Article

ATM ISOs: A Dying Breed or Masters of their Own Domains?

Just as the Roman Empire suffered dozens of attacks from neighboring power hungry clans, banks are shaking off ATM ISOs on numerous fronts. by Tom Harper, Publisher

March 7, 2002 by

Just as the Roman Empire suffered dozens of attacks from neighboring power hungry clans, banks are shaking off ATM ISOs on numerous fronts.

The private ATM operators aren't launching unified offensives, however, and the damage they inflict is merely a nuisance to the monstrous bank ATM empires.

One executive at a large bank ATM deployer calls ISOs "non-entities."

Non-entities or not, the ISOs and private deployers are becoming masters of their own little kingdoms.

The Function of ISOs

ISOs, or independent sales organizations, provide many of the necessary operational ingredients for other ATM owners, distributors and investors. Services include hardware sales, processing, maintenance, transaction reporting and even cash management.

Not all products and services are available through all ISOs, but by definition they can locate and provide almost anything for their customers. Many ISOs deploy their own machines as well as manage ATMs for their customers.

Do they compete with their own customers for site locations, then? Sometimes.

ATM management companies-a more recent hybrid of the ISO-delve deeper into deployment strategy, marketing, portfolio management, installation logistics and branding.

Coming are the days when banks will hand over their ATM portfolios to these management firms. Increased competition for consumer transactions-and lower transaction volumes-will force banks to outsource their ATM operations.

Today's ISOs primarily deal in cash dispensers (CDs). These limited-function ATMs have fueled a meteoric deluge of machines due to their low cost and ease of use. Their dial-up technology, replacing the more expensive lease-line machines, allows deployment in lower-traffic locations because of the lower overhead per machine.

ISOs are the driving force behind off-site nonbank deployment. They represent a concentrated special forces team with a single-minded focus: Get the best locations before the banks do.

An ISO who Knows Where it's Going

Born in 1994 under the umbrella of one of the country's largest food distributors, Financial Services Plus, Inc. of Temple, Texas offers its customers profit-building programs and turnkey ATM opportunities.

Parent McLane Company serves more than 30,000 retail customers-many great ATM locations included.

"We signed our first major deal in 1995 with Diamond Shamrock," said Al Walters, managing director of McLane FSP. "They own the machines, we manage them, and Bank One brands them. We've also entered into relationships with Mobil, Star Enterprise, Phillips 66, Conoco and most recently Sunoco and Citgo. We manage over 1,000 machines now with another 1,000 planned for 1998."

Mr. Walters said his company prefers not to handle small ATM portfolios. "Our focus is primarily on retail chains in the petroleum and c-store markets where the McLane name is well known."

Under some of its management arrangements McLane FSP provides vault cash and bank-branding programs.

McLane FSP's other programs include equipment sales/leasing, check-cashing services, pre-paid phone cards, coupon redemption, check collection and payroll services.

Mr. Walters' outlook on the survivability of ISOs isn't altogether optimistic. "ISOs will be out of business soon. If three years ago the banks knew where the ATM industry was going, we (ISOs) wouldn't be here. Right now we're just filling in the gaps until the banks take control again."

Mr. Walters said his company plans to concentrate on building its distributor network and has attained master-VAR status for NCR.

When asked what role ISOs will play in the future, Mr. Walters recanted somewhat. "Not all ISOs will be out of business. The well-run ISOs with strong ATM portfolios will do well. So will the ISO who has bank customers and manages bank ATMs. We're one of the companies who's going to be around."

An ISO in Charge of its Own Destiny

Another ISO with firm roots in its own future is ATM International, located in Dallas, Texas.

Randy Coleman, ATMI's CEO, mirrors Mr. Walters' outlook. "The small guys are getting bought up." Consolidation, the bane of any industry, is firmly planting its own seeds in the ATM market.

But ATMI rests on solid footing with the vision established by Mr. Coleman. When he founded the company in 1992 he realized early on that off-premise ATMs faced a bright future.

With 1997 revenues reaching $8.5 million and 1998's goals allowing for hefty growth, ATMI hopes to add another 500-1,000 ATMs to its portfolio of corporate owned machines.

ATMI's inhouse processing platform, called the TPS2000, adds considerable functionality to its ATM management capabilities. "We can provide custom dispense applications for ATMs such as stamps, coupons, gift certificates, phone cards and various other products," said Mr. Coleman.

In addition, the TPS2000 switch can handle employee payroll, onscreen advertising, money orders, check cashing and electronic bill paying. "We can provide some of the same services large third-party processors offer to their business customers. We already provide online monitoring of our ATMs and our goal is to be self-sufficient in all areas of our business."

Mr. Coleman's take on the ISO empire-building? "Many of them are in acquisition mode as they gear up for going public," he said.

"You'll see a number of IPOs in our industry over the next few years as the ISOs use their sites as leverage. Since Wall Street won't look at you unless you do $60-80 million in gross revenue, you really need to build up your site numbers either by merging or buying out other portfolios."

With the advent of bigger ISOs, margins go down as volume goes up. We've seen it happen at this same historical point in just about every other major industry.

So where does that leave the rest of the ISOs with more modest businesses?

The Demise of the Little Guys

It's clear that big money is catching hold of the ATM industry. But as more and bigger players enter the fray, what exactly will happen to the majority of the ATM companies currently operating is not as easy to predict.

Banks will certainly act as major change agents. When they fully flex their muscles, the ensuing ripples will reverberate throughout the industry and change it forever.

Some visionaries have predicted there are still over 500,000 viable ATM locations left for the picking. The majority of those, however, won't support enough transactions to attract most banks.

That leaves plenty of room for smaller ATM management companies to build their own empires based on marginal site volume rather than strictly transaction volume per site.

So, ISOs, the bottom line is this: prepare for change. Work on a five-year survival plan and find a niche you can dominate, whether geographical or technical. Become an outsource ATM specialist for banks in your area.

But don't count yourself out.

Until you sell out, that is.