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.
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:
In the models Paynet has given to Equity the following key assumptions are made:
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.
It is considered that this is loaned out at the net loan rate as shown in (2) above to create interest income for Equity.
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.
Any increase in this number as supported by the CABS example would have a profound impact on:
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.
Implementation fees –
Other capital outlays –
All the following costs apply equally to each option considered:
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
All ATM vendors charge an annual maintenance fee of approx 10% and this has been modeled.
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
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
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:
2. There is less risk in the Paynet outsourced service for the following reasons:
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.
Retail ATM Strategy Modelling , By: James Mwangi