Is a cash contraction coming?
by Daryl Cornell, CEO, Triton Systems
Nationwide cash outage? Retail sales hiccup? GDP hit? Could the much-maligned retail ATM be the cause of a serious economic disruption later this year?
Apparently the Federal Reserve in Atlanta is concerned enough to have started asking the question on their own blog. Let’s look at the facts:
Lessons from up north
Just four years ago, our neighbors in Canada embarked on their own national EMV upgrade journey. With a regulatory mandate and firm milestones enforced by meaningful sanctions, all POS terminals and ATMs were to be EMV ready by the end of 2012.
And yet, record sales of hardware were recorded in Canada in 2013, post-deadline. These were the nearly 10 percent of all ATMs operated by ignorant or skeptical owners which were simply turned off at the end of 2012 and then later upgraded or replaced.
Fast forward to 2016. What might the U.S. out-of-service ATM numbers look like in a six-times larger market only now in the midst of conversion to EMV without prodding from any sort of regulatory mandate?
A look at the US numbers
The most recent industry estimates show 425,000 U.S. ATMs in operation, 125,000 of which are operated by financial institutions and most likely to be EMV-ready by this October.
This leaves 300,000 retail ATMs, 200,000 of which are merchant-owned.
Current POS EMV readiness stands at less than 20 percent, and the post-October 2015 fraud chargebacks are now flowing. ISO ATM EMV readiness is estimated to be about 40 percent, while merchant ATM EMV readiness is reportedly below 10 percent.
Even given a strong EMV upgrade push between now and October, it would appear that as many as 100,000 retail ATMs are poised to go dark in Q4. These are ATMs whose owners have been deemed by sponsor banks, processors or ISOs as unable to absorb the six-figure fraud chargeback losses we saw in Canada.
"So what?" you say. "Won’t customers simply cross the street to find an EMV ATM?"
Perhaps, but consider the overall industry and economic impact of 100,000 out-of-service ATMs.
Even 200 monthly transactions at an average of $60 per ATM would represent more than $14 billion in dislocated cash annually.
Bank branches, which have shrunk by an estimated 50 percent since 2000, are ill-equipped to handle any surge in counter traffic. Merchant-fill ATMs and POS cash back programs are constrained by till proceeds.
Bank ATMs and other high-traffic cash machines are mostly serviced by armored cash-in-transit service providers with tight cash-fill schedule algorithms and cash balances.
Could a serious cash contraction really be on the way?
In what appears to be a perfect storm, this cash contraction might occur quite suddenly.
Card brands and issuers have thus far been reluctant to publicize the tsunami of fraud chargebacks headed towards non-EMV ATM owners for fear of arousing the wrath of merchants or legislators. Processors and sponsor banks have been mostly quiet in an effort to keep their own ISO customers in the fold.
Of those ISOs who do understand the risks to their businesses, most have had little luck convincing their merchants to upgrade and are desperately looking for solutions. Unfortunately, time and resources are now in short supply.
Given the billion dollar chargeback stakes and the coming Oct. 1 Master Card liability shift deadline, it appears that simply turning off magnetic stripe ATMs or declining non-EMV transactions might be the only viable options.
It is this financial game of “EMV upgrade chicken” which seems destined to exacerbate a very large and looming problem.
So what might $14 billion in annual cash dislocation look like?
Most immediate would be the financial impact of a significant loss of transactions for ATM owners, ISOs, processors and, to a lesser extent, sponsor banks and card brands.
Another casualty would be customer convenience, as EMV-enabled ATMs begin to run short of cash regularly and branch bank lines — at least until cash on hand adjustments can be made.
In-store sales appear likely to suffer as customers would now be unable to access many merchant ATMs. And without the cash recycling provided by in store ATMs, merchants would be forced to resume hand-carrying deposits to branch banks in brown paper sacks, further adding to branch bank congestion.
The only real winner here would be the card brands that stand to reap billions of dollars in offloaded fraud expenses. Oh, and don’t forget the lawyers who are already choosing sides in what will likely be a pitched and public battle among players in the payment chain.
Like most industries, the cash provision industry operates in a "just in time" manner. As a result, it is vulnerable to shocks to the system such as a large retail ATM contraction. After Oct. 1, when the dust settles and the financial casualties are carted off the battlefield, wouldn’t it be ironic if the retail ATM emerged with some newfound respect.