What’s a financial services utility? It’s all about optimization

What if your customers’ everyday transactions could be done at an ATM?

It’s not science fiction, it’s already happening. Customers are moving money between accounts and one another, using smartphones to initiate and complete complex transactions. And this trend will only continue—which means financial institutions will need to make tremendous strategic changes to remain competitive and profitable. While the convenience for customers is undeniable, the real game-changer is in the potential for operational cost optimization and improved staffing alignment.

And here’s the best news: the limitations of a financial institution’s current infrastructure aren’t a problem— you can thank financial services utilities—including the leading ATM networks—for that.

Utilities and what they do

If you think you’re not in the market for utilities, think again: you’re already using them. “Utility” simply means useful—like a utility knife, which is a multipurpose knife with retractable blades. A utility is simply a useful service provided to customers. In much the same way that a public utility provides an essential service like water or electricity to homes, businesses, schools and factories, financial services utilities provide many categories of essential useful services for financial institutions.

Utilities are typically formed to fill a specific need—whether they serve the public or industries like ours. Their development tends to follow a common cycle: first, the setup of the utility to satisfy an immediate need, second, developing and establishing the core business to make the service better and third, to make it increasingly sophisticated to provide a wider range of services/with a broader footprint/more seamlessly.

How utilities originated in financial services

Financial institutions started using utilities in the 1960s to process large volumes of transactions. Later, in the 1970s and 1980s, when debit cards and electronic networks for debit transactions were widely adopted, many financial institutions also began using outside utilities for debit card transactions.

Utilities have been developed to help financial institutions reduce and control costs by improving efficiencies in their operations, including:

• Streamlining back-office operations
• Standardizing platforms
• Improving maintenance services
• Enhancing security on a network level
• Detecting and preventing fraud
• Maintaining legacy infrastructure
• Revealing data that can lead to valuable insights for strategic decision-making

Through these types of services, utilities are helping financial institutions focus on the core business functions, like customer experience and product development.

Example A: ACH processing

For example, automated clearinghouse processing—the foundation for modern electronic payments.

In the mid-20th century, the financial industry was wrestling with a paper-intensive, error-prone system for handling recurring payments like payroll and billings. Checks, the traditional payment tool, were slow, costly to process and prone to fraud. All parties wanted a more streamlined solution.

So financial institutions and industry associations decided to collaborate to find a better way. The solution was a standardized electronic payment system that leveraged new computer technology to process large volumes of transactions efficiently and securely. This system acted as a clearinghouse to transfer funds accurately and promptly.

But adopting such a clearinghouse called for significant investments in technology and infrastructure. Systems had to be radically upgraded to handle electronic transactions and a robust communication network was essential. The National Automated Clearing House Association (NACHA) was formed in the US during the 1970s to establish industry standards, govern ACH processing and address security concerns and system compatibility issues. A few years later, similar systems were adopted in Canada, the European Union, Australia and other countries. The concept spread globally, with variations in pace of implementation and adoption rates driven by infrastructure, regulatory frameworks and consumer acceptance.

Today, ACH processing handles billions of transactions annually, including payroll, direct deposit, consumer bill payments, business-to-business payments, person-to-person transfers, e-checks and more. Its success is a testament to the power of collaboration within the financial industry and the ability of utilities to address fundamental business challenges. Though there are faster ways to transfer money, such as wire transfers, ACH hits the sweet spot of low cost, highly secure and pretty fast (generally two to three days).

Example B: ATM networks

In much the same way that ACH is a utility, an ATM network is a utility: it’s designed to optimize costs through efficiency, standardization and security.

ATM networks have evolved significantly since a few financial institutions got together and agreed to share their new ATM machines for the convenience of customers who needed cash outside banking hours. As the job of keeping ATMs maintained, updated and compliant became increasingly sophisticated and complex, networks evolved into the utility model financial institutions use today to expand self-service access through third parties or by outsourcing or augmenting their own fleets.

These ATM networks are helping financial institutions move many transactions to ATMs because self-service transactions cost less than using a teller to process transactions and because network ATM locations are convenient for customers. For online and neo banks, ATM networks are essential to having a physical presence where their customers are. Across the board, the shift is akin to a steamship transforming into a spaceship.

Today, ATM networks are doing more than previously imagined to help financial institutions to expand access while optimizing costs, streamlining processes, improving security and innovating services. The potential here is unlimited. ATM networks are already using AI for remarkable performance improvements, and this trend is only accelerating. ‍

The future of ATM networks and other financial services utilities‍

By reimagining the ATM network as a utility, its scope can be broadened to give it “legs” into a wider range of core customer functionalities. Through standardized services and interoperability across institutions, an ATM utility network can streamline operations and reduce costs for financial institutions while expanding the potential of self-service financial access.

As the financial landscape continues to evolve, we can expect to see the development of new utilities that address emerging needs and challenges for financial institutions.