Cents and Sensibility

Things really are tough all over when banks have a tough time making money. But being on a budget hasn't been all bad. It's taught banks and credit unions to streamline operations and run their businesses more cost effectively. A young but proven means of cutting costs is outsourcing off-premise ATM services to an independent sales organization (ISO).

"Hiring out" this customer service can reduce or eliminate the labor, worries and investments that traditionally have made balance sheet losers out of ATMs. Outsourcing is especially attractive to small banks and credit unions that lack the capital to set up, expand and service an off-premise ATM network.

But according to operators of several ISOs, financial institutions of any size can benefit from ATM outsourcing.

"If we can run their ATM network less expensively than they can, I think they'd want to work with us," said Jon Thomas, COO of

ISOs like Jackson, Miss.-based

Whatever level of ATM services they provide, a 1998 Dove Consulting study proves that ISOs can run off-premise ATMs cheaper than banks. On average, researchers found ISOs can operate an off-premise terminal for roughly $600 per month, while the same operation costs most banks about $1,000.

"We can help (banks) assess and develop a program on a cost-efficient basis, something that's less expensive than what they traditionally do," said Tommy Glenn, CEO of Financial Technologies. A potential customer for Glenn is a bank that wants to gain efficiency and lower cost. "And that could be small bank or a very large bank."

Jim DeRentis, senior vice president of Retail Banking for Bank Rhode Island, said his financial institution, which operates 13 branches and has $659.3 million in assets, was able to increase its off-site network for very little cost by working with Providence, R.I.-based

Before striking a deal with Atlas,

"Our primary competitors are significantly larger and have significantly more assets than we do," DeRentis said. "This was a way for us to pick up new locations without having to invest in infrastructure."

The relationship benefits Atlas, DeRentis said, because all of the ATMs now carry the Bank Rhode Island brand. "It gives their machines more credibility and increases traffic.

Why expand?

When ATMs were first offered to U.S. customers 30 years ago, banks provided them as a value-added service. But now -- even with the help of transaction fee income -- off-premise ATMs dispense nearly as much red ink as cash.

Despite these losses, bankers say they can't cut off-premise ATM services because customers demand them. And off-premise ATM networks continue growing because banks view that extended reach as another competitive advantage.

Here, say ISO operators, is where they're best fit to serve as liaisons between banks and merchants. Their service is to allow those two entities to do what they do best -- banking and merchandising -- while the ISO shoulders the burden of ATM management.

"By utilizing an ISO, the financial institution may not have to train and integrate an ATM program within their sales force," said Joelle Colosi, marketing director for TASQ Technologies in Rocklin, Calif. "An ISO may set up the merchant and take care of processing and/or maintenance of the machine, therefore allowing the financial institution to concentrate on its core business."

Double duty

As the link between a bank and a retailer, ISOs must meet the unique challenge of serving two customers in one.

Basically, banks want ISOs to reduce service demands and cut off-premise ATM costs. To do that, the ISO may provide a little or a lot in terms of hardware and services. It all depends on each bank's needs.

"We can offer them error resolution, client call-backs for disputes, request for retailer payment, a client call center, full field technical services, first and second line maintenance … whatever," said Daniel Piña, founder and CEO of Evergreen Teller Services in Grass Valley, Calif. "We also can develop an internal branding strategy that's probably better than the bank can do on its own if doesn't have that type of department within its institution."

Evergreen and TASQ are working together to offer a retail ATM program to financial institutions.

Thomas said Access Cash brings experience, efficiency and wide-reaching networks to the table.

"For over six years we have done nothing but off-premise ATMs; it's our number-one thing," he said. "We have the systems and processes in place … and we offer access to excellent locations in high-traffic, well-known retail sites."

Currently, the company has national contracts with heavy hitters like K-Mart, Shell, Texaco, BP and Amoco stations, as well as with several regional convenience store chains.

In addition, Thomas said, Access Cash can often negotiate a better deal on hardware than a small financial institution because it buys machines in larger volumes.

What merchants want from an ATM program is a bit different from a bank's needs; their main goal is to increase store traffic. If customers get money at their stores, merchants know chances are good that they will spend some of it there.

Thomas cited research by the National Association of Convenience Stores that showed ATMs consistently rank in the top five most-used resources in c-stores. Having that information, he said, gives ISOs a lot of leverage in sales meetings with merchants.

And, he added, customers with cash are less likely to use a credit card, which could save merchants thousands of dollars paid out annually in service charges attached to those transactions.

How retailers and banks pay the ISO for its services differs with each and every contract. Most merchants with ATMs want to share revenue from transaction fees, although a few simply want to provide another service to their existing customers.

Some bank partners want a share in transaction revenues, but those who want to provide surcharge-free service to their customers generally pay a fee to the ISO. The fees may fluctuate based on traffic at the ATM, while others are flat, line-item expenses for the bank.

Either way, banks and merchants stand to gain from offering the service when an ISO handles the whole process. It allows both to concentrate on their core competencies; most banks could see a drop monthly expenses, while merchants can tap a new revenue stream.

Banks and merchants alike prefer dealing with one company rather than with a series of vendors, said Steve Parrillo, operations manager of Atlas ATM.

Convincing the banks

As promising as the idea of outsourcing sounds, convincing financial institutions to hand their ATM business over to ISOs is a slow process. While thousands of merchants outsource their ATM programs, ISO operators estimate there are less than a few hundred banks and credit unions doing the same.

Part of the struggle, Piña said, stems from having to convince a multitude of officers and directors at each financial institution that a change would do them good.

"The sales cycle is longer and you have to invest more resources to get your customers … because there are more approval processes," Piña said. "In order to get funding for these programs, they have to be sold that we're capable of providing them that service."

Financial Technologies' Glenn agreed, saying it takes about a year to sell a bank on an outsourcing deal -- as opposed to a merchant, who might close the deal in days or weeks. Financial Technologies has more than 2,000 retail customers but works with fewer than 100 financial institutions.

Not all banks are so slow to close a deal. Parrillo, of Atlas ATM, said working with a small institution like Bank Rhode Island means dealing with fewer levels of management. "It's easier to talk to the top person at a small bank."

A slow decision-making process can cost a bank retail ATM customers, said TASQ's Colosi.

"In the retail market, a merchant can sign up with an ATM program on the spot. Therefore, if a financial institution delays in the implementation of an ATM program, they may be either losing their merchant clients or missing out on a new merchant client opportunity," she said.

Thomas said that some banks also fear that outsourcing such a labor-intensive service would force them to lay off employees. That kind of a culture change, he added, is especially upsetting to financial institutions that once were non-profit cooperatives or depositor-owned banks, which tend to be more sensitive to employee welfare.

Adversaries or allies?

ISO operators said that, in the past, the situation was aggravated by an adversarial relationship between banks and ISOs. Both competed aggressively for the same business in the merchant market, and today both remain protective of current market shares.

But all said they believe the climate is changing for the better as ISOs prove themselves not only worthy competitors, but potential partners. Banks always will own a large share of the market, said Piña, but he believes that there are "niches to fill," which is where ISOs are strongest.

Glenn said that since the off-premise market is growing, he believes competition between banks and ISOs actually will diminish. A larger market, he said, provides new opportunities for partnerships.

"I don't perceive us as competitors anymore, because I think there's a big enough pie for everyone now," he said. "We've worked with several banks in alliance-type relationships, and I think we'll do more of that."

Access Cash's Thomas believes that as financial institutions better understand how they can succeed in the off-premise market, the more natural it will be to partner with ISOs. "It absolutely makes sense that we'll cooperate in the future," he said.

Stressing banks' need to upgrade offerings in order to capture customers, Colosi said it doesn't make sense for banks -- especially small to medium-size institutions -- to try to go it alone. Partnerships with ISOs, she said, are the best way to facilitate off-premise ATM growth.

"(Banks) understand that they will need to continuously diversify their product and service offerings to maintain and grow their merchant client base," she said. "However, without the efforts of an ISO, they will not be able to completely satisfy their merchant's needs without it being very costly."