Editor's Note: In celebration of the ATM's 40th birthday, this is the first article in a two-part series on new opportunities in the ATM product and services sphere. This installment discusses the traditional ATM business model. Nontraditional ATMs — hybrids, self-service kiosks and "cash-in, cash-out" variations — will be covered in Part II.
Nearly 400,000 ATMs are in the United States today, 49% of which were placed by ISOs. That's the good news. Now, the bad news: Revenue generated per ATM is declining dramatically. This is due to increased competition among ATMs and rising use of debit cards at retail locations.
But there's more good news: There are still lucrative opportunities in the ATM sector for ISOs and merchant level salespeople (MLSs) who can think on their feet and adapt.
The ATM industry is large. According to Dove Consulting, a division of Hitachi Consulting, ATMs in the United States dispense a total of $600 billion a year, with an average surcharge of $1.77 per customer. However, after nearly a decade of gold-rush like growth, the domestic industry is mature and may have reached saturation.
"There is a high penetration or density of ATMs per capita in the U.S.," said Mike Lee, Chief Executive Officer of the ATM Industry Association. "The average transaction rates per ATM decline, as the total transactions are spread over a much larger installation base."
Lee pointed out that since ATM revenues flow primarily from transactions, fewer of those mean less revenue per ATM.
"We won't see increases in ATM numbers in the U.S." said Patty Hayward, Senior Analyst at the Mercator Advisory Group and author of an upcoming study on the ATM industry.
"I would expect a decline in the overall number of ATMs in the U.S.," she added. "As the machines age, the unprofitable ones will probably just be pulled rather than replaced, resulting in fewer overall machines."
For banks, the glory days of ATMs may have returned to the pre-1996 era when ATMs solely added value for customers. "Financial institutions will have to provide ATMs," Hayward said. "Consumers in the U.S. insist on it."
But ISO ATM deployers aren't in business for customer service. So, they're using a variety of tactics to boost flagging revenues.
"In this particular phase of mature market development, the industry can either increase ATM functionality and raise additional revenue through new services such as ATM advertising, ticketing, that kind of thing, or it can cut costs," Lee said.
"It can consolidate for bigger economies of scale, or it can expand into other markets or new market sectors within the U.S.," he noted. "And some ATM business models can manage to be profitable even with relatively low transaction volumes, for example, convenience ATMs, which use the merchant cash fill model."
Freefalling transaction numbers aren't the only pressing concern. Hayward said Visa U.S.A. has recently decreased its interchange for ATMs. And Lee pointed out that increased compliance costs further erode profitability.
Also, Greg Adkins, Director of the National Association of ATM ISOs and Operators, said more regulations and compliance issues are facing all ATM deployers, which increases their costs of ownership.
Clearly, cutting costs can be vital in maintaining profits.
ATMIA has published the Best Practices Manual for ATM Business Efficiency. It details the factors impacting ATM life cycle costs and areas that may be addressed to improve business outcomes and lower expenses.
According to the manual, the average ATM requires between $7,500 and $25,000 per year to operate, and the average life cycle of an ATM is 10 years.
"We look at underperforming machines regularly to determine the best approach to optimize our profitability," said Lloyd Nobles, Senior Vice President of Cardtronics LP, the largest nonbank ATM owner/operator in the United States.
Nobles emphasized that pulling an ATM out of service is a last resort. "We will also look at other measures such as surcharge increase, signage and placement evaluation to determine if visibility is an issue, and renegotiation of business terms," he said.
Lee suggested that ISOs have merchants refill cash in ATMs placed at their stores. "Some ATM business models _ like convenience ATMs, which use the merchant cash replenishment model _ can manage to be profitable even with relatively low transactions," he said.
Cash replenishment accounts for 17% of the cost drivers of a typical ATM, according to ATMIA's best practices manual.
That includes the cost of the cash (the purchase of cash and holding it for delivery to an ATM) and the cash provision costs (the expense and management of standard cash delivery, emergency cash delivery and collection/reconciliation).
The 17% does not include the loss of interest that would be accumulated if the cash in the ATM were available for overnight deposit. Since cash replenishment is the biggest cost for deployers, some ISOs lease ATMs to merchants who are willing to replenish the cash themselves for a lower lease price.
"In the lease model, the merchant fill cash replenishment saves the ISO on running costs," Lee said. When ISOs sell rather than lease ATMs, merchants can eliminate cash replenishment costs by doing it themselves.
"In this case, the ISOs use that as a selling point, so they sell more ATMs to more merchants," Lee said.
Cardtronics uses the merchant cash fill replenishment model with some, but not all of its machines, according to a Cardtronics spokesperson.
But Donna Embry, Senior Vice President of Payment Alliance International, warned that the merchant replenishment model can create money laundering issues.
"There is no way to track the genesis of the funds or how many times the money changed hands, which could lead to tracking problems," she said.
Embry said there are a number of options for ISOs that want to increase ATM profitability.
"Banks are looking to outsource; money transfer companies are looking to automate their branches; and prepaid companies _ especially wireless prepaid _ are looking to utilize the distribution channels that ISOs/MLSs present," she said.
As ATMs evolve from profit centers to a customer service investment, many financial institutions (FIs) are lowering the cost of ATM operations by outsourcing: They pay to brand ATM units owned and operated by U.S.-based ISOs.
According to Dove Consulting's 2006 ATM Deployer Study, 41% of the largest U.S. banks have at least one branding deal with an ISO; 7% are pursuing a branding deal; and 19% are interested in branding in the future.
"It's an interesting out for financial institutions," Hayward said. "It is definitely a way for them to expand their footprint without the associated upfront or operating costs.
"And the consumers can't distinguish between a bank-operated ATM and an ISO-operated one if the branding is the same."
Embry advises ATM deployers to look at integrated and branding opportunities, which can turn a traditional loss into a profit.
Branding deals allow FIs to expand their reach quickly with lower (and predictable) upfront and maintenance costs in a mature ATM market. Also, many of the most desirable ATM locations are already taken. So branding existing ATMs can give FIs access to high-traffic locations that are otherwise unavailable to them.
Proponents of the ATM branding model point out that the sheer number of branded ATMs acts as advertising for FIs. Logos can remind nonbank ATM customers of a bank's existence. Additionally, an ATM's content and features can cement relationships with customers and noncustomers alike.
Cardtronics is a leader in the branding model, with over 14 banks branding Cardtronics' ATMs, including JPMorgan Chase & Co., HSBC Bank, BB&T Corp., Guaranty Bank, and Sovereign Bancorp Inc.
FIs exclusively brand Cardtronics' ATMs. And Cardtronics provides surcharge-free transactions to FI customers at locations branded by their FIs.
"Under our typical branding program the financial institution will pay a fixed monthly fee for the branding rights," said Keith Myers, Cardtronics' Executive Vice President of Financial Services.
"Branding revenue and the incremental transactions should provide a positive contribution to the overall economics of an ATM."
Myers noted that an increasing number of FIs are expanding their self-service offerings by bolstering their own ATM networks. They are doing this with a combination of branded machines in retail locations and surcharge-free networks.
"With ATM access named by consumers as one of their top priorities in choosing a bank or credit union, any financial institution looking to compete in the market needs to address the self-service channel quickly and creatively," he said.
Branding deals can be complicated. For example, Sovereign wanted to nearly double its customers' ATM access. It struck a deal with Cardtronics to put the Sovereign name and logo on almost 900 ATMs at CVS Corp. drugstores in six states in the Northeast.
To do this, Cardtronics had to create a three-way deal between itself, Sovereign and CVS.
In general, the bank's customers get fee-free transactions at branded ATMs. Merchants and Cardtronics split the fees from nonbank customers.
When making three-way deals with merchants, Cardtronics tries to convey the primary benefit, which is additional traffic to the ATMs. ATM users spend money on site, and that additional traffic means more sales and gross profits to the site owner, Nobles said.
In addition to the logistics involved in a three-partner deal, the sales presentation for branding arrangements may be dual-pronged. The technology and features of the ATMs themselves must be sold in addition to the locations or merchants where the machines reside.
Sovereign expressed interest in a second deal in New York, but the New York CVS ATMs were already branded. In cases like this, Cardtronics will try substituting a similar retailer. And with many mega-retailers in its fold and over 25,000 of its ATMs in the United States alone, the ISO often succeeds.
However, structuring a deal that satisfies geographic, demographic and technological requirements _ as well as three parties with differing needs _ can take time.
Third-party ads running on ATMs haven't taken off in the United States, but they appear to be getting traction in other places. ATMs in Scotland, for example, have displayed ads for British Airways, Orion Publishing Group and Comic Relief.
Although the declining average revenues and rising costs associated with ATMs concern many, the ATM industry on the whole is optimistic. New technologies, new business models and new markets will spring up to replace the lost revenues _ if deployers are nimble enough to move with the market.
"Consumer behavior is changing rapidly, Adkins said. "Each day presents new challenges and new opportunities for those forward thinkers."
Lee foresees overseas opportunities unfolding in much the same way the United States market did during the ATM boom years.
He also expects ATM advertising to "finally succeed in a major way on Windows XP platforms," which will increase functionality and may provide profitable synergies with the cell phone industry.
But the more things change, the more they stay the same. Technology advances, interchange fluctuates and new consumer practices take hold. But the essence of ATM placement remains constant: "A high demand for cash and large foot traffic are still the keys to success," Adkins said.
Location, location, location.
For the latest ATM statistics, read "ISOMetrics: The ATM story in numbers" in this issue of The Green Sheet.
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