STRATEGIC PARTNERS
A major tremor is due to hit the ATM industry this year and next, as a large number of contracts written in the early years of off-premise deployment expire. While it won't rattle the Richter scale in the same way that the widespread introduction of the surcharge did in 1996, it will shake up the industry nonetheless. Financial institutions, in particular, may face some hard decisions as they assess the performance of their off-premise locations and decide whether to extend those relationships.
December 17, 2001
A major tremor is due to hit the ATM industry this year and next, as a large number of contracts written in the early years of off-premise deployment expire.
While it won't rattle the Richter scale in the same way that the widespread introduction of the surcharge did in 1996, it will shake up the industry nonetheless.
Financial institutions, in particular, may face some hard decisions as they assess the performance of their off-premise locations and decide whether to extend those relationships.
"Banks are almost at a crossroads," said Mark Shonebarger, a senior consultant for NCR's Professional Services division. "As some of their original off-premise contracts come up, they're starting to say, 'What did these sites do for me, if anything?' They're starting to see some difficulties in sustaining a business model at some sites."
While many of the sites are profitable, they may not generate enough income to satisfy bank executives who are increasingly beholden to shareholders. "ATMs must compete for capital with other entities in the bank," Shonebarger said.
At what cost quality
Like ISOs, financial institutions have experienced a dramatic drop in their transaction volumes as more ATMs appear in more locations. Unlike ISOs, however, banks have a more obvious brand presence – and are thus more sensitive to quality issues such as downtime. They are less likely to take cost-cutting steps such as using dial-up rather than leased line communications.
Financial institutions typically spend more on maintenance, telecommunications and ATM hardware. In an often-referenced 1999 study of ATM deployers, Dove Consulting found that independents spent an average of $703 a month to maintain an off-premise ATM while banks spent an average $1,090.
"ISOs have beaten financial institutions at the profit game," said Jerry Silva, the TowerGroup's senior analyst for customer interaction. "Banks can't afford to put $2,000 machines out there."
Financial institutions locked up much of the prime retail real estate in 1996 and 1997, largely by leveraging their better known brand names – but the market has become increasingly competitive since then. ISOs, particularly the large and well-funded ones, will fight banks for the right sites rather than settling for lower-volume locations only.
"The ISOs are beating on their doors," Shonebarger said.
More than money
Because ISOs typically offer retailers a bigger cut of revenues, Shonebarger said it's important for financial institutions to create a value proposition for merchants that focuses on more than just fee generation.
He said, "For the sites they want to keep, or maybe even add, we encourage banks to lay it all out: 'Here's what an ISO will do for you and here's what you'll have to do. Now here's what we'll do for you.'"
For instance, the overwhelming majority of ISOs rely upon a merchant cash replenishment model while most banks continue to handle that task. "You might make one cost, the armored car, disappear by having the site owner load the ATM – but you're going to add another set of complexities for that site owner," Shonebarger explained.
Some of the bills from the till may not be fit for an ATM, requiring the merchant to sort through them and remove the especially ragged ones or risk dealing with a jammed dispenser. The phenomenon is common enough to have an industry term devoted to it: cash culling.
Also, Shonebarger said, "The owner of the cash is responsible for disputes." While most merchants don't want to haggle over chargebacks, it's a routine part of bank business.
Another issue related to both cash replenishment and first-line maintenance, which is another chore most ISOs entrust to merchants, is the training of personnel responsible for those duties. "Training can be a practically continual process" in c-stores and other retail environments with a high employee turnover, Shonebarger said.
One of the biggest strengths a financial institution can offer to retailers, said Ken Karant, director of ATM consulting services for Verdi & Company, is its card base. With increased sensitivity to fees, more ATM users are seeking out machines they can use without paying.
"Foot traffic is more valuable to a merchant than the surcharge," Karant said. "It goes back to the reason we deployed ATMs at retail locations in the first place. If a customer withdraws $20 and spends $10 at that store, that's 50 percent profit. That beats the heck out of $1.50."
Not all financial institutions see a perceived threat from ISOs, however.
"We haven't seen a lot of competition from the ISO market," said Rodney Simmons, ATM network administrator for Pennsylvania-based Sovereign Bank. "Most merchants prefer to have a bank presence; they think the brand has value."
Sovereign, which has some 550 branches and 1,000 ATMs in seven states, maximizes the value of its brand name, Simmons said, by "making a site as attractive as we possibly can" and by offering user-friendly features like color screens at its ATMs.
Karant agreed that most ATM users, if given the opportunity, prefer to use a bank-branded machine. The reason is simple, he said. "They know who to talk to if there's a problem."
Setting one's sites
Sovereign "went all out" for about two years following the 1996 implementation of the surcharge, Simmons said, acquiring locations at major grocery and convenience store chains like Cumberland Farms. But the bank has become more selective when considering new deployments and has pulled a small number of under-performing machines in the past two years, he said.
The TowerGroup's Silva believes that most financial institutions, like Sovereign, are becoming more selective about their sites. Grocery stores and shopping malls are the biggest prizes, he said, because they offer several key advantages: high brand visibility; high transaction volumes, including foreign transactions; and strategic relationships with merchants, who may give their cash management or payroll business to banks.
When assessing retail sites, Simmons said Sovereign looks for locations with some, if not all, of these traits: a high amount of foot traffic; a high-profile spot within the business where a machine can be located; and a banking relationship with Sovereign.
Profitability is the main motive for Sovereign's off-premise ATMs in the mid-Atlantic states, Simmons said, but customer retention and recruitment are bigger factors in New England where Sovereign's branch presence isn't as well developed.
Keeping the customer
Noting that Verdi conducted a study that showed that the number one reason consumers choose to open a checking account with a financial institution is the availability of ATMs close to where they work, Karant said customer retention is too often overlooked in banks' evaluations of their off-premise ATMs.
If a Universal Bank customer uses Ubiquitous Bank ATMs frequently, Karant said, he'll open an account with Ubiquitous. "Where does the money for the Ubiquitous account come from?" he asked. "Universal Bank, right? Even if he keeps an account with the original bank, both of them lose wallet share. He's not a profitable customer for either financial institution."
Financial institutions need to know the demographics of their customers, Karant added. "You better know where your customers live and work, or you're throwing good money after bad."
While banks should work to identify and eliminate their marginal off-premise ATMs, Karant said it's important to look past the obvious criteria of transaction volume and fee generation.
"If you're only doing 300 transactions a month at a particular location but 270 of them are on-us, that ATM served a very valuable purpose," he said.
