GS Logo
The Green Sheet, Inc

Please Log in

A Thing

Processing in the House

By Ann All, Senior Editor,

Originally published on, April 21, 2004; reprinted with permission. (c) 2004 NetWorld Alliance LLC. All rights reserved.

For the past decade, ISOs have focused on growing their ATM fleets by building direct and indirect sales forces-and more recently through portfolio acquisitions.

With opportunities for new sites dwindling, the emphasis is shifting to wringing more profit out of existing sites, either through cost control or growing volumes with new transactions.

Combine that with acquisition activity among transaction processors-with two popular third-party processors being acquired by Concord EFS in 2002 (and Concord in turn being purchased by First Data earlier this year)-and more ISOs are considering driving their own machines.

ISOs are evolving, said Alan Falconer, Senior Vice President of Paragon Data Services, a consulting firm that advises both financial institutions and ISOs on their EFT strategies.

While many ISOs once had to run their businesses on a shoestring, he said, "now we're beginning to see a point where the strong have survived" and built up enough capital to consider investing in their own switch.

Turnaround Times

"Some of them are tweaking their business models; the new models will require more than simple cash withdrawals," he said.

It's more logical to offer products and services such as money orders and prepaid phone top-ups at ATMs in retail sites rather than bank branches, Falconer said, because the demographic profile of retail customers matches the profile of typical users of such services.

A desire to offer new products and services was one reason that Money Marketing, a New Jersey ISO, purchased Mosaic Software's Postilion processing platform in 2001, said Eric Park, Chief Executive of Innobeta, the transaction processing entity spun off as a separate business from Money Marketing.

"Everybody had been talking about new products like prepaid media for a long time, but none of the processors had developed applications for them," Park said. Innobeta was able to create and certify a prepaid phone top-up application on the Postilion platform within six months, he added, and is now offering it on some ATMs.

"People who weren't interested in talking to us a year ago are now contacting us as their existing (transaction processing) contracts are starting to expire," said Chris Klein, Mosaic's Executive Vice President of Marketing. "The processors haven't been as responsive as they would have liked to in their desire to add new products and services on their ATMs."

Postilion software is used by non-bank notables including Columbus Data Services, E*Trade Access, Nationwide Money and 7-Eleven, Klein said.

It's the Economy, Stupid

Simple economics drove David Charles, the President of Wisconsin-based ISO Cash Depot, to install his own switch in 2002, using the software of TNS Smart Network (TNS). Charles said he was able to shave several cents off of each transaction.

"When you're talking about hundreds of thousands of transactions a month, the pennies add up pretty quickly," he said.

With continued consolidation among third-party processors, Charles said, processing prices will likely rise rather than drop in the future.

"As the marketplace changes, this gives us more control over our costs," agreed John Steely, President of Automated Systems America, Inc. (ASAI), a California-based ISO that recently completed installation of a switch with the assistance of TNS.

The costs of transaction processing software and hardware have dropped dramatically in recent years and now average less than $200,000, said Mischa Weisz, Chief Executive of TNS, which has helped nine North American clients establish switches. That does not include costs of the accompanying infrastructure, including items such as a back-up power source, T1 lines for offering Web monitoring and a climate-controlled computer facility.

Those costs can add several hundred thousand dollars more to the tab, Charles said, though tough negotiations with vendors can help keep the price tag under control.

"You can't just buy some computer servers and stick them anywhere," Steely said, noting that ASAI constructed a new room to house its switch and brought in outside IT consultants to help with the intial set-up. Fortunately, because of ASAI's southern California location, the IT resources were fairly inexpensive, he said.

Despite the added costs, Steely said running an in-house switch can become cost effective with as few as 250,000 transactions a month.

In Control

ASAI first began looking at driving its own ATMs when its former processor, EFT Logix, was purchased by Concord. "We figured it might be time for us to get control of our own destiny," Steely said.

Doug Falcone, Chief Executive of Access to Money, a New Jersey-based ISO that outsources its processing to a single third-party provider, said that he seriously considered establishing an in-house switch when he began shopping for ATM portfolios. Access to Money purchased 750 contracts from Automatic Bankcard Services in late 2003.

"Having your own switch gives you more control," Falcone said. "Let's say you've spent a lot of time and effort moving your ATMs away from a certain processor because you've been dissatisfied with their service. You could acquire a portfolio and find yourself right back in bed with them again."

Plenty of Planning

Steely said a certain degree of IT savvy is helpful, particularly in the early stages of moving a switch in-house. "We've always liked the IT part of what we do. Just being an ISO was a little boring for us."

Operations experience is more crucial than actual IT chops, Falconer said. "Most ISOs have outsourced processing and thought of it as a commodity, so they haven't thought about all of the support that may be necessary."

Indeed, planning for an in-house switch can take far longer than the actual implementation. Park said he spent more than a year in the planning stages, a time filled with anxiety, he said, because "you're sinking all kinds of costs into the project without seeing any kind of payback."

Charles said he spent an equal amount of time, roughly six months, on planning and actual installation. Perhaps the single most important aspect of planning, he said, is ensuring that there are multiple options available for such critical functions as telecommunications.

"If you're relying on a single phone company or a single ISDN provider and it fails, you're out of business," he said.

Fear Factor

Fear of the unknown is one reason that Falcone continues to work with his longtime processing partner, Lynk Systems. "It's what you're not being told and what you're not seeing that could trip you up," he said. "There's a lot of additional responsibility involved, from compliance, to certification, to network regulations. Lynk and Concord and Columbus Data have years of experience doing all that."

Klein suggests creating a checklist, noting areas where outside help may be needed and compiling a list of possible partners to address those issues-a process that he said can become quite involved. "None of the pieces is a real big mystery-but there are a lot of pieces," he said.

Expert help is available for solving potential problems, he said. "If you're concerned about your telecommunications, you can get someone like Transaction Network Services to set all that up for you. Someone like Thales e-Security can help you with your data security."

Sharing the Love

ASAI has moved 40 ATMs to its new switch and is in the process of migrating more. However, it will also continue to offer processing through Genpass Technologies, Steely said.

"That will enable our clients to put their customers with whichever switch best suits their needs," he explained. "Some people only want to work with big companies; they'll want to stay with Genpass. Other people would rather not work with big companies. It's mostly psychological, of course, but this way we can offer them an option."

ASAI is creating a new division called Datastream, which will market processing to other ISOs, Steely said. "We're not going to compete with a Genpass or a First Data on a national level. But we can compete with them on a local level, with clients that are small enough to be under their radar screens."

By offering processing, ASAI will have fewer worries about losing revenues if any of its sales agents seek direct admittance to EFT networks through a sponsor bank, Steely said.

Innobeta currently drives some 5,000 ATMs, a combination of machines under contract with Money Marketing as well as some managed by other ISOs and a small number owned by financial institutions, Park said.

Cash Depot drives some 1,000 ATMs it has under contract. It does not provide processing to other ISOs, largely because Charles does not want to assume the direct responsibility of ensuring that processing clients comply with the appropriate network regulations.

"Why would you want to get in the middle of all that? It's just too difficult to control what ISOs are doing out in the field," he said. "When I start getting into that, I'm competing with Concord; that's not my objective."

Compliance is a major issue, Steely said. "You have to run a clean, tight house. If you've ever had any major compliance issues as an ISO, you're not going to be able to pull off being a switch." ASAI recently hired a private auditing firm to help document its compliance procedures and policies, Steely said.

Can See Clearly Now

A key advantage to an in-house switch-and one appreciated by retail clients-is faster settlement and reconciliation of funds, Klein said. Retailers also welcome the ability to monitor transaction data on a real-time basis. "They're good businessmen, so they really appreciate the ability to be proactive in dealing with any problems at the ATM."

Running one's own switch offers a more comprehensive view of transaction data, Charles said, which makes it easier to track chargebacks and other transaction reversals. "When it's coming from the machine right to us, we're seeing all of the data rather than just a portion of it."

Not for Everyone

While running an internal switch offers obvious advantages, it likely isn't for everyone, Falcone said. "I think it's important to look at where you've been and where you want to go. If you overextend yourself, you run the risk of becoming a jack-of-all-trades and master of none."

Weisz expects interest among ISOs to grow, as more decide to take the processing plunge. "It's kind of like 'If Mr. Smith can do it, Mr. Jones can do it, too.'"

However, he urges ISOs to weigh all alternatives carefully. In fact, Toronto-based TNS recently established a new United States division called Smart Processing Solutions to offer processing services to ISOs not inclined to do it themselves.

"Getting your own switch is a little like getting a car with quite a bit more horsepower than you're used to," Weisz said. "You have to make sure you're going to be comfortable driving it."


Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.
Back Next Index © 2004, The Green Sheet, Inc.