The Green Sheet Online Edition
March 10, 2008 • Issue 08:03:01
ATMs and a changing biz model
Is it time to consider a new business model, or is it time to consider a new business? In the U.S. ATM market, business is more competitive than it was even two or three years ago.
Some ATM deployers, especially the ones with deep pockets and lofty portfolios, have found new opportunity on the global market. Others, however, have decided to cut their losses and sell their portfolios.
How can a U.S. ATM deployer evaluate his prospects and decide the next best move?
That's the question many deployers are asking themselves these days - particularly ISOs. Rising deployment costs, falling transaction volumes and U.S. market saturation are forcing some ISOs to reevaluate their ongoing presence.
According to the 2006 ATM Deployer Study released by Boston-based Dove Consulting, a nonbank ATM in the off-premises space pulls about 329 transactions per month. A bank or credit union off-premises machine,on the other hand, pulls about 1,807 transactions per month.
Low transaction volume isn't the ISO's only woe. Increased industry regulation, Triple DES (Data Encryption Standard) and a rise in cash alternatives available to consumers have contributed to the industry crunch.
According to ATM & Debit News' 2007 EFT Data Book, the number of off-premises ATMs dropped almost 9% between 2006 and 2007.
Knowing when to hold, when to fold
So how can an ISO know if it's time to sell an ATM portfolio? Industry experts suggest the following tips:
1. Examine your revenue volume. Marilyn Kilcrease, President of Temecula, Calif.-based Creative Card Solutions LLC, said a falling revenue volume is one clear indicator that all is not well with your ATM portfolio.
"If you have 1,000 ATMs and you're making $50 a month on every ATM, then it's worth being in the business," Kilcrease said. "If you have 100 ATMs or 50 ATMs, that kind of volume isn't going to sustain a company.
"It's very, very, very difficult for anybody with less than 300 ATMs to stay in the business."
2. Determine whether your portfolio can grow. Sam Ditzion, President and Chief Executive of Boston-based Tremont Capital Group, a firm that specializes in strategic planning and mergers and acquisitions in the ATM industry, said any business that isn't expanding - or isn't anticipating an opportunity to expand - is eventually going to slide.
"If you conclude that you can no longer continue to grow your business any further, then it's probably the most valuable that it will ever be," Ditzion said.
"If it can't grow, it might shrink over time and lose value. Everything else being equal, if your portfolio has either been flat or is decreasing, it might be time to consider selling."
3. How much new equipment are you purchasing? In some cases, the purchase of new equipment can be a sign of a thriving and growing business.
Conversely, a company that hasn't bought any new equipment in a long time may be battling stagnation.
"If you're purchasing less and less equipment, one of several things is happening," said Phil Suitt, President of Spring, Texas-based ISO ATM Ventures.
"You've changed your model; you've become more efficient; you've got better machines; you're optimizing the machines that you currently have; or you've run out of places to place machines, and you no longer buy as much equipment."
If your situation falls into the latter category, consider selling your portfolio, Suitt said.
4. Where are you placing your ATMs? As anyone who's been in the ATM business for very long can attest, success is directly related to where you locate your machines. Good locations yield high transaction volumes. Bad locations can result in sunk costs.
If an ISO is having trouble finding any promising new locations, it may be an indication that the market has become too saturated.
"Too many machines are being placed where they shouldn't," Suitt said. "When everything fills up, you'll stick machines where you shouldn't stick them." For example, Suitt said, supermarkets are bad locations for ATMs, since most customers just get cash back at the POS.
5. Do you still enjoy working in the industry? This may seem like an unnecessary question. After all, work isn't supposed to be fun, right?
Not true, Suitt said. "Who the heck wants to work and not have fun?" he asked. "That's pretty basic isn't it?" Unfortunately, he said, the maturity of the ATM market is zapping much of the fun out of being an ISO.
"The business has changed over the years. It used to be a lot more fun, before there was saturation," he said. "Fun, to me, is multiple things. Fun is making money. Fun is enjoying placing machines and creating new opportunities. That's become very difficult in this business."
Tips for planning an exit
Once an ISO decides to bail out of the ATM business, a host of issues should be considered. How can an ISO craft an effective exit strategy that will get it out in one piece? Experts suggest the following tips:
1. Understand the market. Ditzion said it's important that the ISO be realistic about the value of the portfolio.
"I think many people hope that their portfolios are worth a lot more than they actually are, so it's critical to be realistic," he said.
"A seller with unrealistic expectations might reject a good offer because they think that they're getting a bad deal, but in reality, they might have been offered an exceptional deal - one that they should have taken had they been properly advised about valuations beforehand."
Kilcrease said the market is ripe for buying, so sellers shouldn't be too picky. "It's a buyer's market right now," she said. "Everybody is trying to sell their portfolio."
2. Double-check all location agreements. This step is critical, experts say. A location agreement is the written contract that lays out the terms under which the merchant allows an ISO to place an ATM on its premises.
Far too many ISOs don't maintain ownership of ATMs, so they have worthless location agreements, Kilcrease said.
Merchants can decide to break the terms of the agreement or go over the ISO's head and negotiate directly with the ATM owner or transaction processor - and many do.
"If that merchant can - in 30 seconds - go with somebody else, then how valuable is that contract?" Kilcrease asked. "Say you have 100 merchants: What are you going to do? Are you going to sue every merchant?"
Without effective location agreements, some ISOs simply have to sell their portfolios, cut their losses and get out, she said.
3. If possible, ensure that all ATMs you plan to sell have undergone all necessary security upgrades. Security upgrades include Triple DES compliance. No one - especially in a buyer's market - wants to purchase a bunch of ATMs that require a significant investment to bring them up to current security standards.
"That's a big deal," Suitt said. "If someone wants to pay for something, the equipment has to be current, it has to be compliant and it has to be making money."
4. Clean up your merchandise. In the past, many ISOs have dabbled with the notion of turning the ATM into a marketing tool by placing advertisements on the exterior of the machine.
"We've found that advertising on a machine is not very effective. It never has been effective," Suitt said. "The only effective advertising on a machine is on the screen itself."
And advertising on the enclosure is even less effective when you're trying to sell the machine in question. Suitt said such advertising should be removed before placing the machine on the market.
5 Find a professional you can trust. Last but not least, Ditzion said ISOs interested in getting out of the industry should seek out a professional with experience in selling ATM portfolios.
"You don't want to be in a situation where you have to spend precious time teaching the professional about the ATM industry," Ditzion said. "You only have one shot [at] doing this right the first time."
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