The last two years have been especially challenging for IADs and operators. We have seen declining revenues, soaring expenses, increased regulation, network changes and a slew of other challenges, seemingly from every facet of our industry.
Kahuna ATM Solutions recently commissioned a study with Empire Research Group Inc. which resulted in research and analysis regarding the trends, issues and future outlook for our industry.
Our research revealed six major challenges facing our industry.
Challenge #1: Decreasing profits
Decreasing ATM profitability is one of the biggest challenges facing the industry today. Contributing factors include an oversaturated ATM marketplace, skyrocketing costs, increased government regulations, decrease in the number of ATM transactions and more.
One factor that affects decreasing ATM profits is the growth in ancillary banking products. More and more people are migrating to an online banking environment and making fewer trips to an ATM. From the convenience of their home, they can easily transfer money, deposit paychecks, pay bills, etc.
Americans are increasingly relying on debit cards and straying away from cash transactions. According to a recent survey, debit card spending increased from 48 percent in 2003 to 59 percent in 2008. Not surprisingly, the percentage of debit card purchases is expected to surpass 67 percent by 2013.
Network fee increases and market consolidation are other key factors that play into declining business profits. In 1995, when the industry was first emerging, the top three networks had a market share of 39 percent. Today, the top three networks have the majority share at more than 70 percent. Networks have used this market power to take profits directly from IADs and redirect them to themselves or their own FIs.
To avoid paying extra fees, ATM customers are limiting the number of times they visit an ATM and increasing the dollar amounts being withdrawn per visit. Prior to the economic crash of 2008, the average withdrawal amount was $78 per ATM transaction. Today the average dollar amount being withdrawn from an ATM is $84.
Challenge #2: Soaring expenses
It costs more than ever to run and manage an ATM business. Regulatory upgrades also add to the increased expenses incurred by IADs. ATMs no longer in compliance with government regulations must be upgraded, or in some cases, replaced entirely.
Recent regulatory upgrades include:
Story continues below...
• Unique keys
• ADA compliance
• Triple DES
• EPP and V-EPP
• Software upgrades to mask card numbers in journal receipts
Challenge #3: We can’t do it all
Starting an ATM business sounds simple, but the reality is there is a lot to think about. Strict government regulations and ongoing compliance issues can be an operational nightmare. Focusing on these challenges can steal your time and precious resources away from other priorities.
Machines break down, theft occurs and the paperwork can be overwhelming. As an IAD, it is important to consider all aspects of your business. An IAD must have someone available to manage:
• Sales, marketing and customer support
• Equipment installation
• Servicing and repairs
• Monitoring and management
• Processing services
• Compliance issues resolution
• Bank sponsorship
In addition, there are several complex tasks requiring training and time to administer, such as back office administration and client service, finance and raising capital, equipment and inventory, balancing bank accounts, vault cash and armored car services
management and coordination and a host of other things.
Additionally, you must consider the time and effort involved in portfolio management, strategic planning and consulting, client retention, customer contract review and negotiation and exit strategy.
Challenge #4: Compliance complexity
One of the major challenges facing IADs and distributors today is staying current with new and mandatory regulations as they are introduced.
In May of 2010, Tom Harkin, a democratic senator from Iowa, introduced an amendment to the Financial Reform Bill to cap ATM surcharges at $0.50. Fortunately, the bill was dropped but the government has their eyes on this industry. Don’t be surprised to see this bill revisited in the future.
New regulations are constantly being introduced as IADs and distributors struggle to remain current. Two of the most recent regulations are:
• ADA compliance, effective March 15, 2012.
• Banks must reject withdrawals from ATM and debit card transactions when funds are insufficient, effective July 1, 2011.
The US Patriot Act requires all FIs to obtain, verify and record information that identifies each person and entity who works with any FI. Due diligence must be completed on any ATM owner as well as individuals who load and service the ATM.
Finally, detailed background checks must be completed as well as quarterly audits. Failure to comply with these requirements could result in fines up to $25,000 per occurrence and jail time.
Challenge #5: Security issues
Theft and vandalism of ATMs is a common occurrence. Skimming, which captures card information, has also become increasingly popular during the down economy. In addition to the outside threats of theft, vandalism and skimming, IADs and operators have to consider theft from an internal source.
Third-party armored car service could also be a security issue. In February 8, 2010, the president and COO of Mount Vernon Money Centers were arrested. Among the charges were fraudulent “vault inventory” reports and $50 Million in ATM funds missing from their vaults.
Challenge #6: Cut-throat competition
Low barriers to entry have dramatically decreased ATM deployments. The average retail prices of an ATM have decreased more than 600 percent in the past 13 years. Saturation of distributors increases the level of competition.
There has also been a major increase in off-premise ATMs. In 1995 there were 18,000 off-premise ATMs; today there are around 290,000.
Additionally, there are more than 350 IADs registered with VISA and countless distributors, operators and sales agents working through these organizations.
For the established and reputable IADs and distributors, competing in this environment is increasingly futile and frustrating. While each singular challenge may not be too difficult to overcome by itself, when you combine them it becomes a daunting and difficult undertaking.
Bryan Bauer is the president of Kahuna ATM Solutions.