News

ISO suppliers feel impact of consolidation

It's not just ISOs that are impacted by the consolidation of the retail ATM business. Vendors that serve them are finding their portions of the ATM pie changing as well; some are getting more dough, while others must fight over crumbs.

July 6, 2004

As ISOs continue to consolidate, the largest companies will achieve an increasing cost advantage over smaller players.

"This will force smaller ISOs to either acquire other firms to gain scale and remain cost competitive, or exit the business by selling to a larger operator. In either case, consolidation begets more consolidation," said Tony Hayes, managing director of Dove Consulting's Financial Services practice.

It's not just ISOs themselves that are impacted by consolidation. Vendors that serve them are finding their portions of the ATM pie changing as well; some are getting more dough, while others must fight over crumbs.

Consolidation cuts both ways

"If the acquirer is your customer, it's great. If your customer isn't the acquirer, it's not so good," said Ron Schuldt, chief operating officer of Columbus Data Services, a New Orleans-based transaction processor that gained some 5,000 processing contracts over the past year when parent company Innovus acquired Momentum Cash Services and Heartland Cash Network.

Though most of its recent gains came from the Innovus purchases, Schuldt said that CDS has won new business from small to mid-size ISOs that don't want to work with larger processors. When processing rival Core Data Services was acquired by Concord EFS in 2002, Schuldt said some former Core Data clients moved their business to CDS and other smaller processors.

"That's a benefit for us," he said. "Some ISOs don't want to give their business to the really big boys. They want more personalized service, which is what they get from us."

Schuldt said CDS tries to maintain an edge over larger processors by developing ISO-friendly products and services like wireless ATMs. "We're pretty far down the road" to offering CDMA, the latest generation of wireless technology, he said.

Consolidation typically causes suppliers to lower their prices in an effort to win the business of acquirers that expect volume-based discounts for their business. However, that's no longer as likely to happen with processors, Schuldt said. "Processing prices are about as low as they can go."

Gary Staub, chief marketing officer for Irving, Texas-based processor Genpass Technologies, said Genpass began wooing companies it believed would be acquirers several years ago, before they began gobbling up smaller ISOs. "We called on the organizations we felt would be survivors and tried to establish relationships with them."

Staub said pricing isn't the only consideration for acquirers. "There is some price sensitivity, sure, but they're also looking for operational efficiencies in how they run their businesses."

Increased R&D

Consolidation has led to increased R&D among processors like Genpass, said Staub, who noted that his company has spent the past two years tweaking its Web-based reporting system. ISOs are particularly interested in technologies that make conversions easier, he said.

Melanie Chewning, vice president of ATM Services for Atlanta-based processor Lynk Systems, said Lynk's business grew in the past year, from 17,500 ATM driving contracts in May of 2003 to 25,000 last month.

She attributes more than 40 percent of that growth to Lynk clients acquiring other ISOs. "Just a couple of acquisitions can add a healthy amount of terminals to your base," she said.

But consolidation can cut the other way. The company lost some 2,500 ATM contracts when longtime Lynk client Hanco Systems was acquired by eFunds in 2002.

Staying in front of the technology curve is increasingly important for processors that don't want to lose business, Chewning said. In the past year, Lynk introduced a file that allows its clients to export conversion data directly from their database and import it into the Lynk system. "So they can get new terminal IDs overnight," she said.

Lynk is also "taking a leader approach to making sure our customers are in compliance" with increasingly stringent network requirements, Chewning said. "We're paying more attention to what the requirements will be and how we can change our infrastructure to accommodate them."

Mosaic Software, a provider of transaction processing software used by companies that drive their own ATMs, has seen a jump in the number of proposals it's submitted to ISOs in the past year or so, said Chris Klein, the company's executive vice president of marketing.

Mosaic also sees opportunities to gain new business as some of its existing ISO clients are acquired by other ISOs. Driving its own ATMs "starts to make sense for companies if they don't have to go through the learning pains," Klein said.

E*Trade Access, which drives more than a thousand ATMs on Mosaic's Postilion platform, was recently acquired by Cardtronics.

Klein believes Mosaic will benefit as large ISOs shift their emphasis from acquiring multiple portfolios to "focusing on their internal processes and learning how to make all those new contracts really profitable."

Networks like Star, Pulse and NYCE may have to drop their fees to retain ISO business, Klein said, after making similar adjustments to retain some of their financial institution customers. "They can't afford to lose big blocks of ATMs to people considering driving their machines in-house."

Cindy Ballard, executive vice president of the Pulse EFT Association, said her network has noticed little direct impact due to ISO consolidation. "It hasn't affected our day-to-day activities too much. Companies that work more directly with ISOs like transaction processors are likely seeing a more immediate effect," she said.

It may become easier for networks to work with ISOs, through their sponsor banks, on compliance issues, Ballard predicted. "We expect the larger organizations to be more sophisticated about the industry, to have better procedures in place," she said.

ISO acquisitions have boosted the business of Efmark Premium Armored, which counts notable acquirers like Cardtronics among its clients, said Robert Malik, Efmark's senior vice president of sales.

This story and all the great free content on ATMMarketplace.com is supported by: Qualtex Manufacturer of the WeatherMaster™ line of Through-the-Wall ATMs, offers Distributor Programs for its ATMs, Accessories and Walk-Up/Drive-Up Kiosks. Advertise on ATMMarketplace.com  Click here for details.

Efmark serves only about two dozen ISO clients compared to 1,600 financial institutions -- but  Malik said ISOs account for a growing portion of Efmark's total business because of their large ATM networks, in many cases thousands of machines strong.

Large ISOs are more inclined to use third-party service providers like Efmark, Malik said. "Their understanding of the business model for service is more developed than that of the smaller ISOs."

John Clatworthy, vice president of sales and marketing for Cash Connect, a Wilmington, Del.-based vault cash provider, said his company has gained business as ISOs have grown.

"A smaller ISO with fewer than 100 ATMs in a tight geography may try to handle some of his own vault cash," he said. "But when he acquires ATMs outside his core service area, he's going to have to use other people's cash. That's good for us."

Clatworthy said Cash Connect benefits from its asset size of $2.2 billion, which is larger than most of its vault cash competitors, and its relatively long service record with ISOs. "We've been doing this since 1998, which practically makes us a grandfather in this business."

In a business that can be unstable, ISOs crave long-term stability, Clatworthy said. "ISOs are all about growth. If you're not going to be able to grow with them, they're going to find somebody who can."

Cash Connect has experienced some downward price pressure, Clatworthy said, as larger customers are able to command volume discounts. "But you're managing fewer accounts, so that partially offsets the price concessions."

Opportunity knocks

Sandra Hartfield, president and chief executive of Palm Desert National Bank's Electronic Banking division, said the California cash supplier anticipates a possible drop in its vault cash business -- but PDNB believes it will experience an uptick in its cash management services.

"Larger ISOs may be able to go out and find their own cash sources, but they still need someone to manage the money for them," she said.

"Opportunities change" as the ISO business continues to evolve, she said. "This is a really exciting time for companies that are flexible enough to go out and look for new opportunities."

Chicago-based ATM manufacturing start-up Qualtex Corporation, which introduced its Weathermaster ATM in 2002, has gained greater brand name recognition during the recent rounds of ISO acquisition.

"Most of our customers have been smaller ISOs," said Brad Zerman, Qualtex's president. "The larger companies are coming in to look at their portfolios and seeing our machine, which is new to them. So we're getting phone calls."

Brian Kett, Triton's president, said the manufacturer is less impacted by acquisition now than it was five years ago when the market was dominated by super ISOs like Card Capture Services (purchased by E*Trade Financial in 2000) and Access Cash (purchased by eFunds in 2001). Both CCS and Access Cash gobbled up smaller ISOs before their own sales, he said.

Triton is not as affected as companies that provide recurring services, such as transaction processors and ATM service providers, he said.

While in theory large customers tend to drive down equipment pricing, Kett said that is not necessarily the case in reality.

"In our experience, it's mostly the upstarts that are driving the commoditization of equipment pricing," Kett said. "The bigger the player, the more structured their business. They sell more value added services rather than just on pricing alone."

Kett sees a positive trend in companies like American Express and E*Trade offloading ATMs. "When you see those estates moving to vibrant organizations where ATMs are the core business, that's positive for the industry and for everybody that serves it," he said.

Included In This Story

---