Article
Are ATM profits drying up?
Falling prices are allowing more deployers to enter the ATM marketplace. But are they making any money? by Ryan DuBosar, contributing writer
February 21, 2002
The ATM market is not saturated, but rather opening up at the bottom end. That's the conclusion of Boston-based Dove Associates, which surveyed both banks and non-financial institutions to understand ATM deployment trends.
While ATM revenues are falling quickly, so are the costs of owning and operating a machine. As a result, merchants and ISOs can place more ATMs than ever. Low-volume locations can be justified because they are not as expensive to operate.
Tony Hayes, a senior associate who managed the Dove survey, said most previous industry studies focused on the top 50 banks. But because the market has changed dramatically in the last few years, Dove was especially interested in ISOs.
"In the past we could talk about the ATM market and it would be fairly homogenous. Now it's broken into different categories, with new entrants making a business out of placing machines," Hayes said. "We've seen a surge of new entrants and a surge of placing machines. It's a boom in deployment."
Survey says
Dove Associates surveyed 673 ATM deployers, and got responses from 98 of them by November 1998. Surveys went to banks with more than $10 billion in assets, as well as credit unions, smaller banks and ISOs. The total sample represents 29 percent of the nation's ATM base.
Hayes and other researchers combed through the data to uncover trends, which they then placed into historical context. Hayes said the ATM market's development falls into three phases.
In phase one, financial institutions ruled the ATM world. "The rate at which FIs bought ATMs was broadly in line with the rate at which transactions were growing," Hayes said.
Phase two began in April 1996, when the national ATM networks Cirrus and PLUS lifted their surcharge bans on ATM owners. Hayes described this as a watershed period, because the revenue that an owner could earn went from an interchange-only fee of 50 cents to interchange plus a surcharge.
Revenue on a per transaction basis went up dramatically with the advent of the surcharge, and lots of new entrants were attracted into the market. Nonbank entities rushed to deploy ATMs in every conceivable location.
The independents offered merchants a share of the revenue, and banks were forced to compete with ISOs for locations. The number of new ATMs far exceeded the rate at which transactions were growing, Hayes said.
This year, the market has entered phase three. Hayes predicts the market will consolidate as transactions continue to fall, the competition to deploy off-site machines intensifies and the market becomes more saturated.
Economics 101
The revenue a deployer gets from an ATM is driven primarily by transactions. Because transaction volume is falling, so are revenues. "The revenue per machine is declining quickly for all deployers," Hayes said. "On the revenue per machine side, we see a very rapid decline."
Also, as ATM owners compete with one another for attractive locations, they are handing back more of their profits to retailers, Hayes said. With more money going into the merchant's register, does it still make sense to deploy?
The saving grace is that deployment costs are plummeting. According to the survey, banks must spend $1,080 per month to operate an ATM, while the cost for an ISO is $703 a month for a typical retail ATM.
"There is a major shift in the economics of the business, but at the same time the net contribution is staying fairly constant. In terms of profitability these are canceling each other out," Hayes explained.
Richard Harty of ATM Direct finds room for growth at locations with as few as 300 transactions a month. His company runs 1,700 machines across the U.S., at locations ranging from a busy Los Angeles street corner where a transaction fee of $2 is charged to a large private companies offering employees the convenience of an on-site ATM.
"The more machines you sell, the lower the cost," Harty said. "You can stock more parts and more machines, and your technicians become more familiar with the basic problems. It's easier to facilitate the more you grow."
High technology, low cost
When banks dominated the ATM market, they used more expensive and robust machines that could handle high transaction volume. Today, the lowest of the low-end machines costs about $3,000, a dramatic departure from the $10,000 machines of the past.
"With a move toward a retail market, we've all seen the emergence of lower cost ATMs that are supplying a lower volume," Hayes said.
Communications costs have fallen as well. Before, all ATMs used leased lines, with a fixed cost of at least $250 a month to operate. Now most ATMs use dial-up lines that cost $35 a month, plus a nickel per transaction. The latest software also is more sophisticated and less expensive to run.
Hardware represents the primary cost of deploying a machine, said Del Tonguette of Schaumburg, Ill.-based Actoras Consulting. He established the Calypso ATM network and kept costs down by using high-powered PCs instead of mainframes. He also used frame relay and dial-up communications instead of dedicated leased lines.
Newer manufacturers like Triton and Tidel have introduced lower-cost terminals, which forces established giants such as NCR and Deibold to introduce lower-cost machines of their own. "That is healthy for the industry that we have this lower tier of ATMs," Tonguette said.
Harty said money-saving features such as thermal paper printers and modular components help keep the cost of ATMs down. "When we first started buying machines, we were paying in the neighborhood of $7,000 per ATM," he said. "Now the cost averages $5,495, depending upon the features. We pass that onto the merchant."
Even the largest manufacturers have developed low-end machines, he said. "This will open up the market to drug stores or c-stores that, when they were looking at a $7,000 to $10,000 machine, thought they couldn't afford it," Harty said.
Tom Hannon, president of the family-owned national supplier Hanco Inc., said in 1995 he could lease an ATM for $249 a month. Now, his price has dropped to $139. "As the break-even point became lower, more people qualified for a cash machine," he said.
Hannon can provide service and a technical support line for machines with as few as 110 transactions a month. He attributes the drop in price to better technology and low-end machines.
"Companies still sell ATMs at extremely high prices, but we work on a cost plus basis," Hannon said. "We can sell a machine for $149 on a lease payment, and we want to get the sales numbers up."
A new niche
Giants such as the newly-merged NationsBank and Bank of America may create national networks of 15,000 ATMs, but smaller ISOs will always be able to carve their niche in smaller markets.
"The new technology has opened up a new segment to the marketplace that wasn't being served in the past," Hayes said. "The banks had fairly high thresholds on what sites were viable for ATMs."
Dove Associates asked respondents how many transactions each needed to sustain an ATM location. On average, banks needed 841 transactions per month and credit unions 1,536, while ISOs required a paltry 346.
Hayes said ISOs are placing machines in locations shunned by banks.
"In many respects they serve a segment of the marketplace that surcharging has now made viable but that the banking community has ignored," Hayes said.
Know your market
Conversely, poor machine placement by a few ISOs has driven down the industry average. "People are scrambling to put ATMs everywhere, and it's no different than a telephone booth," Tonguette said. "You don't want one on every street corner, but you want them where there's high traffic and they will be used."
Tonguette said ATM owners need more marketing to generate more use and, in turn, more user fees.
"Revenues are decreasing because there still is not a real good marketing effort on the part of the deployers," Tonguette said. "I include financial institutions and ISOs. No one is doing a great job of marketing them to the industry."
ISOs have ignored marketing, which costs them transaction volume. Banks have focused their massive marketing efforts toward trendier avenues such as the Internet.
"Someone will come up with that marketing effort and take away a big piece of the business," Tonguette predicted. "The opportunity is out there waiting for someone to take hold of it."
For more information:
Tony Hayes at Dove Associates
thayes@doveassoc.com,
Dove Associates
Del Tonguette at Actoras Consulting, 614-855-0168
dtonguette@aol.com.
Tom Hannon at Hanco Systems, 800-426-7118.
Richard Harty at ATM Direct, 602-413-0847.
Included In This Story
Triton Systems
Triton FI based products • NO Windows 10™ Upgrade • Secured locked down system that is virus/malware resistant • Flexible configurations - Drive-up and Walk-up • Triton's high security standards • NFC, anti-skim card reader, IP camera and level 1 vaults are all options • Triton Connect monitoring • Lower cost
