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eFunds makes Boss deal with ISO acquisitions

In one of the most famous concert reviews in history, critic Jon Landau wrote: "I have seen the future of rock 'n' roll and its name is Bruce Springsteen." Plug the words "ATM business" and "eFunds" into Landau's statement to get an idea of the kind of effect that eFunds Corp.'s recent acquisitions of two major portfolios may have on the retail ATM market.

February 18, 2002

In one of the most famous concert reviews in history, critic Jon Landau wrote: "I have seen the future of rock 'n' roll and its name is Bruce Springsteen."

Plug the words "ATM business" and "eFunds" into Landau's statement to get an idea of the kind of effect that eFunds Corp.'s recent acquisitions of two major portfolios may have on the retail ATM market.

A little over a week ago, eFunds announced that it had bought the ATM contracts of Hanco Systems, for 2,500 ATMs in 30 states. The purchase came approximately four months after eFunds paid some $44 million to acquire Access Cash and its 8,500 ATM contracts.

"Some people in the market are going to make the decision to buy, some are going to make the decision to sell, and some are going to make the decision to expand elsewhere," said Tom Hannon, president and chief executive officer of Hanco Systems. "We went with two out of three."

Hannon is leaving the U.S. retail ATM business to oversee two international offices, the UK's Hanco ATM Systems Ltd., founded in the summer of 2000, and the just-established Hanco International ATM Ltd. in Ireland. (See related story European expansion for Hanco)

"There will always be room for the entrepreneur in the ATM business," Hannon said – but he predicted that the eFunds deal will trigger a wave of consolidation in the highly fragmented U.S. retail market.

Urge to merge

Indeed, large ISOs such as Cardtronics, Momentum Cash Systems, Financial Technologies and Cash Resources have purchased the portfolios of smaller independents in the past year.

And eFunds plans to acquire at least one more ISO, said Nikhil Sinha, the company's executive vice president of global sales, marketing and product management. While eFunds now controls 11,000 ATMs, Sinha said eFunds intends to add another 2,000 to 4,000 machines by year's end.

The Scottsdale, Ariz.-based company has enlisted Frank Capan, Jr., former CEO of Access Cash, to help make a deal or deals. Capan thinks the eFunds fleet could become even larger, perhaps as many as 20,000 machines.

However, he downplayed the importance of numbers. "Personally, I've always maintained that the best way to do business is to throw the number out the window and just concentrate on building a quality, effective network," he said.

An emphasis on size over quality is what destroyed Credit Card Center and scores of smaller, lower-profile players, Capan added.

The acquisitions of two of the country's top ISOs were spurred by eFunds' desire to keep more of the transaction income, Sinha said. "We wanted to move up the value chain. As a processor, we were only getting the back end. Now we're getting the front end too."

New source of business

Sinha said the company also hopes to capitalize on what it sees as a growing trend of financial institutions outsourcing management of all or part of their ATM networks to third parties.

"ISOs are the most skilled in the business at managing ATM networks," Sinha said. "We hope to take that expertise to our financial institution customers. (ATMs) are not a core competency of theirs. What we propose to pitch to them is 'you stick to your core competencies and let us take care of the ATMs.'"

A number of key Access Cash employees, including Capan, and two employees of Hanco will assist with the transition of the two ATM businesses – which will carry the Access Cash name – and some may remain with eFunds.

"The independent ATM business is a very specialized business," Sinha said. "We acquired a great deal of expertise with these two companies, and we don't want to lose that."

Access Cash in July inked a branding agreement with the Co-Op Network, in which cardholders of the network's member credit unions are offered surcharge-free access to Access Cash's ATMs. The machines are branded with the Co-Op Network logo. In return, Co-Op pays a flat fee and additional transaction-based fees to Access Cash to compensate for any loss of surcharge income. (See related story One great union)

At the time of the Co-Op deal, eFunds already had a 24 percent equity stake in Access Cash – and Co-Op Network is an eFunds customer. Gene Polito, Co-Op's chief operations officer and executive vice president, told ATMmarketplace that the eFunds connection "was somewhat of a catalyst to move the (Access Cash/Co-Op Network) relationship along."

Rather than positioning itself as a competitor to Bank of America, the country's largest deployer with some 13,000 machines, Sinha said eFunds will try to acquire BofA as a customer. "We can go to BofA and other financial institutions and tell them they can increase their number of ATM locations by 11,000 by entering into a branding agreement with eFunds," he said.

Processing power

What sets eFunds apart from other ATM deployers – traditional or otherwise – is its ability to provide transaction processing in-house.

Noting that Access Cash used four different processors, Capan agreed that taking processing in-house gives a deployer "more control of their own destiny." Even more important, he said, is eFunds' close relationship with a number of card issuers.

"The combination of ISO and processor has changed the economics of this business," said Sinha, noting that eFunds will offer ATM processing at a price that other deployers can't match. And, he added, eFunds has a greater ability to introduce value-added services such as money transfers or ticketing than any ISO.

Hannon identified this ability to add more functionality – and theoretically revenue – to an ATM program as one reason that he chose to sell to eFunds rather than to other unnamed corporate suitors.

"It's the right thing for our merchants," Hannon said. "eFunds can help[ them get more money in their pockets."

Like Hannon, Capan agreed that eFunds is better positioned to add new transactions to the retail ATM mix.

"You can complain that Microsoft is a monopoly, but look at the great things it's allowed us to do with PCs," Capan said. "At Access Cash, it was hard to go back and try to offer the retailers more options when we weren't making enough money to invest in R&D."

Capan also shares Hannon's belief that consolidation of the retail ATM market is inevitable as profit margins continue to narrow and ISOs take a hard look at their portfolios. "The margins in this business are not getting any better," he said. "At some point in time, people have to ask themselves how in love they are with this business."

As it eyes potential acquisitions, Sinha said eFunds will seek the same things that are attractive to most deployers: well-run companies with what he calls "momentum" managing sites with high foot traffic and relatively high transaction volumes. It may also try to fill geographic gaps in its network coverage, as it did with the Hanco acquisition. Unlike Access Cash, Hanco was a dominant force in the Southeastern part of the country.

Another key factor, Capan said, is a complementary corporate culture. "You have to get along to get the deals done," he said.