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ISO market continues to consolidate in Oz

As the number of ATMs in Australia grows, the number of independent deployers drops. This trend was spotlighted at the recent ATMIA conference 'Asia-Pacific ATMs.'

July 2, 2002

Consolidation will continue in the Australian independent ATM market, with the number of machines rising as the number of deployers drops. That was a key message from the recent Asia-Pacific ATMs conference sponsored by the ATM Industry Association and held in Sydney.

Ian Perkes, director of International Products Australia, told conference attendees that growth in the independent market has been fuelled partly by an increase in poker machines and by bank branch closures.

In 2001, Perkes formed International Products Australia as a consultancy specializing in ATMs, currency handling and vending machines when his previous company, independent deployer VFJ Electronics, was sold to Electronic Banking Solutions (EBS).

Off premise 101

Taking an historical perspective, Perkes outlined three stages of ATM deployment in his presentation, "Critical Success Factors for the Independent ATM in Australia."

During what he called the "club era" between 1994 and 1996, cash carriers were active but banks had yet to explore the club market. Smaller regional banks increased growth, while both the number of independent deployers and ATM suppliers were small.

Average transactions per machine were greater than 3,000 a month, value-added functions were non-existent, and trials of advertising on screen and receipts failed. Deployers were required to show "value" to the customer, such as increased in-store sales, as there was no sharing of interchange revenue.

Perkes said that Australian banks today have bilateral one-on-one ATM interchange agreements, whereby card issuers pay transaction fees to the acquirer banks of around $1 to $1.20 AUD. The acquirer bank then negotiates a deal with the switch and/or the ATM deployer, and pays the deployer around 50 cents to 70 cents AUD for each transaction.

The ATM deployer then typically pays the ATM site owner/merchant about 25 cents to 50 cents for each transaction and keeps the rest -- similar to the sharing of surcharge revenue in the U.S.

"The transaction fee to the ATM deployer and then to the merchant we call 'rebates.' The card holder/ATM user is charged a 'foreign fee' around $1 to $1.50 for using the non-bank ATM, and this is how the card issuer bank recovers the transaction fee they pay to the card acquirer bank," Perkes explained.

Between 1994 to 1996, Perkes said, no transaction fees were paid to VFJ Electronics, the company of which he was managing director. "This changed as the ATMs moved from the EFT/POS network to the ATM network and 'open-ATM interchange' became the buzz words."

Later stages

Perkes described the second key stage of ATM deployment, from 1997 to 1999, as the "pub/hotel era."

During this time, cash carriers defended their base by offering attractive deals but "big banks [were] still not active in clubs or pubs," he said. "Amid continued branch closures, regional banks picked up the slack and were very active in clubs [and] pubs."

The period also saw many independent deployers entering the market. Value-added functions were still not on the radar screen, and average transactions per machine were still above 2,000 per month.

Critical success factors during the period, Perkes explained, included multiple deals to hotel groups. Deals also became more competitive, with deployers offering reduced prices, increased rebate sharing and the option of lease financing for merchants.   The increase in ATM suppliers and deployers continued during the third stage, the "non-premise" era, according to Perkes. Rental deals became the norm rather than purchase from 2000 onward, he said.

Rebates increased, value-added functions still hadn't been introduced and average transactions dropped to approximately 1,000 a month per machine. Key success factors during this era included offering the best deal to get the site at any cost, potential future revenue and securing best-buy price from ATM suppliers to drive out competition.   Perhaps most importantly, Perkes said, "Early deployers take profits and exit the market."

Noting that many deployers give a large portion of interchange to merchants to secure sites, he said, "A self-destructive model, unless you are in it for the short-term. In other words, grow a business to sell to someone else."

"The deployers have never had the upper hand, and it is unlikely they ever will," he added. "The banks are very substantial organizations who have 'allowed' ATM deployers to multiply, as you need a bank as the acquirer of the transactions, for their own reasons."

Some of banks' primary reasons for working with independents include a low card base but high transactions as an acquirer and the establishment of more ATMs at a reduced cost, which helps compensate for the closure of branches, Perkes said.

Not just sales

Perkes was preceded at the conference by independent deployer Timothy Wildash, managing director of Extracash (ATM Solutions).

Speaking on "Setting Up an ATM Operation in Australia," Wildash told the conference he decided not to follow the common ISO model when setting up his company.

He prefers the term, ATMSSP (ATM sales and service provider), versus the more common Independent Sales Organization (ISO).

Wildash cautioned against emphasizing sales at the cost of other services. ATM Solutions does not simply sell an ATM, he said, "we sell a complex financial arrangement."

The necessary back-end technology, ongoing administrative and technical support, parts inventory and other skills are not covered in the term ISO, Wildash said.

He suggested, "We use the terminology ATMSSP [and] eventually merchants will start requesting SSP as a minimum standard."

As a result, he said, the narrow sales-focused organization "will be questioned on its ability to provide the five years service that we know this industry requires."

Wildash also pointed to "the challenging uncertainty of interchange fees" as a key obstacle, adding, "Which way the government, Australian Competition and Consumer Commission (ACCC) and the Reserve Bank of Australia (the country's central bank) will choose to go forward is a concern to the entire industry." (See related stories Australia waits for interchange reform and Australian banks move forward with fee reform)

Another key challenge for new players or existing players who wish to expand quickly, Wildash said, is a lack of intellectual property in the marketplace. "Finding sales, operational and technical people with the experience to succeed is difficult," he said.

Growth by acquisition

Australia is at the point of market saturation, Wildash concluded, ending on a positive note. Consolidation, he said, allows stronger competitors to increase their revenue.

ATM Solutions recently acquired the network of one of its competitors, purchasing roughly 100 installed ATMs and adding one additional employee to assist with management of the new machines.

"We experienced a 7 percent growth in costs with a 38 percent increase in revenue and growing," Wildash said.

Included In This Story

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ATM Industry Association (ATMIA)

The ATM Industry Association, founded in 1997, is a global non-profit trade association with over 10,500 members in 65 countries. The membership base covers the full range of this worldwide industry comprising over 2.2 million installed ATMs.

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