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M. Knox, S. Cohen, B. Adrian
Research Note
27 August 2003
The IFX Standard Opens the ATM and POS Channels
Interactive Financial eXchange v.1.4 introduced significant new messaging standards for the traditionally proprietary automated teller machine and point-of-sale channels, which will affect banks' ATMs and multichannel integration plans.
The Interactive Financial eXchange (IFX) specification v.1.4, which was released in April 2003, contains significant new standards for the automated teller machine (ATM) and point-of-sale (POS) channels (see Table 1 and "Interactive Financial eXchange Standard Extends Its Reach"). These standards will enable operational efficiency, reduce time to market for ATM upgrades and new functionality, and allow potential vendor penetration of new markets. Thus, they will alter the competitive landscape for banks, ATM vendors and service providers.
Table 1
ATM/POS Standards Covered by IFX v.1.4
Financial Transactions Withdrawal, transfer, balance/account
inquiries, envelope deposit, cash deposit, cash recycling, check deposit, personal identification number change, statement print, card verification, customer verification, payment enclosed, payment, bill payment, credit card cash advance, noncurrency dispensing
Security Functionality Data Encryption Standard (DES),
triple-DES, remote-key downloading, message authentication, Europay, MasterCard and Visa (EMV) smart cards
ATM Device Management Alert messages
ATM Terminal Management Open/close messages, local
(Regulation E) configuration
ATM Inventory Management Terminal balancing, terminal
subtotaling, midpoint inventory adjustments
Source: IFX Forum
These ATM/POS specifications will be extended in future versions of the IFX standard (see Note 1 for a list of the members of the IFX ATM/POS working group). Additional areas Core Topic
Financial Services: Financial Services Architectures and Emerging Technologies
Key Issue
What architecture models and technologies will enable FSPs to adapt to major industry trends such as straight-through processing, the real-time enterprise, corporate performance measurement and risk management?
Strategic Planning Assumptions
By year-end 2004, only one-third of ATMs in the United States will still use OS/2 (0.8 probability).
By early 2005, at least 30 percent of ATMs installed in the United States will use terminal software that incorporates the IFX standard (0.7 probability).
© 2003 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
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of coverage are expected to include person-to-person payment, money order purchases, prepaid phone recharges, several check-related transactions and POS transactions. However, the time frame for release of standards in these areas has not yet been determined.
The Need for Standards
Proprietary functionality must be addressed at multiple levels in the ATM channel:
• Individual terminal — Terminals from different vendors, and different models from the same vendor, support different physical features, operating systems and proprietary, software-enabled functionality.
• ATM driving and switching software (or services, where this has been outsourced) — This level can serve to disable functionality that is resident at the terminal level. For example, an ATM terminal may be equipped to offer coin dispensing, but if the driving software does not support the functionality, this feature can't be activated.
The IFX ATM/POS standard, coupled with replacement of OS/2 with Windows-based operating systems, is designed to eliminate these proprietary bottlenecks between the ATM terminal and driving host, and between the driving host and the bank's core systems at the messaging content level.
The proprietary nature of the ATM channel has created a number of challenges for three groups.
For banks:
• Need to support heterogeneous ATM networks — Most large banks have ATMs from multiple suppliers. This is sometimes by design to obtain a better negotiation stance for pricing, and sometimes by default because of mergers and acquisitions. These different vendor and model ATMs have different proprietary software and operating systems. This increases ongoing operational and maintenance costs. It also requires multiple upgrade and development initiatives for new functionality, including the support of new regulatory requirements.
• Inability to share functional components across different vendors' ATMs and other delivery channels without significant rework or customization — The inability to share functional components affects the ability to deliver new products and services cost-effectively, as well as to present a consistent customer ATM and overall retail delivery experience. An area of particular thwarted synergy is the Note 1
IFX ATM/POS Working Group Members
ACI Worldwide Bank of America Concord EFS Diebold eFunds Fujitsu Mosaic Software NCR
Paragon Software Group Phoenix Interactive Design State Farm Insurance Wincor Nixdorf
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inability to share transaction components with other payment channels, such as electronic funds transfer (EFT), credit cards and bill payment, which have many of the same functional requirements.
For ATM hardware and software vendors:
• Difficulty in selling advanced-feature (for example, Web-enabled) ATMs because of proprietary interfaces between the ATM, driving and host systems, which limits ATM functionality — Although the ATM hardware and software may support, for example, bill payment at the ATM, the feature can't be used if the ATM network provider does not support this functionality. This problem particularly affects vendors such as Wincor Nixdorf, whose terminals are designed to emulate other vendors' terminals and thus are constrained to offering the functionality of the emulated vendors' terminals.
• Confinement to a narrow, mature market, with limited ability to extend products and services to other markets.
For ATM driving and switching software and service providers: • Need to maintain multiple ATM terminal interfaces, which
increases the cost of ongoing operations, as well as upgrades or enhancements.
• Inability to extend their solutions to other transaction channels and position themselves as transaction and payment gateways.
Benefits and Risks
Substantial benefits may accrue with the adoption of IFX v.1.4 for the ATM/POS channel. There are also risks and inhibitors (see Table 2 and Table 3).
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Table 2
IFX ATM/POS Standards Benefits, Risks and Inhibitors for Banks and Other Channel Providers
Benefits Risks and Barriers to Realizing Benefits
Banks • Lower total cost of ownership across a
multivendor ATM base because separate interfaces and processes will not have to be maintained for different ATMs
• Elimination of expenses related to
redundancy between ATM and other delivery channels
• Ability to share functional components and staff resources across a multivendor ATM base, reducing time to market
• Ability to share functional components and staff resources with other delivery channels, enabling multichannel integration, consistent customer interactions, improved transactional integrity, improved time to market and less-complex back-office processing
• Improved ability to offer new products and services through ATMs, such as bill payment and phone card replenishment
• Improved bargaining power with ATM and network vendors as ATM hardware, software and networks are commoditized
• IFX may not be broadly adopted internally or externally, making it just one more standard that must be supported
• Lack of buy-in from other channel owners in the bank, affecting the ability to integrate channels
• Continued lack of customer demand for, or use of, enhanced ATM features
Other Channel Software Vendors and Service Providers (such as vendors that target other delivery channels)
• Increased opportunity to port offerings to the ATM channel
• IFX may not be broadly adopted by banks or complementary vendors, resulting in no payoff from the development effort
• Slow migration by ATM owners from the OS/2 operating system
• Need to develop ATM-specific functionality to successfully enter this market
• Commoditization of banking and payment software
• Software scalability issues related to the increased traffic from adding transactions from the ATM channel
SPA-20-8175 Several of these benefits warrant additional explanation:
• Reduced time to market for new products and services — Development of new functionality and upgrades to functionality will only have to be done once, even for multivendor ATM bases. If IFX other channels also support IFX, this one-time development effort will apply to cross-channel functionality. In addition, functionality for other channels that incorporates IFX (for example, bill payment) may be readily adapted for IFX-enabled ATMs.
• Reduced time to market for new vendor-supplied functionality — Traditionally, new feature support was developed and introduced by ATM terminal hardware and software vendors. Once this support was introduced in their products, ATM driving and switching vendors would undertake development efforts to enable this feature. With the introduction of IFX, new feature support will be designed at the standard level, allowing ATM terminal vendor and ATM driving and switching vendor development to happen simultaneously.
Several risks also require additional explanation: Table 3
IFX ATM/POS Standards Benefits, Risks and Inhibitors for ATM Terminal and Service Providers
Benefits Risks and Barriers to Realizing Benefits
ATM Terminal Hardware and Software Vendors
• Improved ability to sell advanced-feature ATMs; this benefit is particularly strong for vendors that sell terminals that emulate those of other vendors
• Ability to extend and sell software that was initially designed for ATM/POS into other channels
• IFX may not be broadly adopted by banks or complementary vendors, resulting in no payoff from development effort
• Slow migration by ATM owners from the OS/2 operating system
• Continued lack of demand for advanced-feature ATMs
• Increased competition because ATM owners would no longer be locked into purchase of ATM software from their hardware suppliers, and emulation vendors will be better able to compete with alternative functionality • Commoditization of ATM hardware and
software ATM Driving and Switching Software and Service Providers
• Ability to reposition as transaction gateways for remote or payment channels
• Elimination of need to establish application programming interfaces for different vendors' ATMs and models
• Improved ability to support and improved time to market for advanced functionality as an extended source of revenue
• IFX may not be broadly adopted by banks or complementary vendors, resulting in no payoff from development effort
• Slow migration by ATM owners from OS/2 • Increased competition because vendors that
serve other channels, such as EFT and credit cards, can position themselves as transaction gateways
• Commoditization of driving and switching software
• Software scalability issues related to
increased traffic; this is primarily an issue for smaller vendors
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• Increased competition for vendors that sell ATM terminal software — ATM owners won't be locked into buying ATM terminal software from their ATM hardware vendor because of technical standardization from the migration to the Windows operating system, as well as messaging standardization from the adoption of the IFX standard. This will remove barriers to other vendors entering the ATM terminal software market.
• Increased competition for ATM driving software and service vendors — Standardization of the interface will give banks more bargaining power, as well as the ability to change driving relationships because of interoperability.
• Competition from non-ATM vendors — The threat posed by non-ATM vendors that may now enter the ATM market is considered less than the threat of ATM vendors to non-ATM vendors. Non-ATM vendors, such as those that provide software and services for other delivery channels, will have to make significant investment in functionality that is specific to ATMs, such as switching and cash dispensing.
IFX ATM/POS Standards Adoption Time Frame
Timing of the adoption of the IFX ATM/POS standards will be closely linked with the migration of ATMs from OS/2. The IFX standards can't be deployed in an OS/2 environment because the standards eliminate the concepts of screens, states and downloads. Instead, presentation in an IFX/Windows environment will be controlled by ATM-resident software. Therefore, banks won't be able to adopt IFX for the ATM channel until they migrate from OS/2. This migration is under way in many banks. By year-end 2004, only one-third of ATMs in the United States will still use OS/2 (0.8 probability). (See "It's Time for a Change in ATM Operating Systems" for more information.) ATM vendors will begin to support the IFX standard in late 2003 and early 2004. Migration from OS/2 and support of American with Disabilities Act requirements — which are expected to drive ATM terminal and software upgrades — are expected to occur in 2004. In at least some cases, the new ATM terminal software will be equivalently priced across IFX-compliant and vendor-proprietary versions. By early 2005, at least 30 percent of ATMs installed in the United States will use terminal software that incorporates the IFX standard (0.7 probability). This mitigates the risk that IFX will be just one more standard that banks and vendors will need to support, and it will propel the standard into being a competitive necessity.
If IBM decides to extend support for OS/2 beyond 2004, and migration from OS/2 does not occur as expected, adoption of IFX in the ATM channel will be slower. This will delay realization of its
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benefits for banks and vendors. Regardless, full value of the IFX ATM/POS standard will not be received within this time frame because of other risks and inhibitors.
Bottom Line: Banks should include support for the Interactive Financial eXchange in their automated teller machine strategies and migration plans, and include IFX support as a requirement in requests for proposal for ATM hardware, software and services. IFX support also should be included as a requirement in RFPs for other banking channel and core banking software and service RFPs to promote the ability to share and integrate functionality across the bank. ATM vendors and service providers should incorporate IFX to capture market opportunities as financial services providers migrate from OS/2 and upgrade their ATM networks to meet new American with Disabilities Act requirements.
IFX standards create competitive risks for ATM hardware, software and service providers. However, vendors that choose not to support the standard will find their products marginalized and market share diminished.
Acronym Key
ATM automated teller machine
DES Data Encryption Standard
EFT electronic funds transfer
EMV Europay, MasterCard and Visa
IFX Interactive Financial eXchange
POS point of sale
