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Commentary: P2P payments app to watch at ATM

With a huge potential market and the growing interest of the major networks, person-to-person payment may be the ATM industry's best hope yet for a new 'killer app.'

March 17, 2002

Since the first terminals were installed in the early 1970s, the ATM has become ubiquitous and indispensable, providing millions of consumers with convenient access to cash from their bank accounts. Spurred by surcharging and technology, the U.S. has surged past 300,000 ATMs as a result of widespread terminal deployment by banks, retailers and ISOs.

Yet, while ATM deployment is continuing to grow, the signs are apparent that the industry is maturing. ATM card penetration leveled off and consumer usage patterns peaked several years ago. The opportunity for increased activation and frequency has shifted from ATMs to point-of-sale, where merchants are actively promoting payment with debit cards.

The net effect for ATM owners is that the number of transactions per machine has started to drop – and dramatically! In fact, the average number of monthly transactions per ATM dropped from nearly 7,000 back in 1992 to 4,000 today.

The implication for terminal owners who are dependent on transaction-based fees for income is not good news. Their income base is eroding and they are faced with two options: Scale back their operations and aggressively prune low volume ATMs to maintain profitability; or develop new revenue generating services to offset the decline in transaction fees.

There is no question that the "killer application" for ATMs today remains the basic cash withdrawal. While there have been many attempts at introducing a broader range of banking and ancillary services, none have been materially successful as revenue producers in comparison to cash withdrawals.

An example of a transaction that is well suited to ATMs and showed much early promise, but never catching on with consumers, is check cashing. Originally introduced by the MAC Network in 1988, there have been several failed attempts at establishing check cashing as a mainstream transaction, most notably punctuated by the bankruptcy of InnoVentry this past year.

Other examples of advanced ATM functionality include using the machines to dispense cash value items, such as postage stamps, tickets for movies and transit, and pre-paid phone cards. None of these services have generated much in the way of transaction volume or revenues, although they have had some success at a limited number of locations, appealing to small segments of consumers. Similarly, using the ATM as an advertising medium is technologically feasible but unproven as a revenue generator

It appears that there may be a breakthrough in this business, with direct person-to-person money transfers as the first major new transaction type for ATMs that has the potential of creating a significant new source of income for ATM owners.

The potential market for P2P money transfers is huge, as reflected by the volume of money orders, wire transfers and checks that currently facilitate these transactions. Just about every major industry player --from the networks to transaction processors and terminal deployers -- is viewing P2P payments with great interest and several have committed significant funding and resources to support the development of the capability for this service.

Incidentally, enabling P2P transactions for ATMs is no small challenge, as networks and processors are required to make significant modifications to their core switching and processing systems and terminal software to introduce a new transaction type to support P2P transfers.

The concept of using ATMs for P2P transfers is not new. While there are variations in how the transaction can be supported, it essentially consists of the ability for an individual with a banking relationship and traditional debit or credit card to initiate a P2P transfer at an ATM using a special transaction. The individual receiving the transaction then receives a special code (or in some cases a card) that can be entered at any designated ATM to withdraw the cash.

Historically, the major impediment to P2P payments via ATMs has always been the challenge inherent in getting enough ATMs on board to make the service appealing to a wide market. The consolidation that has occurred in ATM networks and processors in the past several years has simplified the process of getting buy-in and setting standards for a new P2P transaction.

Whereas in the past, introducing a P2P service would have required the agreement of a large number of players, this is no longer the case. The largest ATM networks are taking the lead this time around, driven by the significant interest expressed by their largest customers.

While traditional cash withdrawals will represent the "healthy heart" of ATM functionality for some time to come, look for P2P payments to emerge next year as an important new service. Most importantly, ATM deployers need to be thinking now of how they can "cash-in" on P2P payments and formulate plans to successfully introduce the service at their terminals.

Since 1980, Speer & Associates, Inc. has been preparing financial institutions worldwide for the challenges of a rapidly changing and increasingly electronic financial services world. Headquartered in Atlanta, S&A is a recognized consulting leader possessing competencies in all vital aspects of the financial services environment.

Les Riedl is a senior vice president of Speer and Associates, Inc. with responsibility for the performance of consulting engagements in the areas of ATM strategies, consumer payment systems and retail delivery. His areas of expertise include the development and implementation of integrated strategies for ATM networks, debit and credit payment products, EFT systems and processing that result in improved performance and profitability.