Article

ATM industry under pressure

While the ATM business appears to possess healthy fundamentals in aggregate, the picture looks less positive for individual deployers suffering from shrinking margins. So says Dove Consulting, which presented results of its 2004 ATM Deployer Study at this week's Thomson Media ATM & Debit Forum.

October 6, 2004

As with many clichés, the old "strength in numbers" saw is one that usually holds true.

That doesn't appear to be the case with ATMs, however.

Tony Hayes, managing director ofDove Consulting, noted that while the ATM business appears to possess healthy fundamentals in aggregate, the picture looks less positive for individual deployers suffering from shrinking margins.

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Presenting the results of Dove's 2004 ATM Deployer Study at this week's Thomson Media ATM & Debit Forum, Hayes said there are now 383,000 ATMs, one for every 281 households, in the United States. The machines will generate some 11 billion transactions in 2004.

The overall ATM number and some transaction data cited by Hayes came from the 2005 edition of the EFT Data Book published by ATM & Debit News, a publication owned by event sponsor Thomson Media.

In the near future, Dove expects the ATM base to continue to expand by 3 percent to 4 percent per year.

Too many ATMs, too few transactions

However, Hayes said, there are "too many ATMs chasing too few transactions."

The average number of transactions per ATM has plummeted to 2,400 a month, down from 6,399 per month in 1996, the year that Visa and MasterCard began allowing widespread surcharging at ATMs. The market saw a "precipitous fall" in per-ATM volumes from 1996-2001, as a huge number of off-premise machines entered the market, Hayes said.

"As deployers have scaled back in the past few years, the numbers have leveled out," he said, with average per-ATM numbers falling from 2,509 in 2002 to 2,400 in 2003.

All industry segments surveyed by Dove -- large banks, large credit unions, other banks, other credit unions, large ISOs and other ISOs - reported drops in their per-ATM volumes between 2002 and 2003.

Large credit unions suffered the biggest erosion, with a 73 percent decline. Per-ATM transactions dropped 64 percent at other credit unions. At the other end of the spectrum, banks (large and other) experienced "only" a 54 percent drop. Large ISOs reported a 63 percent decrease, and other ISOs a 60 percent decline.

The fee cycle

Perhaps more importantly, Hayes said, an increasing number of transactions are "on-us," with fee-averse cardholders visiting ATMs owned by their financial institution to avoid charges.

According to Dove, foreign ATM volumes decreased from 29 percent in 1998 to 20 percent in 2003 at branch ATMs. During the same period, foreign volumes at off-premises machines fell from 57 percent in 1998 to 49 percent in 2003.

"Consumers are voting with their feet," said Jessica Ip, a Dove consultant who helped administer the survey, "and bank mergers have made it easier for them to use ATMs owned by their banks."

Yet both FIs and ISOs are boosting their fees. The average surcharge has increased from $1.45 at on-premises ATMs and $1.48 at off-premises ATMs in 2001 to $1.57 and $1.65, respectively, in 2003. Large banks charge the most, $1.82 at on-premises machines and $1.90 at off-premises sites.

"It's a bit of a vicious cycle," Hayes said. "Deployers are increasing their fees to make up for the revenue gap, which repels consumers even more."

Same old transaction set

While both financial institutions and ISOs continue to express interest in adding new transactions to their machines, ATMs have largely remained simply cash dispensers -- a fact starkly illustrated during the presentation by a Dove graphic showing the virtually identical mix of transactions conducted at ATMs in 1998, 2001 and 2003.

Cash withdrawals accounted for 77 percent of all ATM transactions in 1998 and 2001 and for 78 percent of transactions in 2003. Transfers, balance inquiries, deposits and "other" transactions also remained static during the period, with each transaction experiencing less than a 1 percent change in its share of total transactions.

In 2003, according to the survey, transfers accounted for 8 percent of transactions; balance inquiries, 11 percent; deposits, 2 percent; and other transactions, 1 percent.

Few deployers have opted to invest in the full-function ATMs necessary to offer a broader mix of transactions, Hayes said. "Deployers have asked themselves: 'Do I buy a more expensive machine and try to gain more transactions at a single site?' or 'Do I buy two lower-priced machines and try to get the volumes at two sites?' "

Model under pressure

Because they are based on transaction volumes, ATM revenues are almost entirely variable. Yet ATM costs are largely fixed, regardless of volume.

This "fundamental mismatch" means that "from a pure P&L basis, the model is under pressure," Hayes said. "Deployers are struggling with profitability and, in some cases, questioning the role of the ATM."

According to the study, deployers earn an average $1,054 a month at on-premises ATMs and $952 a month at off-premises ATMs. Those figures represent drops of 17 percent for on-premise machines and 11 percent for off-premise sites when compared to the 2001 survey.

Deployers have reduced operating costs for off-premises ATMs by 8 percent in the past two years, Hayes said, from $1,298 in 2001 to $1,194 in 2003.

Indeed, all costs but rent declined during the period. Average monthly cost of cash replenishment, for instance, dropped from $180 in 2001 to $152 in 2003, a fact Hayes attributes in part to declining transaction volumes. "Fewer cash dispenses mean fewer replenishments," he said.

Perhaps the widest disparity in cash dispensing occurred among ISO-managed machines. While the average ISO-managed ATM dispensed $25,000 a month, the number soared to- $2.5 million a month at ATMs in casinos. "An interesting bit of ATM trivia for you," Hayes said.

The price paid for monthly rent rose from $187 in 2001 to $250 in 2003, as competition for high-profile, high-volume sites stiffened. "We're seeing deployers pay $3,000 to $5,000 a month in rent at places like airports," Hayes said.

Operating costs vary widely among deployer types. The cost is highest, $1,806 a month, for large credit unions. Hayes attributes this to their willingness to purchase full-function machines -- an investment often not offset by high transaction volumes.

Non-bank deployers had the lowest monthly operating costs: $756 for large ISOs and $541 for other ISOs.

Looking ahead

In light of reduced profitability and the capital investments required for pending regulatory requirements such as Triple DES and ADA, Hayes said more FIs are evaluating outsourcing their entire ATM channel to third-party providers.

"Financial institutions have always outsourced items like processing and cash replenishment, but now they are asking whether it makes sense to consider a turnkey program rather than doing it piecemeal," he said.

Credit unions expressed the most interest in turnkey outsourcing. Thirteen percent of large credit unions currently use a turnkey model, and 31 percent are considering it, according to the study. Eighteen percent of other credit unions do so, and 12 percent are considering it.

Hayes also "remains hopeful that the ATM can be more than it is today" with the addition of new transactions, a move that seems more likely to occur with the industry's migration from OS/2 to a Microsoft Windows-based ATM platform.

"It has been costly and time consuming to invest in the technology necessary to offer advanced functionality," he said, "but it will be less so with Windows."

As with the previous two deployer studies, Dove's research was financed by EFT networks (Pulse, Star and the Co-Op Network). Dove surveyed 134 deployers, representing 144,301 ATMs.

Included in the sample were 24 of the nation's top 50 banks, five of the top 25 credit unions and eight of the top 10 ISOs.