Article

Wild, Wild West

Texas is ground zero for the independent ATM industry. One of the first states to allow surcharging, Texas was an early incubator for ISOs. Lots of them are still doing business there today

March 19, 2001 by

You don't have to ask Stan Paur twice if Texas is a competitive market for ISOs.

"It's evidenced by the fact that in our program we have nearly 75 ISOs, and some of those are in the point-of-sale business as well," said Paur, president of PULSE, a Houston-based EFT network. "We have some very large ones like Card Capture Services and Momentum Cash Systems, but we also have some very small ones too. It is a very competitive market."

"We see new entrants into the ATM world all the time," agreed PULSE Executive Vice President Cindy Ballard. "Volumes are increasing; there are just more individuals using ATMs and point-of-sale, I suppose. We look at it as a growth opportunity."

Sure, the ISO business -- and the ATM business in general -- is highly competitive all over. But Texas is where the explosion originally occurred. Ground zero, one might say. The ATM business got rolling in Texas, and it was there that one of the first battles over transaction fees was fought.

In the early days

Originally, interchange fees were set up to compensate the financial institutions that issued the ATM card being used as well as the institution that owned the ATM. Networks were formed to ensure that everyone was compensated properly.

One bank, the First Texas Savings Association, said in 1989 that interchange fees were not covering its costs. It sued the young PULSE Network for the right to charge an additional fee to foreign users.

Arbitration continued until 1991, with the arbitration panel eventually finding in favor of First Texas Savings. It was a hollow victory for First Texas which, by this time, had gone out of business -- but it cleared the way for other financial institutions to charge a user fee.

This led to a "a whole slew" of ATM companies springing up in Texas, according to Bob Cannon, president of the aforementioned Momentum Cash Systems, a Houston-based ISO.

Two companies that were processing ATM transactions for financial institutions, EDS and ACS, saw this and began deploying their own machines. They would remain two of the largest non-bank ATM deployers in Texas for years.

"In the PULSE Network, and specifically in Texas, we had a five- or six year advance on the rest of the country in terms of surcharging," Cannon said. "The companies developed in the Texas market. As the market has become saturated, it's probably become saturated in this market first because we had that head start."

Mature market

Is this intense competition a bad thing? And does it constitute saturation?

"They said the credit card business was going to get saturated, too," said Mathew Donovan of CardTronics, a Houston-based ISO. "I think there's always going to be a market."

Donovan agrees that Texas is highly competitive, however. "Yes, absolutely," he said, "but I don't know if it's any more competitive than any other major markets. It's an older market. In the state of Texas people have been deploying (ATMs) for quite a while."

He points to the price of hardware as an important aspect of the market and where it is headed.

"I think a lot of the larger ISOs such as ourselves have wholesaled out equipment to smaller deployers at a price point that has put them into direct competition with ourselves," Donovan said.

"When you have a guy that is an independent deployer but doesn't have any overhead -- he doesn't have service staff, etc. -- and you give him the ability to purchase equipment at $200 to $500 over what your cost is, you have just added wood to the fire. You're feeding your competition."

It's a double-edged sword, he said, because "the price levels being what they are for medium-sized ISOs, they have to push the machines out the door and to be able to do that they have to wholesale them out at cost."

Donovan added that low-end machines like the Cross Mini-Bank 1000 are driving costs -- and profits -- down. Also, there is a growing market for refurbished machines, which makes it somewhat easier for independents to get into the game.

The onset of massive deployment began in 1996 when the national Cirrus and Plus networks changed their rules to allow surcharging. Many of those early contracts are due to expire in the next few years, which will shake up the market all over again.

"By then, the older machines are going to need to be replaced. Merchants want new machines," Donovan said. "You can buy and give a trade-in value on older machines. Then you'll have $1,000 ATMs -- you can place $1,000 ATMs anywhere and make money."

Secrets to success

While price is always an important factor, Donovan thinks there are other factors that may help the cream of the ISO crop rise to the top.

"There's a bunch of guys running around the country with 100 terminals," he said. "For one or two guys, 100 or 200 terminals is a pretty nice living. He can manage that network, but once it gets past 200 or so he's going to need service help. That can be one of the issues that arises."

Cannon agreed than an ISO's service record is a major factor when it comes to survival in the competitive Texas market -- or any other, for that matter.

"Your name in the market, and service you provide, and backup support you provide allow you to continue to do business," Cannon said. "The fly-by night guys quickly are out of the market. Frankly, the business models of a lot of companies are not supportable, so they have run their course as well."

The Texas market is so competitive, said Bruce Fielder, vice president of marketing for Core Data, an Amarillo-based processor, that "it probably makes sense for newcomers to go under the larger ISOs."

Cannon agrees that the Lone Star State is a tough market to enter at this point. "You would face more entrenched competitors, better financed competitors, more experienced competitors, with a brand identity in the marketplace," he explained. "They can buy hardware cheaper, can get processing cheaper than you can."

Opportunity ahead

Yet competition doesn't seem to faze the established players like CardTronics. Donovan, for one, is excited by some of the new opportunities in the ATM world.

"ATM advertising, if and when it takes off, will allow you to put a terminal anywhere," Donovan said. "If a guy can put a billboard over a toilet, why can't you do it with an ATM? Right now, the ATM is only for spitting out cash, but In the future it will be for so many other things that every company in the world will want to advertise on it."

"We're seeing a lot of other uses like Internet and dispensing other items," Fielder agreed. "While that does open other avenues for revenue, I don't think it makes the market any better."

In terms of market saturation and competition, "Texas is ahead of the pack ... (but) I don't know that you call them problems," Cannon said. "We really still view business as a long-term business which means provide a product, provide service at a fair price and you'll always do well. When we first started six years ago, it was like the Oklahoma land rush."

"The darkest days have gone," he added. "I think the smaller guys have moved on to something else and left us with a solid business still in place."

"You never really know," if a market is saturated, Fielder said. "It's like real estate: location, location location. It's easy to say the high volume locations are already gone, but I would not say we're overstocked with ATMs in Texas. I think there is room for growth. I just don't think it is going to come as fast and furious."

Paur agrees. Competition? Yes. Saturation? Not necessarily.

"I think there's probably some limited growth opportunity," he said.

ISOs are inventive, not to mention the fact that they possess business savvy -- otherwise they would not have survived the land rush.

"I think these guys are acutely sensitive to price and acutely sensitive to the quality of their programs," Paur said, "Some of them operate on a very thin margin, so those ATMs have to be working. Those systems have to be up as much as possible. They are very sensitive to interchange fees."

And even with some 75 ISOs in its network, PULSE has no intention of stunting itself. "We are actively courting these organizations, because they are a source of volume," Paur said.

"From a broader context -- from an industry standpoint -- they've evolved from sort of a non-force in the ATM business to a very significant player. The fact they exist today will impact the future course of ATM operations in the U.S."

And to think, it all began in Texas.