Article

Building on the installed base

In today's mature ATM market, transactions per machine are declining and many if not most of the prime locations are taken. So it's not surprising that some deployers are trying to get all of the mileage they can out of their already-installed ATMs.

December 26, 2001

In today's mature ATM market, transactions per machine are declining and many if not most of the prime locations are taken. So it's not surprising that some deployers are trying to get all of the mileage they can out of their already-installed ATMs.

Although their motivations vary and they operate under slightly different business models, these companies all offer surcharge-free access to their ATMs to customers of card issuers with a limited ATM presence – for a fee.

KeyCorp: Agent bank program

Cleveland, Ohio-basedKeyCorp, for instance, has decided that it makes economic and strategic sense to open its network of 2,400 ATMs in 18 states to other banks – albeit smaller financial institutions that trail Key both in terms of financial assets and number of customers.

In its first year, eight financial institutions have signed on for Key's agent bank program, six of them in Key's primary service area of Ohio/Michigan/Indiana.

Offering ATM access to other banks seemingly contradicts the concept of the ATM as a key customer recruitment tool. Yet Dan Neistadt, executive vice president of Key Electronic Services, believes that the value of ATMs in attracting new customers has been somewhat overblown.

Key Electronic Services Executive Vice President Dan Neistadt

"While we believe intuitively that the ATM is a competitive advantage, at some point we have to ask 'is it really?' I'm not sure how many new customers you bring into the bank just because you have an extensive ATM network," he said.

Key's agent banks share some common characteristics: $2 billion or less in assets, a significant card base and few ATMs. This has less to do with concerns over competition, Neistadt said, than in the fact that those banks have shown the most interest in the program.

Mohawk Community Bank, based in Amsterdam, N.Y., is a typical agent bank. Mohawk has $800 million in assets, some 30,000 cardholders and 17 ATMs, all located at branches.

"The relationship with Key has allowed us to add convenient ATM locations for our customers with very little capital outlay," said Mohawk President and Chief Executive Officer John Lisicki.

Key's program was appealing because of the dwindling number of good retail locations for ATMs, he added.

 "Profitability of ATMs is driven by the numbers. If you have enough volume, it will be a profitable location. If not, you're going to lose money," Lisicki said. "With the locations available today, the chances of having a successful off-premise ATM are much less than they used to be."

Mohawk faced a special challenge because many of its cardholders live in Montgomery County but work and shop in adjoining counties, Lisicki said.

According to Neistadt, the primary impetus for Key's program is a desire to boost the bottom line of its ATM network. Like many financial institutions, Key was losing money on at least some of its 1,000 or so off-site ATMs.

"Our goal for our ATM network is to be expense neutral in the worst case or profitable in the best case," he said. "You can't do that with the traditional methods of distribution."

There is no standard fee for an agent bank, Neistadt said. "It depends on which services they want to purchase."

In addition to surcharge-free ATM access, Key offers depository services at some of its machines and transaction processing. Like the ATMs themselves, Key incurs costs to make these features available to its own customers – costs that exist whether or not agent banks help defray them.

"We had unused capacity in our back office, so we thought we might as well offer (transaction processing)," Neistadt explained. "As we process more transactions, it drives our fixed costs down."

Acknowledging that agent banks have expressed concern that Key could cross-sell its own products to their customers, Neistadt said Key has established rules prohibiting that type of advertising at the ATM.

"We evaluated the pros and cons, what kind of a message it would send to customers and how vulnerable they might be to any cross marketing efforts," said Mohawk Community Bank's Lisicki. "So far, it's not proven to be of concern to us."

Many of Mohawk's customers enjoy "the community bank mentality and way of doing business" which tends to include a more personal approach than what they might find at a larger bank, Lisicki added. "There are other, compelling reasons customers maintain their relationship with us."

It's conceivable, Neistadt said, that Key could relay marketing messages for its agent banks at the ATM – again, for a fee. "ATMs are smart devices, and it's possible to do one-to-one marketing based on the BIN (bank identification number)," he said. "We could pass our marketing messages on to certain customers and different marketing messages to other customers."

Key's agent bank program is a "pretty straightforward model," said Les Riedl, a senior vice president at Atlanta-based consultancySpeer & Associates. "Dan (Neistadt) is making a bet that he's going to get more transaction and fee income from this program than what he'll give up in foreign revenue."

A key reason that the program works, Riedl said, is that Key, which has $84 billion in assets, is selective about which banks it allows to participate. "They can make a decision, on a case-by-case basis, to what extent a local financial institution is a competitor," he said.

ATM National: A new network

A new Washington, D.C. company calledATM Nationaldoes not plan to be as selective as Key. ATM National hopes to recruit several large "super regional" banks that will, like Key, open their ATMs to customers of smaller financial institutions with few ATMs. The goal is to create a network of 30,000 machines.

The lure for the big players, said ATM National President Ben Psillas, is profit.

ATM National President Ben Psillas

"We want to change the price model from a variable, pay-as-you-go revenue stream to more of a fixed annuity," he said. "No major bank is going to give up the competitive advantage (of a proprietary ATM network) without a pricing structure that guarantees them significantly more revenue than they receive via the surcharge."

While the surcharge was a boon for deployers in the early days of off-site ATM deployment, Psillas said it has contributed to a drop in foreign transactions as cardholders seek alternatives to paying fees.

ATM owners have a choice, he added. "They can sit and milk the surcharge for a while longer, or they can look at different ways to optimize the assets they have."

In addition to receiving financial compensation for adding their machines to the ATM National network, the large ATM owners could offer their customers the same surcharge-free access to the network that is enjoyed by the customers of paying participants.

The key to making the ATM National model work, Psillas said, is to maximize the number of ATMs while minimizing any overlap of the super regionals. He contends that the largest banks worry primarily about losing customers to other large banks, "the guy across the street," rather than to competitors across the country.

So while it wouldn't make sense to include Wells Fargo and Bank of America, he said, it would be feasible – and perhaps even desirable – for Wells to share access with Bank One.

ATM National has yet to sign any members since announcing its plans in November. However, the company has lined up the support of two major industry players –EDS, which will switch transactions, andDiebold, which Psillas said may provide future enhanced functionality to members. Both companies are also ATM National resellers.

ATM National enters the market at a time of rapid ATM network consolidation. Most notably,Concord EFS, operator of the MAC network, purchased both the Cash Station and Star Systems networks in the past year-and-a-half.

Emphasizing that ATM National plans to be a "small, niche player," Psillas said, "A market that resembles an oligopoly is the best time for a niche player to come in."

America One: The ISO model

Competition isn't an issue forAmerica One, a Tavares, Fla.-based ISO that both manages machines owned by banks and sells surcharge-free access to its own ATMs in retail locations.

Jim Beyer, America One's chief executive officer, didn't offer specific details about financial arrangements. However, he said, financial institutions generally pay a flat fee plus a small per-transaction fee for access to America One ATMs. The fees vary somewhat based on transaction levels.

America One's financial institution clients consider it "a very reasonable marketing expense," he said.

Branding is often a key part of the deal. In some cases, ATM One machines are branded with a bank logo on the fascia, screen and receipt. "When a customer walks up to the machine, they'll think it belongs to their bank," Beyer said.

America One is not the only ISO to work with financial institutions. Some others include Jackson, Miss.-basedFinancial Technologies, Providence, R.I.-basedAtlas ATMand Arden Hills, Minn.-basedAccess Cash. Earlier this year, Access Cash inked a deal with the Co-Op Network to offer some 6,500 of the ATMs it has under contract to theCo-Op Network's800 credit union members.

According to Beyer, working relationships with financial institutions tend to be more stable than those with retailers. "Once you get into a relationship with a bank, it tends to last," he said.

All involved benefit when ISOs offer financial institutions access to their ATMs, Beyer said. "The banks attain some of their marketing goals and goodwill with customers. The ISO gets more security. And the customer gets more convenience."

Institutions that strike deals with ISOs sooner rather than later will enjoy an advantage, said Riedl of Speer & Associates. "If they step out and strike these deals early, they will benefit at least for a short time," he said.

AutoBranch Technologies: Dynamic branding

Approaching the idea of shared ATM access from yet another angle isAutoBranch Technologies. Based in Toronto and Charlotte, N.C., the company created a patent-pending technology it calls Dynamic Branding.

AutoBranch Technologies President John Sinton

Once the AutoBranch software is installed on an ATM, it recognizes the BINs of ATM users who are members of the AutoBranch network and creates an experience identical to what those users would experience at a proprietary bank ATM.

Since its inception in late 1999, AutoBranch has signed contracts with two financial institutions, All Trans Credit Union Limited and the Taiwanese Canadian Toronto Credit Union.

In an earlier interview with ATMmarketplace, All Trans President Mike Alexander said, "The best choice is always to have our own machines with our own insignia, but this is second best I think. At least we get our screens, which is what people focus on."

Participating financial institutions pay an annual subscription fee based on the number of cardholders as well as a small per-transaction fee. AutoBranch shares some of the revenue with ATM owners.

AutoBranch has established a relationship with Threshold Electronics Limited, owner of major Canadian ISOLaser Cash. AutoBranch President John Sinton said that 120 Laser Cash ATMs, mostly in the greater Toronto area, are members of the AutoBranch network.

The AutoBranch model has not taken off as quickly as the company's founders anticipated, Sinton said. This year's financial implosions of ATM deployers like InnoVentry and Credit Card Center has made both banks and AutoBranch somewhat leery of working with outside parties.

"Moving forward, we must look for ATM owners who will be absolutely solid and reliable," Sinton said.

Another snag is AutoBranch's requirement for a Windows-based ATM platform. "The types of ATMs that can support (the AutoBranch software) are not low-end machines," said Speer and Associates' Riedl.

While he acknowledged that limited technology is a problem with most existing retail ATMs, Sinton said AutoBranch insists on giving financial institutions the kind of functionality that will serve them well for the next three to five years – and that means a Windows-based platform.

He is "really excited," Sinton said, by the recent introduction of advanced-function machines byTritonandTranax Technologies, two manufacturers that command much of the North American retail market.

 "We're committed to building for the long term and looking for relationships that will provide the small and mid-size financial institutions with an ATM channel that will work for them over the long haul," he said.