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Sponsorship is key challenge for independents in most ATM markets

Jorge Fernandez of Capture Systems LLC explains that the right sponsor bank can help independent ATM operators navigate the challenges of certification and other network issues in international markets.

July 24, 2003

Editor's note: This commentary by Jorge Fernandez ofCapture Systems LLCdiscusses the role sponsor banks and networks play in the introduction of the off-premise concept into new markets. It is Part 2 of 3. Part 3 will focus on the role of local ISOs.

A few weeks ago, I wrote about the key role that ATM vendors play in helping ISOs/distributors implement off-premise ATM strategies in foreign markets. (See Are ATM vendors truly committed to international expansion?) From the large volume of e-mails I received, I believe this is an important issue in our industry. In this article, I will address the key roles played by the local sponsor bank and ATM network.

In the United States, it is relatively easy for an ISO to establish an off-premise ATM business. Virtually all an ISO has to do is find an existing large distributor that will sponsor it into a processor. If its dreams are big enough, it can contact a processor directly, pay the membership fees and find itself in business.

Jorge Fernandez

Some distributors and processors require background checks -- a prudent thing to do in this day and age -- but it is still a relatively painless process. Of course, it helps that the U.S. off-premise business is a very mature by now.

Processors in the U.S. provide turnkey services that include bank sponsorship, terminal driving, reporting, cash management, cash delivery and virtually any other service that the ISO may need. This allows the ISO to focus on the task of looking for places to sell or place ATMs. The fact that most of the large U.S. processors are private institutions that are not burdened with the bureaucracies or idiosyncrasies of banks helps.

If you want to start an off-premise ATM business in another country, the rules and level of complexity change dramatically. Life is not that easy, not at first anyway.

To fully comprehend the difficulty of the process, one must consider that the concept of the independent third-party transaction processor does not really exist beyond the U.S. In most markets, ATM networks are owned by a bank or banks.

The networks were established, for the most part, to reduce the cost of processing transactions and reach economies of scale. In most countries there is a single ATM network; in some there are two, but rarely more than that. As one would suspect, these networks have absolute power, and most of the time they do flex their muscle.

Many local ATM networks have not certified the ATMs that are typically used in retail deployments. Since off-premise ATMs are a new phenomenon in most markets, obtaining network certification is not an easy or straightforward task.

The networks do whatever the banks want them to do. Moreover, the bigger banks in the consortium control what goes on; the rest, well they have to put up with it in order to participate in the network. These networks typically just switch transactions between the banks. In some instances, they also authorize for the smaller banks, and they often serve as the sole gateway to the Cirrus and Plus networks.

The fact that most ATM networks are owned by the banks, which compete with each other in the marketplace, represents an interesting dynamic. Imagine a car design company that was owned by General Motors, Ford, Honda, Toyota, BMW and Hyundai. Do you think they will ever come to an agreement on a car design?

Board meetings at many of these networks resemble a Sunday afternoon at the racetracks -- lots of jockeying and positioning, with the strongest horses the clearly predicted winners. Smaller banks are often disgusted with the process and their lack of influence, but without an alternative, they are left to eat crow at most meetings.

The networks are exclusive clubs and the only way to gain admittance is through one of the banks that belong to them. Most banks do not want to give independents the time of day, or tell them where to find a watch.

To certify a new ATM, one must have a member bank present a request to do so. Depending on the internal politics and efficiencies of the network, this process can be quite painful, expensive, and time consuming.

In one market in the Latin American region, my company spent more than $90,000 certifying our vendor's ATM, which included us having to purchase the terminal driver for the network's EFT system. It took nearly a year.

The ATM networks are caught in a bind with regard to the off-premise ATM concept. Most of their general managers realize that more ATMs in the marketplace translate into increased traffic for the network, which in turn makes the network more powerful and profitable. However, the business concept conflicts with the owners of the network, the banks.

If there is a bank or small group of influential banks that are completely opposed to the business, they will often use their influence to delay certifications and create other problems for off-premise ATM operators.

Big banks, almost always, will not consider sponsoring an ISO. The off-premise ATM operator's nimbleness, lower costs and efficiencies are a smack in the face to big banks, which for the most part run either old or homegrown legacy systems that are very costly to operate.

Off-premise ATMs also represent a loss of control for big banks. In most instances, big banks do not let retailers know of the business potential of owning the ATM and keeping the profits for themselves.

We have seen instances where the bank used the ATM as leverage against loans and other businesses that the retailer had with the bank. When we have shown the retailer the potential profits from the ATM, the relationship with the bank has been affected in most instances.

In our experience, we have found that a small- to medium-size bank that is a member of the local ATM network makes the best partner. Smaller banks are attracted to the business opportunities that the off-premise ATM business provides, not only in bringing new retail customers to the bank but also in expanding their network of ATMs and being perceived as a bigger institution. (In most markets, ATMs must be branded with the sponsor bank's name, rather than the ATM owner's name.)

The biggest danger we have encountered is that once the business is going well, some of our sponsor banks have attempted to go around us and either try to renew the contract with the retailer directly, or have the customer install new ATMs directly with the bank. Maintaining a close working relationship with the sponsor bank is very important.

In part one of our series, we identified the ATM vendor as a key partner in bringing the off-premise ATM business concept to new markets. Once this relationship has been established, the primary task is finding a good local sponsor bank. The sponsor is key in helping obtain certification of the ATM into the local EFT network and providing settlement services.

Getting to this point in new markets can take months -- or in some cases, more than a year. Introducing new concepts like the off-premise ATM business into markets where ATMs are seen as mythical machines that can only be owned and operated by a big bank, is indeed a daunting task.

The good news is that the high barrier to entry has a built-in benefit. Once you are in, you have an immediate lead on any new competitor. Few companies are willing to go through the mess of establishing the business; others get intimidated or scared. In the markets where we have stuck it out, we are the only ones promoting off-premise ATMs.

So, now that we have a vendor, a local sponsor bank and an ATM network in place, are we ready to go? Not yet -- in my next article, I will discuss the role of the ISO/distributor.

The author, Jorge Fernandez, is president and CEO ofCapture Systems, the largest independent operator of off-premise ATMs throughout Latin America and the Caribbean. Additionally, the company offers processing services in Central America, Mexico and the Caribbean. He has been in the EFT industry for more than 15 years, most of those in Latin America and the Caribbean. He may be contacted atJorgef1@aol.com.