Article

Are ISOs ready for advanced ATMs?

ISOs like to focus on cash, but as high-tech ATMs continue to hit the streets, will ISOs finally embrace the promise of advanced functionality and new revenue potential?

April 7, 2009 by Tracy Kitten — Editor, AMC

The grip of the economic noose may be loosening, but it will be several months, maybe years, before companies truly regain their pre-recession strength.

In the financial space, the blow of the economic downturn has been the catalyst for consolidation, reorganization and a fine-tuning of business focus. This perhaps has been most evident in the financial institution space, where big mergers and hefty financial bailouts from the government have garnered attention and scrutiny.

In the independent sales organization space, the story, though not quite so publicized, has been similar.

The effects of industry consolidation, though felt well before the most-steep economic downturn, also have touched ISOs and the companies that serve them. TRM's merger with Access to Money and Fidelity National Information Services' purchase of Metavante Technologies are the most recent. But not so long ago, the industry saw Nautilus Hyosung's vie to buy Triton Systems of Delaware; Elan Financial Services' acquisition of PDNB's Electronic Banking Division; Airis ATM Technology's purchase of The ATM Exchange; and Payment Alliance International's buyout of both NetBank Payment Systems and ATM Express. The list goes on.

Those who have emerged from the rubble have vowed to "get back to basics."

For banks, that means a focus on services that customers want and need, such as surcharge-free ATM access, checking and savings account offers and services, and in-branch consultation.

For ISOs, it means a focus on cash.

So where then do advanced ATM functions fit into the story, if at all? Industry observers and ATM manufacturers for years have pushed the promise of advanced functions as a way to react to market saturation and dropping per-ATM transaction volume. Services that target the cash-preferred or unbanked/underbanked market also have been heralded. Save for TIO Networks Corp., which has taken years to perfect and hone its service, self-service bill-payment has not made a real splash in the United States. And self-service check cashing? Companies like Vero tried it and couldn't make it stick.

In 2006, Tranax Technologies Inc., while still distributing ATMs for Korea-based Nautilus Hyosung, vowed to make its SSTs, self-service terminals, more prominent than the well-received Mini-Bank ATM it was selling for Nautilus.

Others have tried similar approaches, but nothing has really caught on.

Nicole Sturgill, an industry analyst for TowerGroup, says ISOs have to change. "ISOs cannot ignore this (unbanked) market," Sturgill said. "And they will have to move toward more advanced functions to reach the market. Doing so offers opportunities for new fee revenue, and they are well positioned for services that reach the unbanked, because they already have relationships with the retailers."

But how realistic are those expectations? Not very, says Doug Falcone, the chief operating office of ATM ISO Access to Money/TRM Corp. The upfront investment and long-term expense associated with servicing and maintaining advanced-function terminals is not worth it, at least not right now.

"I don't see multifunction machines taking off, especially in this economic climate," he said. "It's hard enough to keep a basic cash dispenser up and running; and when you add multiple functions, it becomes increasingly difficult to manage and run that machine. Uptime is an issue, and that's our whole business. When an ATM is down, you lose transactions, and that's not good for anyone."

Besides, as the credit crunch pushes more consumers to use more cash, what motivation would an ISO have to do anything beyond cash-dispensing?

"I think, in general, people are going back to basics," said Sam Ditzion, chief executive of Tremont Capital Group, a strategic planning and acquisition advisory firm that specializes in the ATM industry. "People are not willing to take big risks right now."

The connectivity barrier

Another barrier is technology. Most off-premises ATMs still rely on dial-up connections. Advanced functions, although possible on a dial-up line, are not really practical, says Neil Young, senior director of strategic marketing for MEI, a components provider that specializes in bill acceptors.

"The problem is technological," Young said. "A lot of those machines are on dial-up connections, which is fine if you're doing a simple transaction. But for most bill-payment applications, you'll have to spend more time on the network, so you have to have a higher speed connection."

Limited capabilities of existing equipment also are an issue, Young says.

"If these machines could be easily upgraded, that would be one thing," he said. "But that's not really the case today. These entry-level machines are not equipped to handle these types of transactions."

Even the addition of a sidecar poses problems, since sidecars are not interchangeable among vendors, and they oftentimes do not share components well, he said.

"With a sidecar, you'd want t be able to communicate with the existing device, to share the receipt printer, for instance, and the cash dispenser," Young said. "But how reasonable is that to expect from an entry-level machine that's older and not as advanced? And without some sort of set industry standards or oversight by some group, what motivation do manufacturers have to create a solution that is interoperable, across vendors, makes and models?"

Ditzion says most of the lack of advanced-function acceptance goes back to consumer demand, or lack thereof.

"I don't think the lack of advanced functionality has to do with dial-up or technology," he said. "I just think at the end of the day, consumers view the ATM as a cash dispenser."

Ditzion points to Cardtronics' Vcom kiosk line, which the ISO acquired last year from 7-Eleven, as an example how consumer demand is the most powerful driving force.

"They've eliminated a lot of the functionality from those machines," he said. "You need to make a lot of money to keep all of those functions going. Years ago, Vcom offered dozens of services, but they've narrowed it way down."

Graeme Black, industry marketing manager for NCR Corp.'s financial solutions group, says larger ISOs, such as Cardtronics, are definitely setting the pace.

"The larger ISOs have the scale and the potential to get into this market," Black said. "These entrepreneurs are very inventive. They are very clever. And they've got to be large. So it's kind of tricky to say for the whole market that advanced functions are right or wrong. The hardware costs of these things are not going to be cheap — you're not talking about a $2,000 machine. And because advanced-function ATMs have not been widely deployed, other ISOs will wait while the big ISOs are still learning what types of transactions work."

What do consumers want?

So what exactly will drive market change and consumer demand?

Time, says Access to Money's Falcone.

"As we see more ATMs replaced, the advanced functions will come," Falcone said. "We're just not there yet. Ninety percent of the off-premise ATMs out there are still on dial-up connections, but we do see a lot of interest among retails in going to TCP/IP, not just for ATMs, but for the POS, too. It can really save them money to get rid of those dedicated lines for dial-up."

A large convenience-store chain with 400 locations could significantly reduce its overhead by making a high-speed conversion, Falcone says.

"We've got c-stores converging 12 to 13 lines onto high speed," he said. "When you combine all those ATMs, it's saving them thousands per month."

And since most new ATMs are Windows-based and come standard with TCP/IP ports, when retailers and ISOs buy and place them, the ability to offer more, such as couponing, ATM advertising, automated deposits and even bill payment, will be a no-brainer, Falcone says.

"In 2009, I see the newer lower-end machines coming standard with a lot of these features," he said. "Pretty soon, there won't be a low-end machine without TCP/IP and Windows. And many retailers want to upgrade to newer looking machines. Every time we replace the old machines, like the Triton 9600, our transactions go up over 10 percent. Once those machines have the ability to offer more, I think consumers will do more."

NCR's Black agrees, and adds that changes in consumer habits and the use of self-service are already evident.

"Consumer acceptance is evolving," he said. "The more kiosks around that provide advanced functions, the more consumers will be happy to use advanced-function machines. That has not been the case for the last five to 10 years. But with deposit automation being more accepted, I think we are seeing consumer acceptance going up for different types of transactions and services at ATMs. When consumer adoption reaches that watershed, it certainly becomes a flood."

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