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Article published in Issue Number: 061201

Welcome to the ATM jungle

By Tracy Kitten, Editor, LogoThis story was originally published on, Nov. 8, 2006; reprinted with permission. © 2006 NetWorld Alliance LLC. All rights reserved.

In the ATM world, it truly is a jungle at times, and it's left many independent players wondering how they can keep from going under. American pop references aside, winners and losers are quickly emerging in the independent sales space.

Mergers, acquisitions, a surcharge backlash and a renewed interest in the ATM channel from the financial-institution (FI) side of the street are fueling the ISO struggle. And the continual drop in per-ATM transactions, arguably the result of the United States' saturated market, isn't helping the ISOs' plight.

ISO ATMs, which once dominated the U.S. market, now account for only half of all U.S. installations, according to Dove Consulting's 2006 ATM Deployer Study, a biennial research report that examines the health and viability of the U.S. ATM industry.

Renewed interest on the part of FIs in the ATM channel is forcing ISOs to collaborate with banks and credit unions - entities once deemed the enemy.

During last month's ATM, Debit & Prepaid Forum in Las Vegas, Keith Myers, Cardtronics LP's Executive Vice President, said deals between FIs and ISOs for branded ATMs are laying the groundwork for strange bedfellows, but the deals are a win-win.

For all of the reasons mentioned above - mergers, acquisitions, surcharging and competition for off-premises locations - branding deals make sense. Take a step back, and it's easy to see that ISOs like Houston-based Cardtronics, which are pursuing relationships with FIs, are making strides in the right direction.

Close to the edge

The vigor of most U.S. ISOs is difficult to gauge, since the majority are privately held. Among those that are publicly traded, such as Portland, Ore.-based TRM Corp. and Ponte Vedra Beach, Fla.-based Global Axcess Corp., the future looks bleak.

Both TRM and GAXC are struggling. This week, TRM said its "goodwill and certain other long-lived assets are impaired." As a result, the company has delayed its third-quarter filings until it can get all of its financial statements in order. The company has reported losses for the last two quarters.

GAXC is facing similar woes. Beyond shake-ups at the top, including the naming of a new chief executive, board chairman and board vice chairman, which the company announced last month, GAXC's financials reflect a downward spiral. All three new heads are touted for their histories of helping turn companies around.

In August, GAXC reported a net income loss of $373,000 for the second quarter of 2006, a loss eight times greater than the loss the company reported a year prior.

Some industry insiders argue that the Goliath-like size of TRM and GAXC has played a role in their demise. TRM, with nearly 18,000 ATMs, and GAXC, the parent of Nationwide Money Services with just more than 5,000 ATMs, probably grew too big, too fast, they say.

There could be some truth to that, but it's not the whole truth. When ISOs like Cardtronics - albeit a privately held business, at least for the moment - get tossed into the mix, the argument changes.

Not losing your head

Cardtronics is the world's largest ISO. Its network of more than 25,000 ATMs spans the United States, the United Kingdom and Mexico. And though Cardtronics' last quarterly statement reflected a net loss from 2005, the company continues to grow and diversify, unlike its fellow ISOs.

Beyond making a name for itself in the branding space, including deals with well-known retailers like Target Corp., Walgreen Co. and CVS Corp., Cardtronics spent 2006 buying interests in businesses that fall outside the branding scope.

In February, Cardtronics bought a majority interest in CCS Mexico, a family owned and operated ISO; in December it acquired Allpoint Network, America's largest surcharge-free ATM network.

Ben Psillas, President and Founder of Allpoint, said the acquisition of Allpoint, although outside the realm of ISO focus, made sense for Cardtronics.

"We reached out early to Cardtronics in this process as a partner," Psillas said. "We have a lot of synergies, including how we can use the ATM."

Cardtronics' size and established relationships with large retailers was attractive to Allpoint's 350 FI customers.

"We were looking for a way to work with the big-box retailers, and we wanted to piggyback on Cardtronics' success," Psillas said. "Since the acquisition, our connection to Cardtronics has been invisible to the FIs I work with."

Allpoint operates as an independent subsidiary.

"What is it about Cardtronics that stands out?" Psillas asked. "I think it starts with management. Their management team is top notch, has a breadth of experience, knowledge - they are a well-rounded management team, which has allowed them to access money and funds."

That management team, which includes a healthy pool of former bankers, has done a good job of anticipating industry changes and has adjusted accordingly, Myers said.

"I think we realized that we needed to diversify beyond the traditional surcharge model, and that's when we started working with Allpoint," Myers said. "We saw that a lot of customers don't want to pay surcharge - so we have both. Our customers can use the surcharge-free model or they can surcharge. We see that as the direction the industry is going in, to surcharge-free, so we wanted to get ahead of that."

International opportunities also have garnered attention.

"A further differentiator, I would say, is our expansion into the international markets," Myers added. "We saw an opportunity to take our same model and scale to other countries.

"Our acquisition of Bank Machine in the UK has been very successful. And today we now have over 400 ATMs in Mexico."

Myers said the company eventually plans to deploy 4,000 ATMs in Mexico.

Chris Brewster, Cardtronics' Chief Financial Officer, said the company is examining other international markets as well; but for the moment, Cardtronics plans to focus its attention on markets, like Mexico, where it already has deployments.

"Fewer people in Mexico have bank accounts, and Mexico has about half the ATMs per people with bank accounts than the U.S. But beyond that it's fairly similar, in that the market allows surcharging, and we see the market developing in a similar way to the way the U.S. developed," Brewster said.

"We want to develop relationships with large retailers there like we have done here."

Mexico has approximately 20,000 ATMs.

Other opportunities the company plans to pursue include deposit automation, leveraging the promise of Check 21, and functions like bill payment and card dispense that target unbanked and underbanked consumers.

Cardtronics also is expected to make a public offering sometime in the future. And though Brewster would not comment about a pending IPO, the company did make a bond offering last summer that is fully registered with the Securities and Exchange Commission.

Because of that registration, Cardtronics discloses its quarterly statements to the public.

Keep from going under

Beyond diversification, the strength of branding is obvious. And Myers said Cardtronics is banking on the branding model.

"We're seeing more and more consulting firms like Dove recommending branding programs and surcharge-fee programs for banks, which is exactly what we envisioned and talked about two years ago. It's really exciting," he said.

According to Dove's Deployer Study, 41% of the United States' largest banks have at least one branding deal with an ISO; another 7% are actively pursuing a branding deal; and another 19% say they may be interested in branding in the future.

Credit unions and smaller banks are reportedly less interested in branding deals, but Dove expects that perspective to change as branding with ISOs becomes more common.

"Looking forward, FIs have every reason to be optimistic about ATM branding and the opportunities it can afford in terms of expanding their off-premise[s] footprint and increasing cardholders' surcharge-free ATM access at a lower cost than deploying ATMs," the study stated.

Dove found that FIs pay a monthly fee of between $90 and $300 to brand an ATM.

But not all ISOs are willing to diversify and adjust in the same way Cardtronics has.

Steve Polk, North American Retail Sales Director for Long Beach, Miss.-based Triton Systems, said ISOs that refuse to change will continue to lose.

"Just trying to make money on surcharging is not a model that I endorse," Polk said. "But some are not willing to take an aggressive approach to get more. You can just see some that are dying on the vine. I think that you'll see over time that they will be acquired or they'll just drift off into mediocrity."

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Article published in issue number 061201

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