for the future direction of financial services policy in Canada. Among other things:
* It would shift the status of the ABM delivery channel from that of a competitive, market-driven one towards being an instrument of government policy akin to a public utility. Consequently, this could result in considerable uncertainty in the marketplace and act as an inhibitor of future innovation. Questions would arise about which future directions the government may give to the system and how consistent these directions might be with individual financial institutions’ strategic objectives. Having specific regard to designation, there could be a disincentive to make further investments, whether to replace older machines, make upgrades or add innovations, since costs would be unpredictable as a result of increased uncertainty about which system rules the Minister would or would not approve or amend in future.
* Such a step could have implications for how Canada is viewed on the international stage. If international institutions were to form the view that there is a growing degree of government involvement in the direction of the financial system, it could act as a disincentive to future investment in this country. Accordingly, such a decision would need to be considered from the perspective of whether it would retain and promote investment in Canada or encourage the migration of capital and creation of financial centres in other jurisdictions.
* Designating a system to offer shared functionality could have significant competitive implications for non-designated ABM networks.
* Mandating would raise the issue of whether third-party white-label ABMs would also be required to offer expanded shared functionality, as well as the limited functionality ABMs that some institutions have as part of their ABM portfolio.
* The operational and other implications arising from adding shared functionality identified throughout this submission would need to be carefully considered.
b) Selective Approach
One selective approach would be to make shared functionality a condition for approving a merger between large banks (i.e., merger proponents would be required to broaden the shared functionality of the ABMs of the new merged institution). This approach raises a number of considerations.
One of the first issues to be considered would be whether or not the merged bank would undertake to seek shared ABM functionality through bilateral or multilateral arrangements within Interac or be required to join the Exchange Network. With respect to Interac, the following four conditions would apply to an attempt to any consideration of new bilateral or multilateral shared services:
* The service must not replicate an existing Interac service provided to members.
* The service must not result in any material adverse impact to Interac.
* Market viability of the service must require real-time access to member demand deposit accounts.
* The Interac members participating in the bilateral or multilateral service must bear the costs of developing the new service and any consequent changes required to the Interac Inter-Member Network.
Having regard to requiring banks to become Exchange Network members as a condition of approving a merger, the Exchange Network is currently set up so that transactions between two Exchange members bypass the Interac system. Thus, should an Interac member bank be required to join the Exchange Network, all future ‘not-on-us’ transactions involving other Exchange members, including withdrawals, would go through the Exchange, not Interac. This would result in lower revenue for the Interac system. Accordingly, policy makers would need to assess the operational and revenue implications for the Interac system. Similarly, if Interac were to be designated, policy makers would need to assess these implications for the Exchange Network.
Moreover, if broadening shared ABM functionality were to be a condition of a large bank merger, a question that would need to be considered is what the scope of that shared functionality would be.
* Would all deposit-taking institutions have access to the merged banks’ ABMs and, if so, would the merged entity have the right to expect access to all other deposit-taking ABMs? If so, the merger-condition approach would mean that functionality would be extended across the board.
* Or, would only smaller financial institutions have access to the ABMs of the merged bank, and if so, on what basis, e.g., would it be limited to the members currently participating in the Exchange Network? In the latter case, customers of non-merging members of Interac who are not also members of the Exchange would not participate in the broadened functionality system. Such an approach would allow some banks (as well as credit unions) to make use of the large ABM infrastructure of the merged bank, but would not allow that access to non-Exchange members. Since the former category includes both small and relatively large banks (as well as regional banks and banks with national scope), it is not clear what public policy goals would be achieved through the resulting asymmetry in the marketplace.
* Or, would the merged bank be required to share its ABMs with any financial institution that expressed an interest in having access, and if so, would the sharing be on a mutually agreed contractual basis or on terms set as a condition of the merger? This would raise the question: through which shared network would the shared functionality be achieved and how, in practical terms, would that be achieved? Would, for instance, the institutions interested in sharing with the merged bank be the same as the membership of the Exchange and if not, would that raise operational or governance issues within the Exchange? If the intent were that it would be achieved through the Interac system, how would that be accomplished of only some Interac members were involved?
8. Other Policy Considerations
a) Investment
Over the years, many banks in Canada have made very large investments in their proprietary ABM network. Although banks voluntarily agreed to share certain services through Interac, many of them continue to view ABMs as a competitive market differentiator and allocate capital to this delivery system accordingly. Any decision to require institutions to add to the functionality of their machines in a way not in keeping with their individual business plans, and to share these machines with other banks, trust companies and credit unions, would need to take fair and careful consideration of compensation for the investments made by individual institutions.
b) Precedential Implications
Given the evolution of the retail
November 30, 2004 at 09:19 PM in Financial Services | Permalink | TrackBack (10) | Top of page | Blog Home
Finextra: Pay By Touch to acquire online payments firm ATM Direct
San Franciso-based Pay By Touch has signed an agreement to acquire ATM Direct, a provider of online payment authentication technology. Financial terms of the deal were not disclosed.
ATM Direct's patent-pending software enables consumers to use their debit card PIN numbers to authenticate payments for purchases made on the Internet. The company says the technology enables payments in real time.
Pay By Touch provides biometric payment authentication services. The vendor also delivers payment processing services through its iPAY business.
John Rogers, president and CEO, Pay By Touch, says: "This new addition to the Pay By Touch family gives us the ability to provide a one-stop-shop for an end-to-end payment processing solution."
November 30, 2004 at 07:34 AM in Payments | Permalink | TrackBack (2) | Top of page | Blog Home
Yahoo! UK & Ireland News - Identity Cards: The Debate Hots Up
The Government is set to reveal details of its plans for compulsory identity cards, which it says will help tackle problems such as terrorism and illegal immigration.Controversially, the cards will include the use of biometric data such as fingerprints or iris scans to confirm the holder's identity.
The Prime Minister has given his strong personal backing to David Blunkett's £3bn proposals as a Bill introducing the controversial issue is published later today at Westminster.
Tony Blair argued at his monthly press conference that ID cards will help improve people's security and improve access public services.
He said ID cards were not a "silver bullet" to defeat terrorism but were an important weapon in the fight against terrorism and organised crime.
But the Identity Cards Bill is likely to receive a rough passage through Parliament.
The Liberal Democrats have voiced strong opposition to what they call the "deeply flawed" legislation, while the Conservatives also have strong misgivings.
Many Labour backbenchers are also believed to be uneasy about the impact of compulsory ID cards on civil liberties.
Lib Dem home affairs spokesman Mark Oaten has published figures showing that almost a quarter of a million passports are lost or stolen each year.
He warned of potential "chaos" if this rate of loss is repeated with ID cards, which holders will need to access vital benefits and most health treatment.
The plan is to introduce the cards in 2007-8 and for them to be made compulsory between 2010-2012.
November 29, 2004 at 09:17 PM in Smart Cards | Permalink | TrackBack (3) | Top of page | Blog Home
11/26/2004 5:00:00 PM - An important training lesson learned in the check-out lane
by Neil Sutton
Let's face it: self-service is a relative term.
It seems fairly appropriate when you're at the gas pump or the salad bar, but less so at the grocery check-out, even when you're swiping bar codes across a scanner yourself.
I had my first "self check-out" experience at a Loblaw's superstore
that opened up recently just north of Toronto. Practically any new big box retail outlet will draw crowds for its first couple of weeks either through its sheer novelty or the promise of grand opening bargains. Such was the case at this Loblaw's -- the place was teeming with overeager shoppers and the line-ups were daunting. It was then that I spied two lonely check-outs, curiously bereft of cashiers.
These self check-outs had all the usual features -- a scanner to capture the bar code information, scales to weigh produce, and a display that totaled the purchases.
A man with a small child was trying his hand at one, but was having difficulty getting the bar codes to scan. I lined up behind him and thought, "Man, this is amateur hour." I could have had this guy's stuff scanned and bagged in two minutes. He muddled through, trundled off with child in tow, and I stepped up to the plate.
Easy-peasy. I'll be done with my cart of groceries in no time while the rest of these losers wait in line. I was doing pretty well and had a decent rhythm going with the swiping and bagging. Then came the produce. Never has a bunch of bananas so befuddled a human being since apes descended from the trees and started walking upright.
No bar code.
In a move that ultimately takes the "self" out of self check-out, two employees who were waiting in the wings stepped forward and instructed me to manually tap in a four-digit code to indicate "banana." The apples and tomatoes sitting in my cart followed suit.
These women have stations in the store to aid the checkout-challenged. When a banana-wielding luddite can't figure out when to do next, they swing into action.
This really isn't unlike practically any enterprise scenario in which employees are presented new technology -- the basics are pretty self-evident, but throw a banana problem in the works and it's time to put a call in to the help desk.
Companies spend vast amounts of money sending employees on training excursions to figure out how to handle the banana problems of IT. Whether it's an HR portal, a business intelligence suite or a new PDA, staff require time and training in order to master the technology's potential.
Here at ITBusiness.ca, we devote a reasonable amount of our coverage to "training" stories since it's a universal issue within the industry. Many enterprises are using e-learning tools to communicate IT changes to their staff. It's a relatively cost-effective way of doing it and users can generally learn at their own pace. Others prefer more hands-on training and actual classroom sessions. Those tend to be more expensive and time-consuming, but the personal attention can often yield better results.
Then, of course, there's the help desk and dedicated IT workers who provide ongoing support -- answering questions, smoothing over problems and just generally troubleshooting.
The patient young women who presented me with a solution to the banana problem in the Loblaw's are the equivalent of help desk, but surely their jobs are just transitory. Sooner or later, people are going to have to figure out how to scan bananas for themselves or self check-outs will never take off.
I first heard of the technology when I started working at ITBusiness.ca almost five years ago. NCR provided a briefing at its Atlanta office and talked about the impact self check-out would eventually have on the retail industry. Maybe I'm wrong, but I don't see an awful lot of these devices out there.
The problem is, there really isn't any training for the public at large. Most people have watched enough cashiers swipe bar codes to intuit how do to it themselves, but the nuances of self-checkout are somewhat baffling. (I haven't even mentioned the "bagging platform" that chirps at you if you remove a bag before you've finished swiping all of your groceries. Then there's the bizarre array of payment options. Coin-feeder, anyone?)
Maybe we'll get there eventually -- after all, pumping your own gas was once considered unthinkable -- but for now, self-checkout's going to be playing second banana.
November 26, 2004 at 10:50 PM in Web lifestyle | Permalink | TrackBack (11) | Top of page | Blog Home
Triple DES Dare You | ATM Marketplace News
by Ann All, editor • 13 October 2003
First there was Y2K, the millennium bug that, despite all of the hype, was resolved with surprisingly little fuss in the ATM world.
Then came the federal government's proposed changes to the ADA (Americans with Disabilities Act), a more vexing concern that will require the ATM industry to make its machines more accessible for all users, chiefly by adding the ability to make them talk.
Although the Department of Justice has yet to sign off with its final guidelines for ATM accessibility, the industry seems well on its way to resolving the ADA issue.
The latest acronym to inspire industry-wide angst is DES: Data Encryption Standard, or more accurately, Triple DES.
What DES is
Developed by an IBM team in the mid 1970s, adopted by the National Institute of Standards and Technology (NIST) in early 1977 and approved by an American National Standards Institute committee (ANSI X3.92) in 1981, DES is an encryption algorithm used to protect sensitive data -- such as PINs.
With DES, a binary number called a key is used to encrypt and decrypt data. The DES algorithm uses a 56-bit key length; Triple DES specifies three rounds of encryption, effectively increasing the key length to 168 bits.
Colette Broadway, technical project manager for Thales e-Security, a provider of Host Security Modules (HSMs), the devices where PIN encryption and de-encryption occur at the host, said that there are 256 or 72 thousand-million-million values for any single DES key.
While that sounds like a lot, Broadway said, advances in computing power have made it possible, at least in theory, to crack DES using a "brute force" attack in which a computer tries every single value until the correct one is found.
There have been no cases of fraud linked to a breach of DES, a group called the Electronic Frontier Foundation won a "DES cracking" contest in 1998 by breaking a DES key in less than three days using a specially developed computer. Developed for less than $250,000, the DES Cracker computer was powered by a chip capable of processing 88 billion keys per second.
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November 25, 2004 at 10:17 AM in Financial Services | Permalink | TrackBack (4) | Top of page | Blog Home
Finextra: OFX develops standards for safer aggregation
The OFX Consortium is seeking comment on a new approach to financial account aggregation that would remove the need for sensitive financial information, such as passwords, to be stored on aggregators' systems.
The Consortium, which is typically involved in the development of standards for downloading bank data to popular personal finance programs such as Intuit's Quicken and Microsoft Money, is working to standardise the way financial transactions are transmitted over the Internet.
The proposal takes a new approach to aggregating customer data by extending the widely used Open Financial Exchange (OFX) specification in ways that allow aggregators to receive account data for large numbers of users.
The proposal was developed by the Open Financial Exchange Aggregation Services Working Group over the past 12 months with input from Business Logic, Fidelity Investments, Teknowledge, Intuit, Parsam Technologies, Citigroup and Microsoft.
This extension to OFX provides ways to meet data exchange standards as defined in Bits Voluntary Guidelines for Aggregation Services, Version 2.0, published in January 2004. Similar guidelines have been promoted in the UK by umbrella payments body Apacs.
The security issues involved in the management of personal financial information has been seen as a stumbling block to the wider uptake of account aggregation services in the UK, as the bigger banks have shied away from the service.
Michael Grancolas, chief architect, Citibanking Technology Solutions Group, says the bank strongly supported the effort because of the capability it gives for extending OFX use within and beyond the enterprise. "Citigroup has been an industry leader in offering aggregation services for our customers and early on recognised a need for a better data exchange methodology," he says.
November 23, 2004 at 07:07 AM in Financial Services | Permalink | TrackBack (8) | Top of page | Blog Home
A Nation Online: Broadband Age
November 22, 2004 at 10:52 PM in Web lifestyle | Permalink | TrackBack (7) | Top of page | Blog Home