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Contract basics for the merchant/ISO relationship

Everything is negotiable when it comes to striking a deal between ISOs and merchants, but any prospective ATM owner must consider these basics. Links contained in this report provide more detailed information on each issue.

January 7, 2002

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When an ATM is installed at a new location, it's the crowning moment of what can be either a painstaking negotiating process or a problem-free business agreement. The bargaining begins when an ISO's representative and a merchant come together with an idea for placing an ATM, or several ATMs, in a store or chain of stores.

The two parties must consider a series of issues and negotiate an agreement that each finds acceptable to seal the deal. Included are the details of such issues as ownership, maintenance, management, insurance, monitoring, security and advertising.

Here are the main issues the two sides must consider.

1. Placement terms of the ATM

ATMs are set up as purchases, leases or rentals, though rental agreements are seldom used. Merchants usually work with an ISO, a company dedicated to the sales and service of ATMs. ISOs purchase ATMs in bulk from manufacturers and enjoy favorable pricing. ISOs normally provide merchants with equipment and valuable expertise on ATM installation and management.

The financial arrangement may vary widely. An increasingly common arrangement is for the ISO to install and maintain the ATM at a merchant's store, providing the merchant with a percentage of surcharge fees on transactions. Some merchants prefer to buy or lease machines from ISOs, handling some of the management responsibilities themselves.

In either case, the party taking the largest risk has the opportunity to make the biggest portion of the profit. Momentum Cash, a Houston-based ISO, pays a royalty to merchants per transaction in exchange for space in the merchant's store, according to the firm's president, Bob Cannon.

This is a favorable agreement for the merchant, in most cases, because money withdrawn from an in-store ATM often winds up in the store's cash register. The ATM's presence itself can serve to lure new customers inside as well.

See "Going the distance"

 <http://www.ATMmarketplace.com/news_story.htm?i=3239>

2. Training

ISOs provide merchant training on-site, including instructions on loading money, creating and reading reports, reconciling cash and operating the monitoring system. Once installed, ISOs provide telephone support and follow-up training, if needed.

3. Compensation for the ISO and for the merchant

Surcharging provides the bulk of the income from ATMs.

The split of fees is a key part of any contract involving an ATM. There is usually a split of the revenue between merchants and ISOs, with the percentage favoring the party taking on the most risk. Other participant fees, including charges from processors, networks and banks, must be taken into consideration in the contract.

Of course, merchants gain income generated as a result of the ATM's presence in the store. It's difficult to pinpoint the value of an ATM's presence, but Bill Koch, a senior consultant for NCR, believes in-store sales can increase by as much as 8 percent.

CathiCharlton, ATM coordinator for Arrow Communications, an ISO based in Quincy, Mass., said her company estimates that as much as 40 percent of the cash withdrawn at a merchant's ATM is spent inside the store.

Income from ATM sales of other items, such as tickets or stamps, is another negotiable item in the contract.

See "ATM Basics for New Owners" <http://www.ATMmarketplace.com/news_story.htm?i=83>

4. Electronic connection

The merchant usually pays the connection fee, because it's connected to his telephone. The slower dial-up modem connection is prevalent, primarily because of its low cost. The connection is live only when a transaction occurs.

Other connections are available, such as an always-on, leased line (ISDN or T1 or higher); always-on DSL (uses the regular telephone line, but has a higher-speed modem up to 50 times faster than a regular dial-up); satellite and wireless (gaining popularity);
CDPD (more expensive than dial-up); cable (costs about the same as DSL, is always-on, but is more expensive than dial-up).

See "Triton adds TCP/IP option to ATMs" <http://www.ATMmarketplace.com/news_story.htm?i=5084>
See "Deluxe helps ATM providers convert leased lines to dial-up technology"
<http://www.ATMmarketplace.com/news_story.htm?i=448>

5. Supplies

The merchant is often responsible for stocking supplies to the machine. When that's the case, the merchant may choose to buy supplies, such as receipts and printer ribbons, from the ISO. If not, merchants can often find good deals by shopping online or buying through another supplier. If the contract is a turnkey agreement or a free placement, the ISO provides supplies.

6. Insurance

Typically, the merchant buys a rider on the property insurance policy carried by his business to cover the ATM.

For more information on ATM insurance, see the ATMIA Web site

7. Cash management

Merchants are normally responsible for cash management. Some smaller outlets that lease or own their own ATMs take care of this function themselves.

Jerry Jeffers, CEO of a small ATM operation in Augusta, Ga., is a good example. He replenishes the cash himself, and he said by doing so he saves $75 a drop.

Other retailers prefer to replenish the cash because it assures the machine has an ample supply of cash and decreases the retailer's need for credit.

8. Installation, maintenance and service

If the ATM is purchased through an ISO, or if the ISO manages the machine, the ISO is responsible for installation, maintenance and service by contract or under a maintenance agreement. These functions are often outsourced by ISOs. Larger ISO operations employ teams of installers, while others use contractors.

New ATMs come with a manufacturer's warranty covering parts and labor for a specific period of time. Once the warranty expires, or with used machines, the owner is responsible for service and maintenance.

See "Outsourcing: Everybody's doing it" <http://www.ATMmarketplace.com/news_story.htm?i=637>

See "Zen and the art of ATM installation" <http://www.ATMmarketplace.com/news_story.htm?i=3702>

See "To outsource or not to outsource" <http://www.ATMmarketplace.com/news_story.htm?i=636>

9. Security

Security has become an increasingly important issue, especially with the smaller size of ATMs. Creative criminals have discovered a number of ways to burglarize ATMs.

Many smaller, less expensive ATMs are equipped with a small UL291 vault. These are typical of ATMs in convenient stores.

Cannon, president of the ISO Momentum Cash, said experienced burglars can get into them with the right tools and enough time. "ATM vaults are like locks. Locks are made for honest people. Professional locksmiths can get into any locks. So ATMs are no different from that," he said.

ATMs located inside buildings fare better than those outside, according to Barry Schreiber, professor of criminal justice at St. Cloud State University in Minnesota. He said indoor locations usually have better lighting and more pedestrian traffic, though he said no installation is completely safe 100 percent of the time. The ATM is a tempting target for many thieves.

Visit the ATM security research pavilion:

10. Monitoring the ATM's status

Manufacturers supply software that monitors the ATM, so that owners are able to check the machine's status through a dial-up connection. This includes diagnostic testing that checks supplies and cash on hand.

See "Gasper Corporation introduces entry-level ATM monitoring system"
<http://www.ATMmarketplace.com/news_story.htm?i=4498>

11. Advertising

Merchants are responsible for promoting the presence of the ATM in their stores, usually with interior and exterior signage. Studies have shown effective advertising of ATM locations can boost ATM use by 10 percent.

The ATM provides an ideal place for certain types of advertising. Options include screen messages, toppers, surrounds and coupons. In most cases, ISOs control these messages, so they can sell space to advertisers over a network of machines.

"The ISO likes to keep the rights to the advertising with the merchant reaping part of the revenues derived from that," said Cannon. "We like to be in charge, because we have a bigger population of equipment to work with. We think we can negotiate a better deal than an individual trying to find advertising for himself."

See "Cash Connect, brand ATM team to offer ATM advertising"
<http://www.ATMmarketplace.com/news_story.htm?i=4967>

See "Screen scene: Can ATMs, POS conquer ad world"

<http://www.atmmarketplace.com/news_story.htm?i=4901>

See "Rbuzz, CashPoint form alliance" <http://www.ATMmarketplace.com/news_story.htm?i=4610>

See "Package Deal"

<http://www.atmmarketplace.com/news_story.htm?i=4501>

See "ATM Advertising Part II"

See "CashPoint, Deibold to develop ATM advertising interface

<http://www.atmmarketplace.com/news_story.htm?i=4278>

Summary

Cannon said the normal ISO contract term with merchants is five years. The contract will usually include an ISO option to assign the ATM contract to a third party.

Those are the basic factors to consider in putting together a contract for an ATM. In many cases there are other issues of concern, and many contracts cover multiple locations, so this is just a guide. It is important for any prospective owner to consider each of these issues before entering into a deal to own or lease an ATM.