Ten years of convenience

Ask Chris Klein about the birth of surcharging in the United States and you'll quickly find your notepad filled with tidbits and obscurities that only an ATM veteran could share.

Klein began his ATM career in 1972 as an account manager for NCR Corp. in Florida. He's now the vice president of marketing for Cary, N.C.-based Transoft International Inc.

"It was probably around 1993 to 1994 when surcharging actually began," Klein said. "We did it in 1994, and it wasn't a new concept then."

Klein helped define the ATM-surcharge model while working with Fort Lauderdale, Fla.-based BankAtlantic Bancorp Inc. At that time, he was the NCR representative and eventually became the bank's senior vice president of ATM systems.

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BankAtlantic wanted to place ATMs on cruise ships, and Klein helped the financial institution figure out how it could do it and turn a profit.

"The banks had restrictions and regulations that kept them from surcharging," he said. "So we didn't brand them (the ATMs) as BankAtlantic. They set up a separate company that was like an ISO (independent sales organization), because the banks couldn't surcharge but ISOs could. So even before the ban was lifted, people were getting around it."

One of the first surcharging deals Klein struck was between BankAtlantic and Carnival Corp., d.b.a. Carnival Cruise Lines. Negotiations began in 1992 and the first ATM was placed on one of the lines' ships in 1994.

"It took a while because it involved so much stuff we had never done before," Klein said. "We had to look at satellite communications, and there wasn't a good satellite infrastructure in the U.S. at that time. But the cruise lines had made a big investment in telecommunications, so we ended up running a single T1 line to Carnival's data center and they provided the communications to the ships, regardless of where they were sailing at the time. Everyone said it couldn't be done, but we proved them wrong. We had ATMs talking on satellites; we were surcharging; and we had surcharging onboard the ships. It was exciting."

Ultimately, Klein said, ATMs provided a customer convenience the cruise lines lacked - fast access to cash.

"The cruise ships had a problem," he said. "At the end of the fifth day on a seven-day cruise most people were out of cash because they gambled too much and drank too much."

The ships could cash checks for their customers but it was expensive, usually costing $35 to cash a $500 check.

"So paying $5 for a surcharge was a fraction of what you paid for checks," he said. "I never had a complaint about a $5 surcharge on a cruise ship."

'Breaking out all over'

U.S. consumers are willing to pay for convenience, evidenced by the ATM market's rapid growth. The United States now has about 400,000 ATMs, and about half of those ATMs are operated by ISOs and merchants.

Beyond Carnival, Klein helped BankAtlantic place approximately 800 ATMs in various sites, including Wal-Mart Stores Inc. locations in three states, Indian gaming casinos, convenience stores, entertainment venues, major malls, gas stations and more.

ISOs, like Georgia-based Hanco Systems, which in 2002 sold to Arizona's eFunds Corp. for $11.4 million, and the famed and fallen Philadelphia-based Credit Card Centers, were beginning to pop up throughout the country during the mid '90s.

The market was changing, and ISOs were leading the charge.

"It was the vision of the ISOs that helped the market explode," Klein said. "A lot of the ISOs that came to this business came from the credit/debit side, and all they saw was a better opportunity to make more money."

It was the vision of the ISOs that helped the market explode. A lot of the ISOs that came to this business came from the credit/debit side, and all they saw was a better opportunity to make more money.

- Chris Klein, Transoft International

Vending companies, like Willoughby, Ohio-based WRG Services Inc., also were getting in on the action.

"The market was going gang-busters," Klein said.

Roger Mogan, vice president of WWS ATM, a Brewster, N.Y.-based ISO, was a candy and cigarette wholesaler when he got into the business in 1997. He now manages a portfolio of between 300 and 350 ATMs. About 90 percent of his machines are located in Greater New York City.

"I already had relationships with a lot of the retailers, so I thought I'd give it a try," he said.

'Walking in Rhythm'

As the '70s were to disco, the '90s were to ATMs.

There's no doubt about it: The early to mid '90s were an exciting time in the financial space.

When the Plus (Visa) and Cirrus (MasterCard) networks lifted their surcharge bans in April 1996, surcharging was already alive and well, but not for financial institutions. The ban-lift allowed FIs to reap monetary benefits, too.

What the financial market had for so long feared would turn consumers off actually turned out to be something consumers liked.

"If I were going to complain about anything, it wouldn't be surcharging - it would be the foreign transaction fee that banks charged their own customers for using someone else's ATM," Klein said. "The stink about surcharging has always been more about political grandstanding than actual people complaining."

After all, surcharging fueled the market's growth, said Brian Kett, president of Long Beach, Miss.-based Triton Systems.

"The ability to charge a convenience fee clearly opened up an entire new avenue of locations for consumers to access their banks' funds," Kett said. "It was a way that greatly enhanced the off-premise market."

Kett pointed to the opportunities ATMs provided for the entry-level, off-premises space.

Before manufacturers like Tidel Engineering Inc. (now NCR EasyPoint ATM LLC), Triton and Tranax Technologies Inc. hit the scene, a deployer had to guarantee the bank his ATM could pull about 5,000 transactions per month.

"The convenience fee changed that equation," Kett said. "It allowed the banks another avenue to put ATMs into sites that only needed maybe 2,000 transactions per month to be economical."

Before surcharging, the ATM market was driven by financial institutions.

As Peter Kulik, assistant vice president of product management for Cincinnati-based Fifth Third Processing Solutions highlights, the surcharging model that ISOs created changed the role the ATM played.

"The original purpose of the ATM was cost avoidance," Kulik said. "Banks every day at lunch time had long lines of people coming into their branches. So the first move was to get people who just wanted to get cash out of the teller line. But the banks quickly found that consumers liked having access to their cash 24 hours a day. That's when shared networks started to develop. And it's really the shared networks between banks that made surcharging viable."

Before shared networks, consumers only could use ATMs owned and operated by their FIs. Shared networks opened up ATMs to a larger base of cardholders, and paved the way for the national and international networks used today.

MAC was one of the first open networks. Once independent deployers started linking ATM transactions to the MAC network, the surcharging model sprouted wings.

"It made the deployment of more ATMs profitable and viable," Kulik said.

'Golden years'

The U.S. ATM explosion was the catalyst for many things, including the creation of ATM Marketplace, originally known as ATM Magazine.com, and the ATM Industry Association. (ATMIA is celebrating its 10^th anniversary in February during its East conference in Orlando, Fla.)

"The surcharging model propelled the ATM industry in the U.S., which helped manufacturers grow their businesses," said Tom Harper, publisher of ATM Marketplace and founder of ATMIA. "I don't think the ATM Industry Association or ATM Marketplace would be around if it were not for surcharging."

Fast forward 10 years and it's clear that the association and the Web site have attained global recognition, Harper said.

And that begs the question: What lessons will the rest of the world learn from the United States, where surcharging and off-premises deployments are concerned?

The overall wealth of U.S. consumers, when compared to most of the world, does play a role, said George McQuain, president and chief executive of Ponte Vedra Beach, Fla.-based Global Axcess Corp.

"In other parts of the world, you have a social element that you don't have here," he said. "In South Africa, for instance, you have a crime element that you don't have here. In other parts of the world, you have more of a government element, where the government is working to get more of the population banked. So surcharging might not be as much of an interest there."

But Klein contends, without surcharging, mass off-premises deployments won't be viable, regardless of the market.

"To answer your question, the surcharge model will continue to be challenged every time it goes into a new market, but it won't go away," Klein said. "It's a tight business to put off-premise machines in. Deployers aren't going to do it if they can't make money. If they implement it, the consumer will adopt it and adapt."