Why ATM ISOs Are Hunting for New Revenues
Lauri Giesen
Consumer resistance to ATM surcharges plus more in-store cash dispensers equals declining per-machine revenues for
ATM ISOs. Here’s how some deployers are trying to reverse that trend.
Not so long ago, the basic business model for independent sales organizations deploying ATMs was quite simple: Buy low-cost cash
dispensers and put them in as many stores as possible. Then sit back and collect a dollar or two—occasionally considerably more—in
surcharge revenue every time someone used one of the machines. Making money wasn’t all that tricky.
The only real challenges were securing the sites that would attract the most foot traffic and negotiating the best deals with retailers
over what the ATM ISO would pay for placement rights.
No more. With the number of ATMs located outside of banks growing rapidly in the past decade, the average number transactions
generated per machine declined 5% in 2005 (chart, page 18). And then there is the growth in popularity of surcharge-free networks in
which financial institutions join together and agree not to invoke ATM surcharges on customers of fellow network members.
(In banking parlance, a surcharge is the fee a bank charges a non-customer for using one of its ATMs, while a so-called foreign fee
is the fee the bank charges its own customers when they use somebody else’s ATM. Since ATM ISOs don’t have consumer customers,
all transactions theoretically are subject to surcharges. Also, ATM owners get so-called interchange revenue in the form of a pertransaction fee from the card issuer; ATM networks set the rate).
Hot Topic
With surcharges of $1.50 or more now commonplace, it’s little wonder consumers shop for fee-free ATMs. And with more PIN pads
going into stores to accept debit cards, there are even more opportunities for consumers to avoid ATM surcharges by getting cash back
when they pay for their groceries or other purchases with a PIN-based debit card.
The result of these trends: less revenue for ATM ISOs that had been rapidly deploying machines for the past 15 years.
“It’s a real challenge for ISOs to make money on ATM deployment today,” says Paul Tomasofsky, president of Montvale, N.J.based Two Sparrows Consulting LLC and a former executive with the NYCE electronic funds transfer network. “In the past, ISOs grew
their business by increasing the number of locations in which they had ATMs. But there just are not many good new distribution points
left. And with the growth in surcharge-free networks, there just is not the opportunity to make money from surcharging that there used
to be.”
Other long-time ATM observers also have noticed the changes. “The business models that are from even five years ago are not
applicable today,” says Kirk Ergang, senior vice president of the Star EFT network owned by Greenwood Village, Colo.-based
processor First Data Corp. “ISOs have to look at other models to sustain revenue growth.”
The early response of ATM ISOs to declining surcharge revenue was pretty standard: consolidate. Owners with small ATM fleets
often sold their portfolios to the bigger players, or two mid-sized companies merged. The result was greater economies of scale in
which players could make up for declining per-machine numbers through greater total volume. Also, the cost of maintaining and
operating a large ATM fleet is more favorable than the cost associated with a small fleet.
But consolidation alone may not be the answer. Many ISOs are now looking for new business models that go beyond relying solely
on surcharge revenue. One obvious tactic is to use the machines to do things beyond dispensing cash—sell things like gift cards or tie
special coupon deals to retailer promotions. But such tactics have had minimal success.
So while adding functionality to ATMs is likely to continue, a more popular strategy seems to be emerging: cobranding ATMs with
financial institutions.
“The number-one hot topic in ATMs these days is ATM cobranding,” says Melissa Fox, a consultant with Boston-based Dove
Consulting, a unit of Hitachi Consulting Corp. Fox recently completed a study on new business models for ATM deployment.
In the cobranding scenario, a bank pays ATM ISOs to put the bank’s brand on ATMs. Then that bank’s customers can use ISOowned ATMs whenever they need cash without having to pay surcharges. To compensate deployers for the loss of surcharge and
interchange revenue from transactions made by the bank’s customers, the bank pays the ATM ISOs monthly fees based on the number
of cards the bank has deployed in the regions served by the ATMs, the number of ATMs involved, and the volume of transactions.
Hence, ISOs benefit from increased revenue, and the banks benefit from being able to serve their existing customers at more places
and get their names out to non-customers. Customers may even switch banks if they know they can use a nearby ATM free—a factor
banks consider when signing the cobranding deals.
Even retailers with ATMs in their stores stand to benefit from cobranding if the presence of a bank-branded ATM draws customers
into those stores who want to use the machine. Those customers are then likely to make purchases while on the premises, explains
James Hanish, executive vice president of Ontario, Calif.-based Co-Op Financial Services, a network of credit unions formed to share
ATMs.
Downsides
The most visible ATM ISO to go the cobranded route is also the nation’s largest. Houston-based Cardtronics Inc., with more than
26,000 ATMs, has signed large cobrand deals with such banks as JPMorgan Chase & Co., PNC Financial Services Group Inc., HSBC
Bank USA N.A., and Huntington Bancshares Inc. (“26,000 ATMs and Counting,” January-February 2006).
Those deals seem to be helping Cardtronics’ bottom line. While the firm disclosed in its third-quarter earnings report that its number
of ATMs declined slightly in the past year and the number of transactions on its U.S. ATMs also suffered a small decline, monthly cash
withdrawals per ATM increased 6.9% to 402 over the year while average monthly revenues per machine increased 9.9% to $898 from
year-earlier levels. While Cardtronics attributed some of the latter gains to its growing United Kingdom ATM operations, the firm also
pointed to gains in its U.S. programs.
“Domestically, our financial results were positively impacted by the bank and network-branding agreements that we executed earlier
in the year,” chief executive Jack Antonini said in the third-quarter report. Cardtronics did not respond to interview requests.
Cardtronics is far from alone in cobranding ATMs with banks. “Cardtronics is the most visible, but a lot of other ISOs are
pursuing similar strategies with financial institutions,” says Hanish. “If you get under the covers, you would find a lot of small and
mid-sized ISOs have cobranded deals as well. It’s just the big deals that get all the trade press.”
Indeed, according to Dove Consulting’s study, 38% of ATM ISOs surveyed have at least one cobranding deal in place with financial
institutions while another 24% are actively pursuing that strategy. Only 5% of the ISOs said they were not at all interested, Fox says.
Cobranding, then, appears to be one of the most popular ways for ATM ISOs to turn around their businesses. “Clearly the margins
on ATM operations are getting squeezed, and all the ISOs are looking to generate additional revenue from their machines,” says
Richard Stern, chief operating officer of Portland, Ore.-based TRM Corp., a deployer of ATMs and photocopiers that is restructuring its
ATM operations after reporting a third-quarter loss of $101.2 million. TRM attributed much of the loss to a write-down in the value of
an ATM management portfolio it purchased from eFunds Corp. in 2004.
Stern confirms that TRM is “evaluating new strategies for our ATM operations,” but adds, “We’re not far enough along to comment
on any one strategy under consideration.” The firm, which operates about 17,600 ATMs in the U.S., Northern Ireland, Canada, and
Germany, has publicly announced plans to sell most of its non-U.S. ATM operations.
Still, Stern agrees that cobranding is one option all ATM ISOs need to consider. “Cobranding makes sense because it generates
additional revenue and gives an ISO a higher profile in terms of its market presence,” he says.
But Stern adds that ATM ISOs considering cobrand deals have to look carefully. “Not all locations warrant consideration for
cobranding,” he says.
Indeed, cobranding has its downsides. “We’ve looked at a couple of scenarios where banks have wanted to cobrand with us and
we’re still negotiating. I’m not sure what we will decide,” says Alan Forgione, president of Beverly, Mass.-based United Cash
Solutions, the ATM-owning division of a big ISO, United Bank Card Inc.
One of Forgione’s biggest cobranding concerns is the loss of his company’s own logo. “Having our logo out there in the market has
generated a lot of leads. Other retailers see our machines and want to do business with us,” he says. “You want your logo out there in
the high-profile retail locations, not the bank’s.”
’Uncomfortable’ Locations
Indeed, Forgione says because United Cash Solutions is only 2 years old and has relatively new machines in the market, its transaction
numbers continue to grow. United Cash Solutions has deployed about 1,000 machines nationally, though about 70% of its portfolio is
on the East Coast.
Forgione says ATM ISOs can work with retailers in creative ways to increase transactions. His company, for example, has convinced
some pizza shops to stop accepting credit and debit cards for payment. Instead, customers are directed to the ATM to get cash.
Other ATM ISOs also say they can grow their revenue without cobranding. Las Vegas-based Global Cash Access Holdings Inc., for
example, specializes in the casino market and has not seen resistance from customers to ATM usage fees, according to Thomas Sears,
executive vice president of business development.
“We’ve been approached by banks about cobranding, but collecting the surcharge revenue is important to our current model, which
is still successful for us,” Sears says.
Sears also says his company is working with its casino partners to boost usage. “We’re dabbling with the idea of waiving surcharges
altogether for transactions over a certain amount, most likely $100,” he says. In that case, the casino would cover the cost of the surcharge
on the assumption that the customer has a sizeable amount of additional cash to spend in the casino.
But despite the resistance by some ATM owners, many ISOs seem interested in the cobranding model. While each cobranding deal
is different, Dove Consulting’s Fox estimates the average fee paid by a bank to an ISO to put its brand on a machine is $250 per
machine per month. The amount of traffic, visibility of the location, the prestige associated with the retailer involved, and the lift in
transactions all factor into exactly how much banks agree to pay ISOs, she says.
In exchange for that revenue, the ATM owner forgoes the surcharge and interchange fees on each transaction made by the bank’s
customer. Dove estimates that to be about $2.20 per transaction.
Applying the revenue numbers from Dove, cobranding an ATM apparently would be a good deal for an ISO if no more than about a
third, or 114 or fewer, transactions a month come from the partner bank’s customers. That number is based on the assumption that the
average ISO ATM has 329 monthly transactions and that the loss of $2.20 on each of the 114 cobranded transactions roughly totals to
the $250 monthly bank payment. Up to 114, average per-transaction cobranding revenue exceeds conventional revenue.
Yet while cobranding can be a good deal for banks, consultant Tomasofsky says banks have to be careful when dealing with ATM
ISOs, especially as it relates to protecting bank brands. Not only do banks have to make sure the ISOs in question have stellar
reputations themselves, but they also have to look closely at where their machines are located.
While many off-premise ATMs are in supermarkets and convenience stores, which might enhance the value of the bank brand, some
also are located in adult-entertainment spots and casinos, which could make some banks uncomfortable.
“No bank wants to see a photo in the local newspaper of a place that is being investigated by police and then see an ATM with the
bank’s logo front and center of the establishment,” Tomasofsky says.
No Killer App?
And while most of the ISO-bank deals today call for the ATM ISO to cobrand machines that the ISO continues to own, Fox believes the
next step will be for banks to expand the deals so that the ISOs manage and service bank-owned, off-premise ATMs.
“There is the potential to extend the existing relationships to outsourcing in which the ISOs would take over the management of
banks’ ATMs located in off-premise locations,” Fox says. “We’re not quite there yet, but I see a lot of potential for these kinds of
deals.”
Tomasofsky agrees that maintenance agreements may be the next step. “It’s not a bad idea for ISOs to sell their services to other
ISOs or even small financial institutions that have off-premise ATMs. The ISOs most likely could provide servicing at a lower cost than
what the banks have to pay to do it themselves,” he says.
Star’s Ergang agrees that these serving arrangements make the most sense for banks or credit unions with small off-premise ATM
fleets. “Some institutions that only have a few ATMs might benefit by shifting their servicing to the ISOs. It could get them out from
some of the burdensome costs associated with managing those machines,” he says.
One obstacle to this strategy, however, is that even in off-premise locations, financial institutions often deploy sophisticated, fullfunction ATMs while the ISOs’ typical experience is in servicing lower-end cash dispensers, Co-Op’s Hanish points out. Deposit
processing could become a problem since banks need deposit envelopes to be picked up daily, but ISOs may not service their cash
dispensers every day.
While deals with banks are getting the most attention, there are still efforts by ISOs to increase the functionality of their machines to
increase revenue.
The growth in popularity of gift cards presents some real opportunities to sell cards from ATMs and allow the machines’ owners
to collect a fee on each card sold, says Star’s Ergang. But these sales strategies need to be thought out better than the helter-skelter
approaches in the past. One negative is that buying things from ATMs takes longer than simply getting cash, which could cause lines
to form.
Such drawbacks aren’t stopping ideas from flying around. One tactic that may make sense is for ATM ISOs to partner with
shopping malls to dispense so-called mall cards, which are essentially gift cards that can be used to make purchases at any store in a
given mall, Ergang says. In such cases, either the consumer would pay a few dollars for the purchase of the card or the mall would
underwrite the cost by paying the ATM owner a few dollars for every card sold.
Still, not everyone buys the idea of using ATMs to sell things. “There just does not appear to be much traction with the idea of
turning ATMs into vending machines,” Hanish says. “Nobody has found the killer application yet.”
’Wow Factor’
That’s why ISOs will have to look at where each machine is located to decide what products, if any, to sell, Ergang argues. ATMs
located near movie theaters might be used to sell movie tickets while other products would make sense in other retail locations.
Another option for ATM ISOs to increase revenue relates to coupons. While dispensing coupons is certainly nothing new, Ergang
says the new Microsoft Windows-based ATMs are more “robust” and can take coupons a step further than what has been done in the
past.
He notes that owners of the ATMs can, for example, set the machines to dispense coupons for coffee and doughnuts in the morning
and sandwiches in the afternoon.
The idea of couponing is that the retailers would pay ATM owners on a per-coupon basis, with the assumption that the coupons
generate extra business for the retailer.
Stern declines to reveal if TRM is considering couponing. He adds, however, “my past experience has been that any kind of direct
advertising that can force sales at a retail partner’s location is always attractive. That always rates high on the ‘wow-factor’ in the retail
environment.”
But for the short term, most ATM observers believe it will be the surcharging strategy that will get the most attention from
ISOs.
Are Check Imaging And ISOs a Future Pair?
As banks and independent sales organizations come together to cobrand ATMs so that bank customers can use privately owned
machines without paying surcharges, a question emerges: What’s next?
Are there are more ATM-related services that ISOs can provide for banks, and do ATM ISOs have the sophistication to keep up
with emerging technologies desired by banks?
One of the top ATM technologies banks are looking at today is check imaging. Prodded by the Check Clearing Act for the 21st
Century, the 2003 law dubbed Check 21 that spurred the movement toward electronic check images, customers using an image-enabled
ATM can deposit a paper check without using an envelope. The ATM makes an image of the check, captures its bank-routing and
account data, and then converts that image into an electronic transaction that is transmitted back to the bank and through the checkclearing system.
Only a handful of image-enabled ATMs are in the market today, in part because of their high cost (“Pushing the Envelope Aside,”
November-December 2006). But their advantages are clear. The bank doesn’t have to wait to collect the paper to begin the clearing
process, and depositors get access to their funds faster.
So far, this is a technology that ATM ISOs, which typically deploy only cash dispensers, have avoided. But banks increasingly are
looking to ATM ISOs to provide services to their customers, so some observers believe it won’t be long before at least a few of the
more progressive ISOs jump on the imaging bandwagon.
“There are some ISOs that already see a potential opportunity for Check 21 applications,” says Melissa Fox, a consultant with
Boston-based Dove Consulting. “I don’t know anyone who is doing it yet, but I think it could be on the horizon.”
Fox believes pressure for ATM ISOs to become involved in check imaging could increase if more ISOs take the next step in their
relationships with financial institutions and provide servicing for bank-owned, off-premise ATMs (see main story). Because bankowned ATMs typically offer a range of services, these machines most likely would be the first to offer such advanced features as check
imaging.
If ISOs were to develop the technology to manage check imaging on the bank-owned machines, the next logical step would be to
selectively offer imaging on their own machines, Fox says.
Still, some industry observers think it is unlikely that imaging services would become available on ISO-owned ATMs any time
soon. Offering such services generally would require replacing cash dispensers, which typically cost $3,000 to $10,000, with high-end,
full-service terminals, which typically cost more than $20,000 each. A top-of-the-line imaging ATM could cost about $30,000. Some
cash dispensers can be altered to accept and image checks, but that again would involve a significant investment in each machine.
And then there is the question of sufficient transaction volume to produce acceptable returns on the high investments. “There are not
that many locations that generate the foot traffic to justify making a large investment in these machines,” says James Hanish, executive
vice president of the Ontario, Calif.-based Co-Op network.
Others also see limited interest by ATM ISOs and consumers. “I don’t see a lot of ISOs even wanting to get involved with deposit
activity at all,” says Paul Tomasofsky, president of Two Sparrows Consulting LLC and a former ATM network executive. “And most
consumers are most comfortable with making deposits at their bank branches or, if they use ATMs at all, they typically are more
comfortable with ATMs located in the branch.”
There also are network regulations and state laws that sometimes limit the ability of consumers to make a deposit in an ATM not
owned by that customer’s bank.
“You have to look carefully if there is enough demand to justify adding even [conventional] deposit-accepting capabilities to an
ATM,” says Kirk Ergang, senior vice president at the Star electronic funds transfer network. “And if you do take checks, who will pay
for the investment? I think we’ll only see financial institutions looking at check imaging for the near future. And most banks haven’t
even installed imaging on their on-premise machines, which are most likely to be the first in line.”
Clearly, check imaging under ISO auspices is not likely to happen immediately. But with banks and ISOs working closer together
on ATM deployments, it may win favor with at least some ISOs.