Money not only makes the world go around, it also makes ATM deals happen. So when leasing companies exit the ATM business, as they've done in large numbers in recent months, deployers feel the pinch.

In a conference call to investors regarding the collapse of his company's "preferred provider" deal with Credit Card Center, NCR CFO David Bearman said that the Philadelphia-based ISO's recent money problems were largely due to difficulty in obtaining lease financing for its machines. NCR is taking a $42 million charge in 2001's first quarter for loans and receivables related to its business with CCC

Credit Card Center CEO Andy Kallok acknowledged this was true. In a written statement, he said his company's inventories became hugely inflated while CCC tried to obtain lease financing for a large number of Tidel and NCR machines in its warehouse.

"Wholesale money to the small ticket leasing arena was reduced significantly, forcing several companies out of business and inflating our receivables," Kallok said.

Two of CCC's primary lessors, Newcourt Financial and Advanta Corporation, have exited the ATM business in recent months. Advanta stopped originating leases for all small equipment – not just ATMs – last January.

"Delinquencies were not the basis of that decision," said Advanta spokesperson Catherine Reid. ATMs were only about 5 percent of Advanta's portfolio, she said, so they did not have a significant impact on the company's bottom line.

Yet some believe that the business model popularized by CCC – and since adopted by numerous smaller "wannabes" – has contributed to the industry's leasing woes.

In that model, merchants pay leases of upwards of $260 a month, ultimately paying $12,000 or more for ATMs that wholesale for less than $5,000. The ISO guarantees that the merchants will receive all but a small portion of their payment back each month.

In recent months, CCC seems to be experiencing difficulty meeting obligations to its clients. While Vicki Tibberino, CCC's vice president, said that CCC experienced an accounting problem with "a limited number of customer checks," enough checks have begun bouncing that some merchants are pursuing investigations of the company's business practices with their state Attorneys General.

Tim Wallace, owner of the Daily Market in Lewes, Del., signed a five-year contract with CCC, agreeing to pay $274 a month for a turnkey program that included an ATM, as well as service, processing and supplies. He said CCC's checks were "never on time," with the company running up a debt of as much as $6,000. He went to Delaware Rep. John Schroeder for help, and Schroeder has since asked Attorney General M. Jane Brady to pursue an investigation of CCC.

Mega margins

Despite Reid's statement that delinquencies did not contribute to Advanta's decision to abandon the equipment leasing business, some in the ATM industry contend that inflating the price of hardware leads to a higher rate of lease defaults.

Helen Monroe-Talford, vice president of operations for Southfield, Mich.-based United ATM, said that CCC, the leasing companies it did business with and merchants themselves all share some responsibility for finance problems. They've "done an injustice to the industry as a whole" by over-inflating the price of equipment, she said.

"I do not believe that the leasing companies didn't know how CCC's programs worked after the first year they were in business," Monroe-Talford said. "Everybody got fat on those agreements. The customers share some responsibility too. They signed a 60-month lease agreement. They have a responsibility to keep making those payments."

Monroe-Talford spent seven years working in the leasing business before going into the ATM business. She said that leasing companies expect to finance "soft costs" such as shipping, installation and service of "about 20 percent, not 50 percent." Her former employer, for example, stipulated that at least 75 percent of a computer's finance cost had to be the hardware itself.

In the case of default, many leasing companies aren't interested in repossessing ATMs that are valued at $5,000 or less. "The leasing companies don't want that hardware thrown back at them," said Doug Falcone, president of Access to Money, a Chatham, N.J.-based ISO.

"Tens of thousands of merchants have signed these 'hell or high water' leases," said Jeff Vancleve, vice president and general manager of Diebold Credit Corp., a captive leasing company that is a wholly-owned subsidiary of the North Canton, Ohio-based manufacturer Diebold. "The lease companies don't pursue legal action when a contract is broken since (an ATM) is a small ticket item."

Again, said Hansup Kwon, president of Fremont,Calif.-based manufacturer Cross Technologies, the problem is compounded when ATMs are sold at a price well above fair market value.

"When you get defaulted, the value is based on the wholesale price of that machine. If you get funding of $10,000 for a machine that costs $4,000, $6,000 evaporates the minute you get the funding," Kwon said. "If you have to repossess, the machine is worth only $4,000 minus depreciation."

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Kwon provides leasing companies with a suggested maximum funding limit for his popular Mini Bank line of machines. This amount is typically no more than 50 percent above the wholesale cost of the machine. "That is more than reasonable, I think," he said, adding that "greediness has been driving the ATM channel."

While greed may have played a part, simple unfamiliarity with ATMs contributed to the problem, said Dennis Latora, a branch manager at Atlanta-based Popular Leasing USA. "Some lease companies didn't investigate the market and determine the value of the machines, so they got stuck with a lot of collateral that wasn't worth what it booked for."

And customers often don't know what they're actually paying for an ATM, Latora said. "The salesperson sells monthly payments versus machine price. And because you're dealing with a product that generates a definitive cash stream, he sells the potential for income from that machine. Nine times out of 10, the customer doesn't know what a machine costs; he's just buying a payment stream."

Yet another factor that contributes to defaults is the non-necessary nature of the machines, said Diebold's Vancleve. "Lenders feel a lot of security when they're leasing something crucial to the business, such as ovens to a restaurant. While ovens in a restaurant are an essential-use item, the same thing isn't true of an ATM in a convenience store. Loss rates are higher on non-essential items."

Under (downward) pressure

In addition to the "ripple effect" of overpriced equipment, United ATM's Monroe-Talford said the leasing industry in general is shying away from financing "small ticket" items under $10,000 or so. That's an issue when market pressure causes ATM prices to drop. Retail prices of ATMs commonly deployed in off-site locations, once in the neighborhood of $8,000 to $10,000, have plummeted by 50 percent or more in the last 2-3 years.

"The higher the value of the hardware, the easier it is to get it approved," Monroe-Talford said.

Indeed, Popular Leasing's Latora said downward price pressure is causing his company to re-assess its place in the ATM arena. "The price of the machine is the one thing that worries us down the road," he said, noting that Popular recently lowered its basic minimum rate from $5,000 to $4,000 just for ATM vendors.

"We have to generate a certain number of dollars per transaction in order to cover our money costs and operational costs and to make a profit. If we do a $4,000 lease as opposed to a $7,000 lease, we still have to cover our costs," Latora said. "The overhead is the same. It doesn't matter how many deals you do if you can't make money on each individual lease."

Alphabet soup

In addition, Latora added, "As the machine prices drop, the quality of the credit and the customer tend to drop also."

The incidence of merchants with less than satisfactory credit ratings – so-called "C" and "D" credits – has been increasing as "vendors call on customers they weren't calling on before," Latora said.

Kwon, of Cross Technologies agreed. "Most of the merchants with good credit already have a machine. If you want to sell more machines, you have to tap into these 'C' and 'D' credits. When the economy was better, more leasing companies would take the risk, but now 'C' and 'D' are dirty words to them."

Access to Money's Falcone said he loses eight to 10 deals a month because the merchants are categorized as "C" or "D" credits. Some have personal credit problems but pay vendors on time, he said, while others pay cash for everything and so have no documented credit history.

"A" customers often don't need assistance from an ISO to obtain financing, Falcone said. "If it's an 'A' customer, they can go to their own bank and get a loan or just write a check."

United ATM's Monroe-Talford said not many customers served by her ISOs are "C" and "D" credits. But she said contracts often never get signed with those customers. "In my experience, when you get approved at 'C' and 'D' rates, the customer won't buy anyway."

Criteria for credit ratings vary from company to company, said Latora, but typically include credit reports produced by third parties like Equifax, as well as a bank report.

Many leasing companies, Popular Leasing included, pay close attention to how long a merchant has been in business. In fact, Latora said, Popular recently toughened its definition of a "new" business, from two years to three years.

"Young businesses cause the most problems because they're tougher to evaluate," he said, particularly in instances when the business owner is new to the U.S., a not uncommon occurrence in the c-store/grocery/gas station world.

"Now that all of the great locations have been cherry picked, we're going after the smaller locations," Access to Money's Falcone said. "They tend to flip more often than the extremely profitable businesses."

Because they control the revenue stream directly, ISOs that provide processing are in a unique position to help protect their lease companies, Falcone said. For instance, he requires his merchants to have their monthly lease payments debited electronically from their accounts. Because of this, he said, his default rate is less than 1 percent annually.

Now what?

With the lease market tightening, companies in several different areas of the ATM sector – including manufacturers, processors and ISOs – are trying to come up with solutions.

Triton Systems established a leasing program for its distributors last July – unfortunately, it was with Advanta, which left the ATM business in January, as noted earlier.

Russell Harty, director of U.S. sales for the Long Beach, Miss.-based manufacturer, said finding a new partner for a similar program is "one of our top priorities right now," with a goal of launching a new program in the second quarter of this year. "A lot of people, us included, are scrambling right now to come up with creative leasing programs."

While Triton's sales haven't suffered dramatically, Harty said, "We're not going to increase our sales the way we want to if there's not a competitive leasing product out there."

Based on feedback from Triton distributors, he added, "Any given distributor is getting deals and putting them in a drawer (because they can't get funding)."

WRG Services, a Willoughby, Ohio-based distributor and processor that recently launched its own ATM, the Vision 100, is establishing an in-house lease division called WRG ATM Financial Services to help ISOs obtain lease financing for the new machine. The program will be run through Little Mountain Leasing Company, based in Concord, Ohio.

"We believe that having a strong financial source in-house will drive sales to us," said WRG Vice President Mike Stevenson.

"We have a big investment in this new product," he added. "We could have the most wonderful product in the world and the best sales and support organization in the world, but if we can't get these things financed, it doesn't matter at all."

He intends to establish maximum limits for lease financing of his ATMs, Stevenson said, although he acknowledged that it may be difficult to enforce those limits with distributors. "We'll do our best to enforce fair market value on our machines."

Unlike traditional lease companies, Stevenson said, his company won't have to write off a machine if it's repossessed. "We're not afraid of losses. We can refurbish machines and re-sell them through our own program, so we can mitigate the loss."

While United ATM currently brokers leases with outside companies for some of its ISOs, the company is considering offering financing itself. The service would be only for a "select few," Monroe-Talford said, well-established ISOs with a history of selling to qualified customers.

To help those ISOs attract new customers, Monroe-Talford said United may offer payment plans unusual to the lease world, such as 6-month, same-as-cash programs.

Popular Leasing USA, which processes 350-400 ATM applications a month, three years ago established a "preferred dealer" program for about a dozen of its ISO clients. In exchange for more attractive interest rates and other incentives, the ISOs must agree to assume a greater financial risk and to take a more active role when machines are repossessed.

Falcone said he is considering setting up an in-house lease program as well, primarily because it would offer him more control. "If I have a machine with the potential to do 1,500 transactions a month but the merchant's only been in business six months, I may want to take the risk."

He would also like to see manufacturers and lease companies alike become more directly involved, perhaps teaming up with some of their better ISOs and distributors and putting a loss pool in place.

While Falcone said he thinks the lease finance situation will get worse before it gets better, he believes it will eventually improve as new companies enter the ATM business.

"I think you'll see companies like Advanta continuing to move away from ATMs. But you'll have leasing companies at the lower end of the food chain – the ones that do credit card and POS terminals – move in to take their place," he said.