The big Kahuna in ATMs

With over 13,000 ATM installations under its belt and an average of 35 million transactions processed annually, Kahuna ATM Solutions is a dominant player in the off-premise ATM sphere. Based on feedback from its affiliates, the company endeavors to be the epitome of an adaptable, entrepreneurial ATM cooperative.

A master distributor for three leading off-premise ATM manufacturers, Kahuna also maintains relationships with four key ATM processors.

Prior to opening Kahuna in 1995, company founders had a thriving credit card ISO business. After selling their credit card portfolio, their focus shifted to ATMs. The move coincided with the lifting of the network ban on ATM surcharges. "It opened the floodgates for ATMs being placed in every gas station, convenience store, bar - every nook and cranny that they're in today," said Bryan Bauer, President of Kahuna.

No longer restricted to selling ATMs to financial institutions, off-premise ATM sales soared and, by 2009, comprised 68 percent of total ATM placements. "When we started doing ATMs, we were targeting retailers directly," Bauer said. "In early 2000, we developed the business model that we're operating today, and that's the distributor support model.

"Rather than having a direct sales force that markets to retailers and merchants and VARs [value-added resellers], today we certainly support other distributors, ISOs and operators."

Bauer said he hasn't seen another company doing what Kahuna does. "There are several ISOs out there that have a wholesale component like we operate, but all of them also have the side of the business that is targeting retailers directly on their own behalf," he said. "That's important to know, because it's easy to team up with a larger ISO for volume and get a better price, but you're supporting an engine that is competing with you on the street."

ATM revenue channels

According to Bauer, ATMs provide two primary revenue streams: the surcharge access fee, which is charged directly to the cardholder for using the ATM, and interchange fees, which are paid by the cardholder's issuing bank to the acquirer of the transaction, which in this case is Kahuna.

"So interchange flows the other way," Bauer said. "The issuer pays the acquirer versus the other way around in the merchant business. You have the physical burden of loading the ATM with cash. That's the big difference and that's why the issuer pays the acquirer. Probably the biggest component of the overall operational and sales piece of ATMs is the cash logistics of loading the terminal."

Bauer pointed out that the ATM surcharge typically settles to three primary parties, and one entity could assume the role of all three parties. The first party is the ATM terminal owner, who purchases or leases the system and is responsible for the system's upkeep and maintenance; the second party is the location, or owner, of the property where the ATM is installed; the third party is the entity charged with loading cash into the terminal.

Bauer said cash-loading logistics falls under three categories: the merchant-loaded terminal, which is the most cost effective and represents about 90 percent of the terminals placed by Kahuna affiliates; the route operator, who either sets up terminal placements directly with merchants or partners with terminal owners and agrees to load them; and the armored carrier, who typically sets minimum volume and location requirements and is the most expensive option.

"What a lot of industry players are doing is they're keeping a small portion of the surcharge fee to help pay for the network fees and the administration and the telecom and the processing fee and all that," Bauer said. "That fee cannot only pay for expenses, but sometimes it can help pay for the on-site relationship logistics that an MLS might have to maintain a relationship, be a good contact and resource for the location."

ATM security

Today's ATMs come equipped with multilayered security protection. "Every ATM is triple DES encrypted," Bauer said. "We have key-handling procedures, so they are encrypted; they arrive secure. You have to have two key handlers. You destroy them when you're finished. So there are two components."

Bauer added that Kahuna also addresses Payment Card Industry (PCI) Data Security Standard (DSS) compliance. "It's a standard for our industry that any newly deployed terminal now has to come with a PCI-compliant PIN pad," he said.

Bauer noted that advances in terminal software technology make it possible to detect counterfeit bills and to lock down ATM peripherals when foreign devices, such as card skimmers, are detected.

"They can detect when there has been a change to the software - when somebody is trying to apply a software patch or upload new software on it," he said. "It will shut the terminal down and send out a message."

Bauer believes most skimming device crime targets on-premise ATMs, either walk-up or drive-up terminals. "In our industry that's not a real big problem, and the reason for this is because most of our locations are inhabited 24 hours a day," he said. "They're inside an establishment that has an attendant on duty at all times. They're typically inside, and they're well lit."

He sees a growing opportunity for ISOs to work with financial institutions that are outsourcing their ATM programs. He said financial institutions are supplanting their ATM departments to reduce costs and delegating the work to ISOs who either run them as turnkey operations, providing all the equipment and managing them from top to bottom, or as service providers for institutions that own the hardware or handle their own cash logistics.

Support breeds loyalty

Kahuna affiliate Jeff Cotton, an ATM and credit card services provider since 1990, was one of the first to introduce off-premise ATMs to merchant locations throughout Hawaii. "The wonderful thing about the ATM business: generally it's a five-year contract, and if you can carry your people, you'll have another five, and another five, as opposed to other markets, for instance credit card processing, you never have that luxury of five years," he said.

Cotton appreciates that because of Kahuna's reputation, longevity and business structure, if he is not available, Kahuna is. "Their 24/7 customer support rollover takes care of just about anybody," he said. "I'll put it this way: by working with Kahuna my responsibilities have not been increased. If anything, they've decreased."

Harmon Frankenberg, President of Integrity ATM, who runs his ATM processing business through Kahuna, said, "They have all the equipment you could possibly want at their disposal to sell you, but their service is superior. At this moment, I'm moving much of my portfolio ATM accounts to their business because of that.

"If I need to change a surcharge or I have a dispute or an issue, they help me out. Other companies want you to pay for that, and these guys have been really good about going the extra mile for me."

Frankenberg offered an example: "I stay up late at night and I do a lot of paperwork, so I'll send them an application for a terminal ID for one of my machines. I'm out here in California, and they're back east.

"They'll have it on my website at 6:30 in the morning when I look at it, and I'm checking my other accounts, and that new TID [terminal identification number] is there. I used to have to wait a couple days with other companies, and even at their best, I'd have to wait a day to get it."

Frankenberg's business model includes more than ATM terminal placement. "I'm not just in the ATM business of selling and placing machines as far as the interchange goes," he said. "I'm also an investor. I own about 40 machines that I fill. That's going to till my way no matter who I'm with, because I set the surcharge, and I set the percentage of it that I'm going to get and the location gets."

According to Bauer, Kahuna offers wholesale pricing to affiliate partners, with competitive markup guidelines. And as the price of ATMs is becoming more affordable, many merchants are opting to purchase rather than lease them.

He added that Kahuna will continue to expand in step with its affiliate base. "We're going to grow through our client base," Bauer said. "Our clients are the ones who grow, and they'll grow by soliciting more locations." Expertise

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