Article

ATM ISOs look for a niche, and a focus on cash

The economic downturn is poised to offer independent ATM deployers greater opportunities.

March 8, 2009 by Tracy Kitten — Editor, AMC

It's no secret that the use of cash is going up. As the grip of the credit crunch tightens, consumers are leaning more on cash — a fact that bodes well for the ATM industry.

Nicole Sturgill of Boston-based financial-services consultancy TowerGroup, says the flow of cash has reached record highs just since September. At the end of 2007, $758 billion was in circulation throughout the world. By the end of 2008, that number had leaped to $812 billion, and was up 4 percent from September alone.

The U.S. government's bailouts of the banking and automotive industries fueled currency circulation, and more could be on the way.

A number of factors have come together to improve conditions for ATM deployers. In addition to the increased flow of cash has come a drop in the prime interest rate (now at 3.25 percent) as well as a significant drop over the last 12 months in the cost of fuel (now averaging $1.79/gallon compared to average cost of $3.21/gallon a year ago).

Those two factors have improved opportunities for independent sales organizations, where deployments in new markets and extended ATM-service contracts are concerned.

According to Tremont Capital Group, a strategic planning and acquisition advisory firm that specializes in the ATM industry, regional ATM distribution may offer some opportunities for regional players. Of the 401,500 ATMs Tremont Capital estimatesare currently deployed in the United States, only 88,330 ATMs are installed in the West.

But Sam Ditzion, Tremont Capital's chief executive, looks at those deployment numbers cautiously.

"I don't know how much of a factor that density in the West will be," he said. "I really don't see the number of deployments going up in that region. We are in a very mature, saturated market, and virtually every location that should have an ATM already has one — with some exceptions. Where we may see opportunity is on the servicing side."

In these niche, regional markets, independent ATM players that offer specialized service may find new opportunities for revenue. They could enhance their portfolios by offering expanded service contracts to regional financial institutions, or service and maintain ATMs that are owned by mom and pops, which Ditzion says own about 80 percent of the off-premises market.

Ditzion estimates that around 19 percent of all independently deployed ATMs — meaning those owned and operated by non-bank entities — are full-service, turnkey deployments. And he defines full-service, turnkey as being ATMs that are not only owned by the ISO but also operated and serviced by the ISO.

The vast majority of off-premises ATMs deployed in the U.S. today are owned by the merchant. Though Ditzion does not see the percentage of ISO-owned machines going up dramatically, he does see opportunity for ISOs to service some existing machines.

"I think this will be more on the FI side, where a financial institution owns and operates ATMs in a retail location," he said. "Many of those deployments will be up for renewal soon, and with the current economic climate, some banks may consider not renewing, because they want to cut the expense of maintaining and servicing those machines."

Ditzion says he already sees ISOs looking for opportunity in those scenarios, as they look for ways to partner with FIs from a service and maintenance standpoint.

"But the problem is that you need to make a big investment," he said, "because these are large chain locations, typically. You would have to have enough staff and financial resources to service a relatively large off-premises deployment."

Del Tonguette is an industry consultant who's been involved with the ATM and payments industries for the last two decades. He says ATM ISOs should look for ways to differentiate their professional services, since most retailers are ill-equipped to deal with certain ATM nuances.

Tonguette points to PCI compliance as an area of opportunity, since most retailers are struggling to understand and comply with the looming PCI Data Security Standard.

"PCI is a big issue in the retail space," he said. "And I know a lot of ISOs out there that still don't know a great deal about it themselves. But this could be a real opportunity for them."

The PCI Security Standards Council recently announced its Prioritized Approach for DSS 1.2— an approach tool designed to offer smaller merchants guidance on DSS compliance.

According to the PCI Security Standards Council, the Prioritized Approach helps merchants focus on PCI DSS implementation efforts in a way that expedites the security of cardholder data. The tool also helps businesses identify highest-risk targets, creates a common language around PCI DSS implementation efforts, and enables merchants to demonstrate progress on their compliance process to key stakeholders — such as banks, acquirers, etc.

Tonguette says an ISO that takes it upon itself to learn the ins and outs of PCI DSS compliance and promotes the new Prioritized Approach could have a leg up on the competition.

"Now, if I were an ISO and recognized that there is a need and an issue with small- to medium-sized merchants, and knew that this was something of importance, I would start marketing myself to these merchants as a PCI expert who can help them along," Tonguette said. "Here is that unique selling proposition that everyone is always looking for. Now I can say, 'I am the only or one of the only ISOs that offers PCI compliance and training, and if you buy your ATMs from me, I can help you with all of it.'"

The cash basics

So what about advanced ATM functionality, such as bill payment or prepaid-card dispensing?

TowerGroup's Sturgill says ISOs will soon be forced to offer advanced functions and services that target the traditionally unbanked — a growing segment.

In 2007, 40 million of the United States' 116 million households were unbanked or underbanked, according to TowerGroup. U.S. FIs are already focusing attention on this market, but ISOs may be better positioned to actually reach the market.

"ISOs cannot ignore this 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. They also understand the market, so maybe the FIs could learn from the ISOs."

But while the industry talks a lot about advanced ATM functionality, many ATM deployers have been reluctant to adopt it.

Doug Falcone, the chief operating office of ATM ISO Access to Money/TRM Corp., says the upfront investment and long-term expense associated with servicing and maintaining advanced-function terminals is not worth it.

"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."

Ditzion says ATM ISOs will go back to basics — focusing on what they do well and only on the things that make money.

"I think ISOs will want to focus on basic cash dispensers," he said. "To date, the cost of advanced-function terminals has not justified the deployments. A lot of very smart people have made big investments in that technology, and still have not been able to make it happen. In this environment, businesses are already extremely wary of investing in anything unproven."

And as the credit crunch pushes more consumers to cash, ISOs might be better served focusing on cash.

"Consumer demand for cash is not going anywhere right now," Sturgill said. "The only threat I see to cash down the road, and this is out about five years, is in the contactless payments space for transactions $25 or less. I see promise for these types of contactless payments with cards and mobile phones equipped with chips. After the economy stabilizes, we will see more of this. It is inevitable."