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Will "worst practices" of some doom the ATM ISO?

Frank Lunn is afraid that the unscrupulous business practices of some ISOs are a threat to the entire retail ATM business. He says it's time for the ISO industry to save itself.

June 18, 2003

Ibenezer Scrooge, president of the Ibenezer Scrooge Organization (ISO) wakes one night to a nightmare. A ghost appears to show Ibenezer his sordid past -- full of greed, jilted vendors, unpaid debts, shady deals, unfulfilled promises, and living large on free cash flow without reinvesting in infrastructure.

In the vision, a low barrier to entry, combined with cash flow without any regulation or oversight, allows the Ibenezer Scrooge Organization (ISO) to grow and prosper despite its lack of solid business fundamentals. Ibenezer drifts back off to sleep.

ISO present

Then another ghost appears…the ghost of ISO Present to deliver another scene. Large companies with aggressive sales forces create a "pyramid-type" scheme to use on their unsuspecting customers, selling them inflated leases to offer them incentives with their own money.

Frank Lunn

After the collapse, leasing companies burned by the excesses go away. Some short-term, unprincipled companies take wholesale pricing to the street and erode margins and profit for the rest of the industry. Others post prices on the Internet where all can see them. Many good sales reps go away because of vanishing margins.

Companies like the Ibenezer Scrooge Organization (ISO) sell below cost to try and win market share and tap into residuals and money belonging to customers to cover their expansion, extravagance and arrogance. Merchants are getting ATMs below wholesale; they are receiving a large percentage of interchange in addition to the surcharge.

Ibenezer sees himself and his peers floating in a body of water, desperately trying to keep their heads above the water. Waves of issues like triple DES, ADA requirements, theft and security issues buffet them. It seems like days pass, with more waves of network regulation, fees, vendor changes and sponsor bank shake-ups.

A boat, the SS Consolidator, appears to be rescuing some. Oh, what joy!  But joy turns to fear as the promise of rescue turns out to be for only a few.

As the ships' crew realizes what hazardous baggage their new cargo is carrying, they become alarmed. The ship lists to port and takes on water at an alarming rate. They discontinue their rescue efforts to fix their ship with their own fate uncertain. 

Ibenezer wakes up in a cold sweat. Thankful it was only a bad dream, he returns to his slumber -- which is interrupted again by the ghost of ISO future.

ISO future

The image shifts to a battlefield. Ibenezer and others use the dead as shields to deflect the enemy's barrage. The dead appear to be customers and smaller ISOs.

Tactics change to giving away all profit in equipment, service and finally processing. As survival becomes the issue, soldiers turn on other soldiers. The enemy watches their adversary's infighting with delight.

In the end the Ibenezer Scrooge Organization (ISO) falls, a victim of its own excess. The scene shifts to a quiet, fog-filled graveyard and a tombstone marked: ATM ISO Born 4/1996- Died 4/2005.

Taking stock

Will this industry and the remaining players take this path? It is up to us to decide.

We need to take stock. Motivational expert and business strategist Brian Tracy discusses a technique called "zero-based thinking." Quite simply, this is asking yourself the question: "Knowing what I know now, would I make the same decision to get into this business?"

You have to be honest with yourself to analyze this. How would you feel about a business opportunity working twice as hard for half the money? What about an industry that is increasingly filled with bureaucracy and regulation? How excited would you be if your risk and exposure increased, while your return on investment and return on equity decreased?

What would your level of enthusiasm be if a number of your not-so-bright or not-so skilled competitors made short-term business decisions that might be good for them (debatable!) yet drained profit from every viable aspect of the business?

I'll tell you that I am very upset by recent trends. As if the Credit Card Center debacle hadn't done enough damage to the ATM ISO industry, we are seeing trends that can only be classified as "worst practices."

If they continue, they will absolutely guarantee this industry's failure. The ISO will be pushed out completely, and the banks will take over.

It may seem that I am negative and pessimistic, but my goal is to create urgency and a call to action toward good and prudent business practices.

The time is now for all of us committed to this business to accept the feedback of our industry and correct our course before it is too late. As members of this community, we have an obligation to no longer turn a blind eye to "worst practices."

Where have the margins gone?

There are only three areas to create revenue and margins in the ATM industry: Equipment, processing and service.

Lately there have been examples of ISOs from every manufacturer selling at or even below cost to maintain their volumes for pricing advantage. A business has never succeeded with a model of "we lose money on every sale, but we make it up in volume!"

Service revenue? Forget it! You have Internet resellers, trunkers and rogue ISOs promising service, supplies, lifetime warranties and a free toaster without the slightest ability to sustain or deliver based on their pricing. The result is that reputable service companies with committed technicians -- along with infrastructure costs and overhead -- are not able to survive.

Now with processing being given away to merchants and promised to sub-ISOs and sub-sub ISOs, there is a point (rapidly approaching, by the way) where there is no more money to give or get.

I hate to be the bearer of bad news, but if the value chain does not make money, it collapses. If everyone in the value chain -- including sales person, sales company, ISO, manufacturer, processor, sponsor bank and network -- does not make money, the chain will collapse.

Ask yourself: Three years ago, what were you making in margins selling to merchants? What are you making now? How much margin did you earn in processing revenue? How much interchange, if any, was given to the merchant?

Now look at where you are today, and carry this trend forward two years. Scary to imagine, isn't it?

The end is near?

With most of the ATM industry worrying about Triple DES and PIN security, it is like a homeowner who focuses all of his attention on security to prevent intruders -- while all the while, an infestation of termites is gnawing away at the structure's foundation.

The ISO could die through increased network regulation and added pressure from sponsor banks. Don't think it could happen? Just ask someone at the First National Bank of Alamogordo, N.M. why they are no longer a sponsor bank. (See related story Networks increase oversight of sponsor banks)

The ISOs are an annoyance to the larger banks; they would like to see us gone and forgotten. We as an industry are giving them all the ammunition they need to support the conclusion that the ISO model cannot regulate and effectively police itself.

What if the requirement for sponsorship becomes a net worth of a million dollars and a reserve equal to a percentage of the cash that flows through their ATMs? A 10 percent reserve on a portfolio of 100 ATMs averaging 300 transactions a month and $50 per withdrawal would require $150,000 in cash.

If you are an ISO with 100,000 transactions a month, could you set aside $500,000 in cash in order to maintain your bank sponsorship? What would your business be worth if you woke up and no longer qualified to have a sponsor bank?

Unfortunately the barrier to entry in our industry is very low, and the advent of the Internet has allowed criminals and fast-buck operators to thrive without any re-investment in the infrastructure. Combine this with the ISOs who either don't know better or willfully choose to take action adverse to the industry as a whole in their pricing and advertising or selling models. 

Because the cash flow is good in this business, it provides a lot of cover for businesses that rob from tomorrow to pay yesterday.  It works just fine…until it all crashes down.

What we are seeing now is nothing short of an Ponzi scheme, where a few are getting what they can before they get out. The rest of us (and the customers again) will have to foot the bill.

Enablers

My goal is to make you mad and make you think. We all bear responsibility for where we are, and we all must play a role in affecting change to sustain our industry into the future. If the ISO chain collapses, everyone will be hurt.

What has allowed this situation to propagate is the fact that no one really complains too loudly as long as the money flows. Everyone loved Enron until the walls crashed down.

• Advertisers, manufacturers, processors -- You have a responsibility and an obligation to stop being enablers and stop looking away when you know a business is not acting in an ethical way.
• ATMIA-- You need some teeth in enacting policy or creating change to prevent abuse of the system.
• ISOs -- Take a hard look at why you are in business. If you want to sell your business, create a solid business to sell. I think the days of building it for a quick cash-out are long gone. We have to do the right things and put pressure on our peers who do not.

I am all for competitiveness. I love great competitors and am willing to go head-to-head to either win or lose business based on the value we can add for our customers. If your model is real estate at any cost, I challenge you that your business model is not sustainable.

Still opportunities

If this article seems gloomy, it is in direct proportion to my optimism for what this industry still can be. There are tremendous opportunities to create long term relationships and sustainable businesses that earn profit if we can find a way not to let a few companies pee in our collective pool.

Changing ATM technologies and possible new revenue opportunities are exciting. Providing value-added service and taking care of clients are a great way to build relationships and offer additional services as they become sustainable.

The bottom line: This industry needs a wake-up call to do the right things -- or to suffer the consequences and eventually go the way of vinyl records and betamax tapes.  The choice is clear -- as are the rewards or the consequences.

Frank F. Lunn is the president of Kahuna Business Groupand the author of the upcoming book, Stack The Logs! (www.stackthelogs.com) He can be reached for comment or criticism via e-mail atfrank@kahunaworld.com.