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Ring a ding ding

Much as Americans have embraced the idea of 24/7 access to their money, many have also become hooked on the convenience of carrying a phone with them wherever they go. So it's not surprising that the U.S. ATM and wireless industries appear ready to converge.

June 23, 2002

Much as Americans have embraced the idea of 24/7 access to their money, many have also become hooked on the convenience of carrying a phone with them wherever they go.

So it's not surprising that the U.S. ATM and wireless industries appear ready to converge, with several ATM deployers planning to offer prepaid wireless "top-up" or "recharge" services, allowing customers to purchase phone time at their machines.

In addition to the convenience connection, both industries have experienced market shifts in the past few years that have left them eager to attract new customers.

A steady decline in the number of transactions per ATM has resulted in falling revenues for deployers, who see adding new products and services as the best way to reverse the transaction trend.

Likewise, wireless carriers have begun to exhaust their traditional subscriber base and are eying new markets such as twentysomethings, minorities and the credit-challenged -- all of whom are logical candidates for prepaid service.

According to the Yankee Group, a Boston-based consulting firm, approximately 12 percent of the country's 130 million wireless subscribers are on prepaid or "pay as you go" plans. The Yankee Group expects that percentage to exceed 30 percent by 2006.

In the U.S., wireless carriers have attained market penetration of approximately 45 percent, according to the Yankee Group. That compares to a higher penetration of nearly 80 percent in Europe. In contrast to the U.S., where prepaid was first marketed as an option for the credit-challenged, prepaid accounts carried little if any stigma in Europe.

U.S. carriers wanted the guarantees that came with long-term contracts, said Ken Jessen, alternate channel manager for wireless transaction provider US South. However, the downsides included a costly billing process and a number of "deadbeat" subscribers.

"In the U.S., the business people and others who are going to sign long-term contracts have already done it," Jessen said. "They might switch carriers, but they're already locked in. The future growth will come from prepay. (The carriers) are just trying to determine which markets and which delivery channels."

Hanging on the telephone

The ATM industry isn't wasting any time trying to position itself as one of the primary delivery channels.

Leawood, Kansas-based Euronet Worldwide, which offers prepaid top-ups at ATMs in several European countries through partnerships with financial institutions and carriers, hopes to duplicate that success here in the States.

Euronet has inked agreements with Boston Communications Group (bcgi), a transaction provider to the wireless industry, and three ISOs with some 6,000 machines under contract between them, Jackson, Miss.-based Financial Technologies, Euless, Texas-based International Merchant Services and Jacksonville, Texas-based The Bailey Group.

An NCR subsidiary, Dayton, Ohio-based iATMglobal, is in the midst of a pilot in an undisclosed location, offering prepaid wireless, prepaid long distance and movie tickets at a group of ATMs.

Arlington, Va.-based E*Trade Access, in partnership with bcgi, is preparing to launch a pilot of its own in the Boston area. E*Trade Access Director Dale Dentlinger said one of the primary appeals of prepaid wireless is that, unlike some of the other advanced ATM applications being considered by deployers, no additional hardware is required. And it's possible to offer on almost any ATM, including firmware-based cash dispensers.

"You don't need a second printer or anything like that. It's just a software change to get new screens to the machine," he said.

E*Trade has already successfully tested a prepaid wireless application on a TritonATM at bcgi's Boston headquarters, Dentlinger said.

Dave Grano and Rick Holt have chosen prepaid wireless as the first application to be offered by their new venture, Portland, Ore.-based transaction software developer Aptus Financial. Both Grano, the former CEO of Card Capture Services, and Holt, the former VP of sales and marketing for E*Trade Access, also have backgrounds in the wireless industry.

Not a fast fix
 
But despite the big-time buzz surrounding prepaid wireless at the ATM, deployers will face some formidable challenges in making it a mainstream application.

Yankee Group senior analyst Farid Yunus, who covers the European market, said there are multiple possible channels for recharging wireless accounts, including point-of-sale terminals, standalone kiosks and the handsets themselves, in addition to ATMs. The most dominant method by far, however, is via cards sold over the counter at retail stores.

Yunus estimates that just 20 percent to 30 percent of European prepaid customers use electronic methods rather than cards to recharge their accounts - this despite the fact that several electronic channels have been available for about three years in Europe.

"It's a slow transfer toward the ATM and other alternative methods. I think you'll see it happening at an equally slow or even slower pace in the U.S.," Yunus said.

Fellow Yankee Group analyst Knox Bricken, who covers the U.S. market, agreed with Yunus. "The typical prepaid user is credit challenged and may not have a bank account," she said, noting that a deal announced earlier this month in which US Cellular teamed with Western Union so its users could purchase prepaid time at Western Union outlets was designed with the unbanked in mind.

Brooks Smith, chief executive officer and president of Atlanta-based US South, estimated that approximately three quarters of today's eight and a half million prepaid users are credit challenged. However, he predicted that prepaid wireless will follow a similar curve as prepaid long-distance, which has been increasingly adopted by consumers of all income levels -- and at an accelerated pace.

Wireless carriers have already modified their prepaid promotional campaigns to target a younger, hipper audience, said Brian DuCharme, bcgi's senior product manager. The demographics of those users match up nicely with those of regular ATM users, he added.

Grano, of Aptus Financial, sees opportunity in the financial limitations of some prepaid customers. He called a prepaid account "one of the single best aggregation points" for those who may have a need for other financial services such as bill payment and check cashing.

"A prepaid account represents a virtual bank account for some of these customers," he said. "It can be used as a tether, if you will, to pull those customers in. Then the carriers can consider the possibility of layering additional financial applications onto those accounts."

While a terminal that lacks a cash acceptor, like most ATMs, will have limitations in serving unbanked customers, Grano said it's possible that carriers could issue their own magnetic-stripe cards. Or carriers could facilitate the direct deposit of payroll into these "accounts," then allow customers to use phone numbers and/or PINs at the ATM in lieu of cards.

Marginal margins

In addition to a slow adoption period, deployers may have to contend with slimmer-than-expected margins. DuCharme, of bcgi, said it would be unrealistic to expect margins for ATM recharge to be as high as those for cards sold over the counter. 

"The margins need to be lower to incent the carriers to make a long-term commitment to ATMs," DuCharme said. "In the end, that will mean additional transactions for everyone involved."

Ron Ferguson, Euronet's executive vice president of U.S. market development, said that wireless carriers typically pay a commission of 20 percent to 30 percent of a prepaid card's value to resellers. While he agreed with DuCharme that those rates may decline somewhat, he said, "We think there will still be plenty of money on the table."

In the European countries where Euronet offers ATM recharge, Ferguson said most machines generate 30 to 100 recharges a month. (Keep in mind that overall transaction volumes tend to be higher in other countries as well.)

Beth Bailey Alexander, president of the Bailey Group, one of the three ISOs that has signed an agreement with Euronet, said that the economics of wireless recharge make more sense to her than those of other transactions such as check cashing which involve increased inventory costs.

"With a strictly electronic transaction, you make what you make," she said. "The device is sitting there anyway, and you've already got the connection to the processor, so why wouldn't you do it?"

Alexander said her company plans to roll out recharge on 500 Wincor Nixdorf ATMs, mostly in Texas, New Mexico and Utah. "Offering advanced functionality was one reason we selected the Wincor units," she said. "We've just been waiting for the industry to catch up."

ATM versus OTC

Another issue that remains to be resolved, said US South's Jessen, is whether retailers will want to give up selling the cards over the counter. While they will share in the revenue generated by ATM top-ups, it will be a smaller cut than the commission they currently earn from carriers.

Robb Straub, iATMglobal's vice president and chief operating officer, believes that many retailers will gladly give up a portion of the profits in order to minimize their fraud and shrinkage risks.

"After they've given up four square feet of display space to sell the cards and factored in shrinkage and other costs of inventory, their profit has probably been cut in half anyway," Straub said.

One way of minimizing retailer concerns over giving up counter sales, Straub said, is by offering a variety of different transactions on the iATMglobal platform. "Our role is to act as content aggregators and offer a suite of products to drive customers into the store and add incremental revenue."

Euronet's Ferguson said that selling prepaid wireless is "a bit more complicated" than selling prepaid long distance.

Unlike most prepaid long distance customers, prepaid wireless users have allegiances to specific brands. "So the retailer is in a position where he's going to have to add a dozen SKUs instead of one or two," Ferguson said. "They really don't want to have to stock multiples, because that shelf space is valuable."

DuCharme, of bcgi, believes that ATM recharge will complement, rather than replace, existing counter sales. For instance, he said, it will allow carriers to sell higher denominations via ATMs. Many retailers don't mind selling $20 and $30 cards but shy away from stocking $100 cards, he said.

In addition to dramatically lowering carriers' distribution costs, DuCharme said that ATM sales will help them become better acquainted with their customers, which in turn will help with future marketing efforts.

"In today's environment, where most cards are sold through wholesale distributors, the carriers don't know when and where they're sold, who purchases them or why," he said. "The ATM could give carriers their first insights into those customers' behavior."

Indeed, according to the Yankee Group report "Can U.S. Carriers Become Profitable in Wireless Prepaid?," carriers only know who about 50 percent of their current wireless customers are. The consulting firm suggests that "getting to know the customer" is one of seven strategies that carriers must adopt to maximize prepaid profits.

Recharge here

Perhaps one of the biggest challenges will be letting prepaid customers know they can use the ATM to recharge their accounts.

Straub, of iATMglobal, said that educating consumers about wireless recharge and other new services at the ATM won't be nearly as tough a task as getting them to use ATMs in the first place.

"We're fortunate that we're trying to get (consumers) to change their behavior using a device they already trust," he said. "It's just a matter of educating them that additional services are available through that trusted device."

Straub said that clerks at stores where prepaid customers buy phones can aid in the education effort. Most effective, he said, would be if an ATM were available at the store for a hands-on demonstration.

Euronet's Ferguson said that, in his talks with carriers, they seem open to promoting ATM recharge in their own advertising campaigns and possibly contributing co-op dollars to help pay for ATM signage and other promotional materials that could be used by deployers and retailers.

Euronet has designed a brand called PaySpot that it hopes wireless carriers, and later other service providers, will use to direct their customers to ATMs offering non-cash services. The ISOs that have signed agreements with Euronet plan to display the PaySpot logo on their ATMs, Ferguson said.

Dentlinger, of E*Trade Access, said his company plans to update the ATM Locator on its Web site to reflect which machines offer recharge and other advanced services.

Alexander, of The Bailey Group, believes that consumers will catch on quickly if the service is offered on enough ATMs.

"Consumers in a retail environment are convenience oriented. That's what created the retail ATM industry," she said. "We've shown that if you can offer transactions at the right time and in the right location, and do it a reasonable cost, the customers will do those transactions."