An Issue Every ATM-Owning Credit Union Should Watch

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When it comes to purchasing and maintaining their equipment, financial institutions of all types-whether they are large financial institutions, smaller independent community banks or credit unions-have always enjoyed freedom of choice.

Whether they perform their own service and maintenance, purchase a service agreement from the manufacturer or hire a third-party maintenance company, the way that equipment, such as automatic teller machines, is bought and serviced is first and foremost a decision best left to the customer.

But there is a brewing controversy that if left unresolved will adversely impact the owners of all types of software-based financial services equipment beginning with ATMs and spreading next to electronic security, digital video, pneumatic systems, keyless vaults and other equipment categories.

The controversy-and the negative effect it will have on equipment owners in terms of fewer service options and higher maintenance fees -centers around the squelching of competition because of new password-protected software being installed on new generations of ATMs, as well as on older ATMs receiving the Triple DES retrofits.

Under the auspices of a Visa International and MasterCard International security mandate, ATM owners of all sizes must upgrade all their machines from a single data encryption standard to triple data encryption standard, or Triple DES, beginning in April 2005.

While the new Triple DES mandates will go to great lengths to make consumers feel even safer in conducting their electronic banking business and ensure that ATM owners are deploying machines that adhere to the industry's highest level of security, Triple DES is also a catalyst in the unfolding controversy over password-protected software.

One major manufacturer of ATM machines and bank equipment, in our view, has used Triple DES as a springboard to unfairly "lock out" third-party maintenance companies from servicing their newest line of automatic teller machines, as well as older generation ATMs receiving the manufacturer's Triple DES hardware and software.

One Company's Policy

All ATM owners are now in the process of upgrading or replacing their machines to comply with forthcoming Triple DES regulations. But under the auspices of Triple DES, at least one major manufacturer has imposed password protection on the operating system of its new line of machines and reversed its long-standing policies pertaining to service and parts sales.

With its new policy in place, only the manufacturer has access to the pass code needed to work on this new line of machines. What's more, the manufacturer is now requiring that any of its installed base of ATM customers who want any upgrade must purchase new ATM keyboards and encryption software directly from them. They are telling their customers with existing installed ATMs that only they, and they alone, can perform the installation and subsequent repairs (if necessary) since it is password protected and they do not allow any other maintenance source to service this. What this in essence would mean is that if a financial institution had a third-party company providing ATM service, and, the Triple DES retrofit required service, they would also have to pay the manufacturer to provide service on this component.

Whether ATM owners need to purchase a new machine or purchase parts and service for an already installed ATM, this manufacturer is forcing those ATM owners to solicit business from them-and only them.

The manufacturer insists that password-protected software and changes in its parts sales and service policies are needed to protect its large financial investment in a new product line of ATMs.

But we think these changes unduly harm independent third-party maintenance service companies by preventing these companies from fairly competing for-and winning-equipment service business, particularly for ATMs.

Many third-party maintenance companies are locally owned and operated with strong ties to their regional and local financial services market. They know their customer and their equipment, can respond instantly to resolve a service maintenance problem and offer highly competitive rates compared to those offered by a manufacturer.

If third-party maintenance companies are prevented from competing on a level playing field for service contracts, this will result in a less competitive market, fewer choices for equipment owners and higher services costs that will ultimately be passed on to the banking consumer in the form of higher transaction and teller fees.

We are pursuing a legal complaint against a major bank equipment and ATM manufacturer to keep the equipment service business on an open and level playing field. These issues pertaining to ATMs inevitably will spread to other categories of bank equipment as software-based products are becoming more prevalent in the entire financial equipment industry.

The issue of suppliers and service companies having access to a manufacturer's parts and the subsequent effect on who controls the corresponding service business isn't just restricted to the financial services industry. For instance, on behalf of its more than 7,000 members, Alliance of Automotive Service Providers is pushing for Congressional passage of HR 2735, which would continue to allow motorists to choose where, how and by whom to have their vehicles serviced, repaired and which parts to use for replacement.

The parts and service issues are similar: Without a level playing field or the right to buy certain automotive computer parts from original equipment manufacturers, independent automotive service providers will unfairly lose business to dealers and others who do have access to computers that completely control and monitor systems such as: brakes, air bags, steering mechanisms, sound and ignition systems.

Who We Represent

Our association-the Financial & Security Products Association - represents more than 300 companies who supply products and services such as ATMs, cash dispensers, currency counting equipment, ATM buildings and kiosks, signage, electronic security equipment, physical security equipment, pneumatic tube systems, under-counter steel equipment, modular financial buildings, software, parts and replenishment, disaster recovery, furniture and furnishings, vehicle and fleet management, and point-of-sale equipment.

On behalf of our members-and all owners of all forms of software-based financial services equipment-we are watching this unfolding controversy carefully. Most financial equipment manufacturers, whether they are large or small, sell parts to customers or service companies or maintain reseller or business partner programs whereby outside parties can purchase parts or obtain access to information such as diagnostics schematics. But not all do so; the action and policies of one major manufacturer that has a share in excess of 90% of the ATM parts and service market for its ATMs is a precedent that other bank equipment manufacturers could follow.

Through our court complaint, we are working to prevent that from happening. We are not asking for any monetary damages-we are seeking an injunction and a dialogue that restores competition and the right of the equipment owner to freely choose its service company.

On its website, the U.S. Department of Justice states: "The historic goal of the antitrust laws is to protect economic freedom and opportunity by promoting competition in the marketplace.

Competition in a free market benefits American consumers through lower prices, better quality and greater choice."

That statement sums up what is now happening in one vital part of the financial services equipment market and what could happen in other parts as well if a level parts and service playing field isn't restored.

Our members, who can typically provide an ATM owner with savings of up to 25% (or even more) compared to the service programs offered by the manufacturers, will be watching the outcome. As customers and owners of ATMs and other financial equipment, we think you should, too.

John M Vrabec is executive director of the Financial & Security Products Association, a non-profit association headquartered in Albuquerque, N.M.

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