Retail ATM Strategy Modelling , By: James Mwangi

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Retail ATM Strategy Modelling

Paynet undertook to provide Equity with an overview of the nature and selection of financial switches and ATMs in the Kenyan market as well as provide some rationale as to what particular option might be best suited for their requirement.  This rationale included financial modeling of the various alternatives using Paynet’s detailed retail ATM modeling format which compares the returns of the various alternatives that Equity may consider.

This was presented to senior management of Equity in March 2004 and a further meeting took place in April where senior finance managers were taken through the financial models in more detail.

This document seeks to address some of the key assumptions and considerations within the modeling in order that all parties can buy into the logic used.


Paynet initially presented comparisons between Equity running their switch and ATMs via a Paynet outsourced service and via a Kenswitch outsourced service.

After the initial presentation we were asked to provide a further option in which Paynet manages a switch owned by Equity.

In summary:

  • Equity owns switch – Paynet manages the operations
  • Equity uses the Paynet outsourced switch – Paynet manages operations
  • Equity uses the Kenswitch outsourced switch – Kenswitch manages operations

The first and second options above only differ in one issue and that is the additional capital Equity would have to pay for license fees and hardware to own their own switch.  This amounts to a further Ks/15 million for the project.  As there is no upside to Equity owning its own switch versus using Paynet’s or Kenswitch’s switch this additional Ks/15 million cost is considered excessive and this option is therefore removed entirely from the scope.

Under both the first and second options above Paynet would manage the Equity switch and ATM fleet in its server center on 21st floor, Ambank House.  There is no additional risk or compromise to Equity in using an outsourced switch service and therefore the only consideration should be financial.


Paynet has had extensive experience in this field with two major implementations in CABS (Zimbabwe) and NIC Bank (Kenya).  The results from both of these ATM projects have shown us what really happens in a live case when certain assumptions are put into practice and from these we have built our models to reflect a conservative picture of where we see the situation forward.

Anyone can argue what may or may not happen and it is imperative that financial institutions are able to model sensitivities in order to ensure that they are covered under all scenarios.  With large investment requirements associated with ATMs and switch there needs to be a mature investment appraisal.

Having said that many financial institutions are at significant risk if they take too conservative a stance as this may lead to any one of the factors below, all of which would be disastrous:

  • Wrong choice of partner as revenues might be reflected unnaturally low in a sensitivity analysis making costs seem high
  • Decision not to move to deliver an ATM service at all to customers because an unnaturally low sensitivity analysis makes the project return an unacceptable ROI.
  • Decision to merely dip a toe in the water and see where it leads, which in turn allows a competitor to steal the thunder by being the first aggressive bank to market


In the models Paynet has given to Equity the following key assumptions are made:

  • Revenues will be earned in three ways in this project:
    • Ks/30 per ATM withdrawal (other ATM transactions are free)
    • Single charge of Ks/200 as a one off for the initial ATM card given out to customers in order to cover the Ks/150 fee to produce each card
    • Loan interest income on a certain level of new deposits achieved via this initiative.
  • The loan rate is calculated as follows:
    • Money loaned out at 15%
    • A bad debt provision of 20% is taken off this to leave a net loan percentage of only 12%
    • As only 40% of deposits are loaned out only 40% of this net 12% loan percentage is considered, thus giving a net loan percentage of 4.8%

The assumption is therefore that all additional deposits taken in via this initiative will be loaned at 4.8% which takes bad debt and non performance into consideration.

  • The deposit amount each customer maintains as an average in Equity each month is calculated as follows:
    • Average gross income per month for all customers = Ks/30,000
    • Average net income based on a 25% tax rate would be Ks/20,000
    • It is assumed that all of this would be deposited each month with Equity by the customer
    • Typically the majority of this net income would be taken out almost immediately, and thus Ks/20,000 net might fall to Ks/10,000 quickly.  The remainder would typically be withdrawn evenly over the month, thus giving an average fund on deposit of Ks/7,200 for each customer each month.

It is considered that this is loaned out at the net loan rate as shown in (2) above to create interest income for Equity.

  • Initial customer base at start is 230,000 but it is felt that as a number of these customers will be rural and not able to receive ATM cards, nor utilize the service (initial ATMs only in towns) the applicable number may be considered at only 100,000.

This customer base is expected to grow to over 600,000 in the five years of the project but again only 400,000 of these may be deemed applicable (non rural) and able to use ATMs by the end of year five.  As more ATMs are deployed in a wider area the percentage of customers using the product will become greater but it is unlikely to ever cover all customers.

  • Evidence in CABS in Zimbabwe (which had 1 million low end customers of a similar type to Equity) showed that all of these customers embraced ATMs and used their cards frequently from the beginning.  Pent up demand for this service plus busy branches suggests Equity may have the same experience but we have been very conservative in the modeling and considered only 25,000 transactions per month at the first month (1 in 4 customers) moving to 400,000 at the end of year five (1 for each customer).

Any increase in this number as supported by the CABS example would have a profound impact on:

    • Transaction revenues
    • Per transaction costs, if the Kenswitch model is used
  • Capital Investment


These are all considered as brand new models and all are costed in the models at the full price (including VAT as this is non refundable) of the most expensive model on offer.  This model has full deposit-taking capabilities as well as latest multi media graphics on screen. 

Experience shows ATM prices are falling all the time and they have come down 20% in the past six months so this may be conservative.  It is also highly unlikely that all ATMs deployed would be the top of the range models as some locations may only require a lesser machine.


    • Equity uses the Paynet switch – one off fee of $50,000 payable to Oasis for the “new customer” on the license.
    • Equity buys their own switch – one off fee of approximately $125,000 for most decent switches with unlimited ATMs and POS capabilities.
    • Equity uses Kenswitch – one off fee of approximately $30,000for membership and joining fees

 Hardware –

  • Equity uses Paynet switch – zero further costs
  • Equity buys their own switch – about $60,000 in server equipment and hardware security modules if DRP backup is purchased
  • Equity uses Kenswitch – around $10,000 for router and other hardware requirments

Implementation fees –

  • Equity uses Paynet switch – estimated one off charge of $50,000 depending on work to interface Oasis to Equity core system.
  • Equity buys their own switch – estimated one off charge of $30,000-50,000 to pay the vendor/distributor of the switch to do the necessary interface work
  • Equity uses Kenswitch – estimated $10,000-20,000 for finbridge and interface to core system.

Other capital outlays –

All the following costs apply equally to each option considered:

  • Offsite installation of ATMs - $1,000 per ATM installed out of Nairobi
  • Civil works per ATM site - $5,000 per ATM installation for hole in the wall and other civil engineering.
  • Signage – $1,000 branding and signage per ATM site.
  • Monthly management fee
    • Equity use Paynet switch – fixed monthly price for end to end solution including management of switch, ATM vendors, reconciliations, card management, etc.  Price alters according to the number of ATMs being managed and this in turn alters per the number of transactions/customers.
    • Equity buy their own switch – considered the same as above if Paynet manage this service for Equity
    • Equity use Kenswitch – a fee per transaction as agreed with Kenswitch and discounted with volumes.  For special consideration:
      • As volume of transactions rise so does the variable cost so there is less upside for Equity.
      •  Kenswitch are unclear as to whether this fee per transaction is only for withdrawals or for all transactions (including deposits, mini statements and balance enquiries).  If the latter then this is likely to be a further 50-70% additional new transactions to be costed each month and this will make the model economically unviable.
      • Kenswitch have different prices per transaction if Equity own the ATMs versus if they don’t (use Kenswitch ATMs).  If Equity use Kenswitch ATMs they must take into consideration that these are 10-15 year old machines with no deposit capability, no enhanced graphics on screen and likely to break down more often.
  • Annual maintenance on switch

Oasis charges an annual fee of 18% on their license fee so this would be applicable to Equity if they used the Paynet outsourced service or bought a switch themselves.  It would be 18% of $50,000 if they used Paynet’s switch or 18% of $125,000 if they bought their own switch.

It is not clear if Kenswitch propose an annual maintenance fee

  • Annual maintenance on ATMs

All ATM vendors charge an annual maintenance fee of approx 10% and this has been modeled.

  • Card production fee

Paynet believes that for the volume of cards that Equity possesses any card supplier will give a discount down to circa Ks/150 per card.

Kenswitch charge around $3 (Ks/220) per card produced

  • Monthly ATM fees –


If Equity has an ATM at a branch that is connected via their wide area network already this will not require further communications charges.  If the ATM is not at a branch site this communication charge is considered at Ks/40,000 per month for wireless or leased line connectivity.

This applies equally to all models.

For the models it is assumed 50% of the sites will require communication links and the other 50% will not


For all models it is considered that 24x7 security is required at the ATM and this is costed at Ks/40,000 per month

Cash management

For ATM sites at branches the staff may handle the reloading of money into ATMs and other cash management issues such as reconciliations and this service is therefore for free.  If the ATM is not at a branch then this would cost around Ks/40,000 per ATM site per month.

For the models it is assumed 50% of sites are managed for free and 50% cost.

These are the key assumptions in the models and they can be changed to reflect sensitivities as is necessary.


Paynet recommends that Equity takes the Paynet outsourced service option for the following reasons:

1 . The net profit and ROI in this model is better than either of the two other models.  This is because:
  1. There is less capital spend than the model where Equity buy their own switch but all other factors are the same.
  2. The transaction fees rise sharply with the increased transactions in the Kenswitch model whilst the monthly management fee stays largely flat in the Paynet model.

2. There is less risk in the Paynet outsourced service for the following reasons:

  1. One customer already on the service and another customer currently being implemented – experienced systems and procedures in place for all operations
  2. Top quality operational management team in place with over 45 years of direct ATM experience between them – Paynet has assembled one of the best teams in Kenya with their Manager being
  3. the former Standard Chartered ATM Manager (Chrispine Opondo) who initiated ATMs in Kenya and has 15 years experience in the region
  4. World class server environment in place with full on-site and off-site disaster recovery in place
  5. Highest ATM up-times in Kenya due to 24x7x365 operational management

3. Economies of scale will ensure prices stay low going forward as Paynet brings on board new customers

4.New products and services will be regularly introduced as Paynet has the focus to deliver on these objectives.  These features may be VISA, point of sale connectivity, mobile top up and bill payments and all of these are currently in the implementation phase.

5. Confidentiality of new products, launches, feature-enhancements, etc, that cannot easily be provided in a consortium environment.

6. Ability to directly interconnect with selective banks and other institutions to use their ATMs or vice versa at a fee to be agreed between banks without a third party charging for this service.  This can benefit customers for wider access on the one hand whilst also benefit Equity via additional revenues if they charge a fee per transaction for third party acquiring.

7.Ability to chose who uses the Equity ATM network and when and for how much which is not necessarily applicable under Kenswitch

The Paynet model is to work closely with each customer to ensure that their particular customizations are in place to afford them the best possible results.  Paynet believes in developing close relationships with its customers and guiding them along the entire way to ensure no pitfalls or hidden costs.  Each customer is treated individually as required and there is likely to be a limit to the number of banks Paynet will allow on their outsourced service so they can continue to offer the same quality service they have produced for NIC Bank to date.

Paynet has no ties to NIC Bank or any other bank and there are no common Directors.  Complete confidentiality is ensured in all matters and this is underlined by Paynet currently managing simultaneous relationships with 11 banks in Zimbabwe and 5 banks in Kenya on the corporate payments product and confidentiality has never been compromised.

Paynet offers a consulting service which both NIC Bank and the new bank currently under implementation have both used, in order to drive the implementation and launch in as quick but thorough manner as possible.  Paynet has wide experience that extends beyond technology into strategy, operations, marketing, sales and other critical areas and we have project managed all these disciplines for both of our current customers to launch.

The time to implement post signature of any agreement is approximately 3-6 months depending on the availability of resources at Equity and the nature and type of the core system.  As the market is rapidly evolving and competitors are likely to drive their own ATM strategies in the short term we would advocate moving quickly and implementing this ATM project alongside other projects in order to gain the crucial first-move advantage.  The building society that first delivers ATMs in Kenya will gain massive reward and kudos and those that follow will be picking up the remains.

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