ard issuers appear to be in the midst of a phenomenon all too familiar to those in the ATM business-saturation.

For the first time in 2003, Americans made more in-store payments electronically than they did with cash or checks, according to a Dove Consulting/American Bankers Association study. Cash and checks accounted for 47% of in-store payments in 2003 versus 52% for purchases made with debit and credit cards, according to the study.

Most of the electronic growth came on the debit side, with credit's share relatively static at 21%. Ruth Ann Marshall, President of MasterCard's North American Region, in an address at last October's ATM&Debit Forum, noted that there were 650 million credit cards in 2003, an average of six per household-with that number likely to fall in the next decade.

While debit is still experiencing double-digit growth, Marshall predicts that will change. "Debit will reach saturation far more quickly. Few people need or want six debit cards," she said.

More Momentum

Debit could maintain-and even gain-momentum with the introduction of new card-based products and services that open the market to those without traditional bank accounts.

For instance, about 2.2 million payroll cards are currently in use, double the number in circulation in 2003, according to the Financial Insights market research firm. Research Manager Aaron McPherson expects the number to grow to 3.5 million cards in 2004 and to 7 million cards by 2006. Among the companies using them to pay some of their employees are McDonald's, Sears and FedEx.

Jackson Hewitt, the country's second-largest tax preparation service, is offering refunds on prepaid cards at its 4,500 offices in 2004. The largest tax preparer, H&R Block, is testing them in three cities.

The state of Oregon recently began offering the option of receiving unemployment benefits on a prepaid card; so far, 500 benefits recipients have opted to do so. Several states, including Colorado and Minnesota, are distributing child support payments on prepaid cards.

Card issuers may not be the only ones who could benefit from the growing number of prepaid cards. In the past 18 months, a small number of ATM deployers have begun offering prepaid services, including wireless phone top-ups, at their machines. Transaction numbers remain small, however-at least partially due to the fact that many prepaid purchases are paid for with cash.

Cash In Hand

For that reason, among others, most prepaid products and services today are purchased at point-of-sale terminals. Ron Ferguson, Executive Vice President of Euronet Worldwide, said his company offers prepaid wireless top-ups and prepaid long distance under the PaySpot brand on about 7,000 POS terminals and 500 ATMs in the United States.

Ferguson said Euronet has a total of 45,000 ATMs under contract with deployers to offer PaySpot. Processors Core Data/Concord EFS, Innobeta and eFunds have certified PaySpot transactions; certification efforts with Genpass Technologies are under way.

PaySpot POS terminals, which are located mostly in convenience stores, average 60 to 70 top-up transactions a month. "In comparison to POS, the ATM numbers are very small," he said.

The ATM numbers will grow, Ferguson believes, as more prepaid cards are issued and as more teenagers and young adults-a key target market of wireless carriers such as Virgin Mobile-begin using prepaid services.

"They may have indirect access to a bank account through a parent's ATM card," he said.

While cash withdrawals will remain the "bread and butter" ATM transaction, Ferguson believes offering prepaid services can add up to "a generous helping of jam" for deployers.

Because many likely users lack a bank card, ATM-based prepaid wireless top-ups can currently reach between just 50% and 65% of the potential market, said Ed Kountz, a Tower Group Senior Analyst and author of a report on prepaid top-ups at ATMs.

On the positive side, Kountz's research shows that consumers in the 18-24 age category and the under $25,000 income category-two demographics considered likely to use prepaid top-ups-are somewhat more likely to have conducted an off-premise ATM transaction than other cardholders.

Kountz categorized wireless top-ups and other prepaid services as "an important exploratory opportunity for ATMs" but predicted that ATMs will remain a small part of service providers' overall delivery strategies. By 2007, he expects ATM transactions to account for 7% of the total U.S. top-up market.

During the same period, Kountz expects POS' share of the prepaid top-up market to drop from 72% to 31%. While carriers are interested in the ATM, he said, they are investing more effort in promoting solutions in which prepaid customers use the Internet or the phone itself for top-ups.

With these methods, top-ups are usually based on pre-set parameters-once a month, for example, or when accounts reach a $5 threshold. Prepaid ATM volumes could rise significantly if manufacturers added cash acceptors to their machines, Ferguson said.

Kiosks Coming

Hamed Shahbazi, chairman and Chief Executive of Info Touch Technologies, which offers prepaid services at 250 standalone ZapLink kiosks it owns and operates in convenience stores and wireless stores, agreed that offering cash acceptance gives kiosks an edge over ATMs. In addition to prepaid wireless and long distance, ZapLink kiosks offer prepaid WiFi, money orders, money transfer, bill payment and other prepaid mobile content such as ring tones and games. Info Touch is adding prepaid services to 100 kiosks it owns and operates on U.S. military bases and expects to add another 100 kiosks to new locations in the next four to six weeks. The company just announced an agreement to deploy 34 ZapLink kiosks at Mac's Convenience Stores in Canada.

It's difficult to add new services to ATMs, Shahbazi said, as most are built on an OS/2 or proprietary embedded operating system. In contrast, kiosks are typically based upon more flexible platforms such as Microsoft Windows or Linux.

Transaction times are another factor, said Steve Hensley, Executive Vice President of Worldwide Sales for software developer KAL, which is working with both ATM and kiosk deployers to offer prepaid services including wireless top-ups. "People are generally more tolerant of variable length transactions on a kiosk," he said.

For that reason, Hensley said he expects to see more environments in which both ATMs and kiosks are available. "I think you'll see more dual self-service offerings in which kiosks may be used for e-shopping, ticket purchases and lengthier transactions, and ATMs are used for quicker, more intuitive transactions."

Enter the ATM

As more financial institutions begin to introduce prepaid cards, it makes sense to begin offering prepaid services at ATMs, said Michael Struttmann, Director of National Sales for EWI Prepaid Services, KAL's partner on a pilot with a credit union in which prepaid wireless top-ups will be offered at several ATMs on college campuses.

Struttmann said FIs could offer prepaid services on their Web sites, as well as at ATMs and possibly in branches. "There are some excellent cross-selling opportunities there," he said. ATMs, particularly those owned by FIs, enjoy advantages, Struttmann said.

"The ATM industry has done a great job of going in and locking in good locations and good contracts. We greatly covet that real estate." Some 80% of EWI's current prepaid business is conducted via POS terminals, Struttmann said, but he expects an uptick in ATM and kiosk transactions in the next 24 months. James Anderson, Vice President of Payment Services for Boston Communications Group (bcgi), agrees that FI backing will be necessary to advance the concept of prepaid services such as top-ups at ATMs.

"I'm a big believer that you need a strong brand, such as a bank brand, somewhere in the equation," he said. Working with both E*Trade Access and with NCR's iATMglobal subsidiary, bcgi currently offers Wireless Wallet top-ups on several hundred ATMs in retail locations.

Late last year bcgi moved its focus from third-party ATMs to those owned by banks, Anderson said, and began working with ACI Worldwide to develop an interface to its BASE24 transaction processing software, which is used by many FIs. A pilot to offer Wireless Wallet top-ups at ATMs owned by an unnamed FI will begin this summer, Anderson said.

Among the ATM's biggest strengths as a delivery channel for prepaid services, Anderson said, are consumers' comfort levels with using the machines and ATM owners' strong desire to leverage a fixed-cost asset by introducing new services.

The company recently announced an agreement with enTrac Technologies to interface its cash accepting device recharge (CAD) interface with enTrac's ExpressPay system, with an eye toward adding Wireless Wallet top-ups to kiosks. A handful of kiosks in office supply stores are currently testing the service, Anderson said. Coinstar partnered with bcgi to add Wireless Wallet to its coin-counting kiosks, which are typically found in large grocery stores. The service has been introduced on some 600 Coinstar kiosks and will be rolled out across Coinstar's network of 10,000 kiosks in the next 36 months, said Steve Verleye, Coinstar's General Manager of Electronic Payment Solutions.

Coinstar intends to offer prepaid products and services at kiosks like this as well as at POS terminals. In addition to prepaid wireless top-ups and prepaid long distance, Coinstar is testing bill payment, prepaid debit cards, other wireless content such as ring tones and electronic services for holders of payroll cards at its kiosks. While the fate of the other services is still being decided, Coinstar intends to add prepaid wireless and prepaid debit cards to all of its machines.

"It makes sense to add this functionality to existing kiosks," Anderson said, "but I'm not sure there's a strong business case in deploying dedicated devices. In a typical retail environment, I think it makes more sense to look at integration with existing POS devices or ATMs. Now, if you can offer a really rich bundle of services at a kiosk, that could change the equation."

POS Power

In addition to its kiosks, Coinstar is making a POS play with its recent purchase of CellCards of Illinois, a distributor of prepaid products with a major presence in check-out lanes at drugstore chains like CVS, Eckerds and Walgreens.

Mike Herold, CellCards' President, said that POS has been the predominant distribution point for prepaid services to date because of its low start-up costs and retailers' comfort levels with the terminals. However, he believes that use of other channels will grow.

"It's not an either/or deal in my opinion," he said. "Retailers may be comfortable keeping the quicker transactions at their counters because they're paying those cashiers anyway. But they'll want to keep the more complicated services like bill payment off their desks."

POS has "the power of incumbency," agreed ATM veteran Sam Jonas, who recently signed on as Vice President of Business Development for CellCards. As demand for prepaid services grows, however, fewer prepaid customers will want to "wait in line behind the guy buying a couple of six-packs of soda," Jonas said. "They'll go to a self-service device instead."

The increased issuance of prepaid and stored value cards will boost adoption levels, Jonas said. "You've got a new group of people with a growing degree of trust in the electronic delivery of financial services." At least one major ATM operator, Kahuna Business Group, is also adding POS distribution of prepaid services to its product line-up, via a partnership with Prepaid International Network (PIN) of Green Bay, Wisc. Among the services offered will be guaranteed check cashing in all 50 states, which is accomplished by loading payroll and government checks onto a prepaid debit card, said Ernie Beckman, Director of Sales for Kahuna, which has some 5,000 ATMs under contract.

Also offered are a number of other prepaid services, including wireless and long distance and Internet access, as well as traditional credit card processing-all through a single VeriFone 3750 terminal. "A lot of these locations have two to four terminals offering the different products on their counters. They want to free up valuable counter space, and they don't want to have to train their employees on all of the different terminals," Beckman said.

Tom Mortimer, Kahuna's Executive Vice President, said Kahuna wants to offer its distributors (which it calls affiliates) another tool to improve relationships with retailers. "If they don't have a value add like this, another guy is just going to come along and offer the merchant more interchange."

He added, "This isn't a quick sale where you're going to go out and never come back. You can offer some of the prepaid services to the merchant and prove they work, then come in later and offer more services. It's a great way of continuing that relationship."

Beta tests were recently completed with the new terminals, and results are promising, Mortimer said, with prepaid wireless top-ups performing especially well. For now, Mortimer believes it makes more sense to offer these types of services behind the retail counter rather than at an ATM or other self-service device.

"Retailers can use card displays and other advertising media to direct customers to the counter, and let's face it, when people are in doubt, they're going to ask a clerk for help," he said. While he thinks the ATM may grow in popularity as a distribution point for prepaid services, especially if manufacturers add cash acceptors to their machines, he said the real winners will be companies like his which offer multiple distribution strategies.

"Ultimately, the consumer will determine what's convenient for them," said bcgi's Anderson. "I think you'll have different products and services available through different channels."

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