Article

ISOs getting brand conscious

When it comes to ATMs, ISOs and financial institutions generally take separate paths. Profit drives ISO programs, while customer service is the main motivation for banks. Yet several companies have reached a crossroads, with branding programs in which ISOs offer bank customers surcharge-free access to their ATMs -- for a price.

May 13, 2003

When it comes to ATMs, ISOs and financial institutions generally take separate paths. Profit drives ISO programs, while customer service is the main motivation for banks.

Yet several companies have reached a crossroads, with branding programs in which ISOs offer bank customers surcharge-free access to their ATMs -- for a price.

Gary Walston, vice president of Houston-basedMomentum Cash Systems, said that the branding proposition benefits all parties involved -- the ISO offering the service, banks using it, retailers in businesses with branded ATMs and ATM cardholders.

Toll-Free ATM

About a dozen financial institutions -- ranging in asset size from $20 million to $1 billion -- participate in Momentum'sToll-Free ATM Network, which offers cardholders surcharge-free access to some 750 ATMs in Texas and Louisiana.

"The bank customer saves money (on surcharges) and gains convenience. The financial institution expands its ATM network for very little cost. We get added revenue and drive new transactions to our ATMs, which makes our merchants happy," Walston said.

Momentum spent about a year tweaking the details before launching the program in the second quarter of 2002, Walston said. The concept rose from the ashes of Momentum's failed effort to launch an Internet bank that would have offered ATMs as a delivery channel -- the same approach used byE*Trade Financialwhen it bought the ATM network of Card Capture Services in March of 2000.

Momentum Chief Executive Bob Cannon came up with both ideas while seeking ways to leverage his ATM network. After nearly two frustrating years of attempting to win regulatory approval for a bank charter, Cannon scotched the idea of an online bank in favor of Plan B: Toll-Free.

eFunds/Co-Op Network

At about the same time, in the spring of 2001,Access Cashagreed to open some 6,500 of its ATMs to cardholders of the 772 credit union members of theCo-Op Network. The St. Paul, Minn.-based ISO had offered branding to financial institutions on a smaller scale since 1999, said Gregg Zastrow, eFunds' vice president of product management.

The Co-Op logo is featured on ATMs in eFunds' branding program. This machine includes another branding partner, California's Wescom Credit Union.

"We worked with some FIs on a regional scope in the Northeast and Southwest," he said, noting those early branding agreements remain in place. "It helped us prove the concept and gauge customer reaction," as well as develop streamlined processes for functions like settlement and reporting.

Access Cash, the Co-Op Network and the branding program have all grown since then. Access Cash became a subsidiary ofeFundsin September of 2001; eFunds then purchased four more ATM portfolios, for a total of nearly 17,000 machines. Co-Op Network now has 1,215 members.

About 7,800 ATMs are included in the Co-Op Network branding program -- 800 of them in Canada, a number relevant to Ontario's Civil Service Co-operative Credit Society, which joined the program last October.

Allpoint

Two of the country's biggest ISOs, Houston-basedCardtronicsand Arlington, Va.-based E*Trade Access, last month added their machines -- a total of 23,000 -- to theAllpoint Network, which is operated by Washington start-up ATM National. Among the first companies to join Allpoint arePentagon Federal Credit Union, the nation's third-largest credit union with $5 billion in assets, andSkylight Financial, a provider of checkless bank accounts.

Ben Psillas, ATM National founder and president, expects to add at least another 7,000 ATMs to Allpoint by year's end. He is seeking "a balanced portfolio" with the majority of machines in densely populated areas. "We want to put our ATMs where people are located," he said.

When he first announced plans for the network in late 2001, Psillas expected the ATMs to come from large banks that would agree to open their machines to customers of smaller financial institutions for a fee. While he is still in discussions with banks and hopes to add some of their machines to Allpoint, he found them to be more proprietary than expected in regard to their ATM networks.

"Some major banks still believe their ATM networks are one of their last remaining competitive advantages," he said.

Psillas found a more receptive audience in ISOs, who were eager to add a fixed revenue stream to their more variable, transaction-driven profits. While financial models in branding programs vary somewhat, they generally include a flat monthly access fee paid by financial institutions, often combined with a small transaction fee to reimburse ISOs for the "on-us," surcharge-free transactions.

Not just about the bucks

While the upfront revenue is important, it's not the only advantage ISOs enjoy.

Doug Deitel, executive vice president of corporate services for Cardtronics, said that participating in a branding program doesn't require an ISO to reinvent the ATM. "It's fairly easy to set up. No software changes are required, and it's not invasive. You just let the processor know which BINs (bank identification numbers) to block and you're off."

In the case of Allpoint and the Co-Op Network program, unlike Toll-Free, ISOs do not even have to go out and recruit the financial institution participants themselves.

Walston admits this can be a challenge. "A long sales cycle" is required with FIs, he said. While more FIs are open to the idea of partnering with ISOs to extend their ATM reach, others are still not comfortable with ISOs -- or even with retail machines. He described a meeting with two representatives of a multi-billion dollar bank that was interested in enlarging its ATM footprint in Texas.

"One of them had only used a machine in a convenience store once in his entire life. The other one had never done so," Walston said. "They just couldn't get over the fact that, 'eww, I'm going to have to go in there to use the ATM?'"

He added, "Some bankers still manage to miss the fact that their customers' behavior patterns are different than their own."

Traffic jam

Those two bankers notwithstanding, the prospect of added store traffic that results when customers of participating banks seek out branded ATMs is a selling point for ISOs trying to win new business. It also is a significant relationship builder for existing retail accounts.

"The guy who had the only ATM around in '94 understood the value. He knew it could drive traffic to his store," Walston said. "Now that ATMs are everywhere, just having one isn't going to drive the traffic. A branding program will because you're giving bank customers a reason to go to a particular machine."

Momentum has seen significant transaction increases at some of its Toll-Free locations, and there have been no drops in surcharge transactions.

In one location, a hardware store, Walston said that monthly transactions made by customers of a particular credit union increased tenfold when the credit union joined Toll-Free.

Zastrow said that eFunds has experienced similar effects on its transaction volumes. "It varies a lot, depending on the prevalence of the card issuer in a particular area. We've had wide swings -- everything from no change to huge increases."

In the beginning, contacting all eFunds retailers to obtain their permission to include their ATMs in a branding program was daunting because of the sheer number of merchants involved. Most -- though not all -- opted in, Zastrow said.

The ISO gets even fewer rejections now that the program is more established. A branding clause is a standard feature of eFunds contracts.

"Putting new customers in their store, with cash in their hands, is a pretty powerful statement to make (to a retailer)," Zastrow said.

What's in it for the banks?

Like Toll-Free, a significant number of eFunds transactions at branded ATMs come from customers who hadn't used those machines before. The lack of a surcharge provides a compelling reason for them to alter their ATM usage, seeking out a particular brand.

The Allpoint Network includes 23,000 ATMs managed by Cardtronics and E*Trade Financial.

Banks with large networks understand this, and use it as a recruiting tool, Psillas said.Bank of America, for instance, hired high-powered ad agencyBozell, New Yorkto create print and television ads that showcased its ATM fleet.

Smaller financial institutions have been at a disadvantage when it comes to ATMs, since few of them can afford to invest in large numbers of machines, especially in non-branch locations.

Branding programs provide a way for them to level the playing field, Psillas said. "If you can tell your customers you went from 40 ATMs to 23,040 ATMs, that's compelling."

An "instant" ATM channel is perhaps even more compelling for non-traditional financial players like Internet banks, brokerages and insurance companies, Psillas said. "Those kinds of companies attract and retain customers with attractive rates on mortgages and CDs, but they have the highest percentage of customers who have their primary checking accounts with other financial institutions."

Few Co-Op news releases don't mention the network's 16,800 surcharge-free ATMs -- nearly half of which are managed by eFunds. The Co-Op Network site includes an ATM locator, as do the Toll-Free ATM and Allpoint sites.

A marketing strategy to promote branding programs like Toll-Free is key to making them work, Walston said. To make the Toll-Free logo easily recognizable to cardholders of participating FIs, Momentum installs signage -- including backlit ATM toppers, exterior pole signs, door and gas pump decals and other items -- at each location.

Walston said that Mometum also provides training for employees of participating FIs to help them promote the program, and encourages them to "create a buzz" with statement stuffers, postcards and signage in branches.

Messing with the matrix

If there is a downside to branding programs for ISOs, it may be changes in their carefully calibrated service and cash management matrixes due to increases in transaction volumes.

While it's too early to tell if Cardtronics ATMs will see big transaction boosts, Deitel said he believes it will be manageable. "Allpoint isn't signing up Citibank. Their customers are largely going to be the smaller FIs."

While larger transaction volumes require ISOs to hone their management styles, Walston said that's a given in branding programs. "You've got to have the control and the confidence in your ability to stay on top of your machines if you want to work with banks. They're not going to stand for a machine being out of service."

Zastrow said that eFunds has experienced its biggest transaction increases in locations where ATMs are placements, which are more closely monitored than non-placement sites.

He added, "So it takes a little more cash going through the machine. It's no different than paying more taxes when you make more money. That's what we're here for, to drive transactions."

Deitel believes that branding deals may signal a significant movement in the retail ATM business. And he thinks it's a move in the right direction. "I think it helps us gain integrity for our industry," he said.

Branding boom?

As with many industry trends, Deitel said, the largest ISOs will be better positioned to capitalize on branding -- mainly because of their large ATM fleets and greater geographic reach.

"We've got more machines in more locations. We can offer brand names like Sunoco, Circle K and Barnes & Noble that complement a bank's expectations," he said.

In addition to its participation in Allpoint, Deitel said Cardtronics is marketing smaller branding programs to local and regional banks that may welcome the opportunity to pick and choose their ATM locations rather than joining a large network like Allpoint.

Walston said that Momentum plans to expand Toll-Free, although it may have to partner with other ISOs to do so. It is moving some of the 900 ATMs owned byInnovus, its parent company, into the Toll-Free program.

Zastrow said that eFunds expects to gain more branding business due to the synergies between transaction processing and ATM management. "We manage the ATMs, and we run the switch. It's all us."