Components: ATMs for Modern Consumers

 

By Peter Lucas

 

With transactions leveling off, independent ATM networks are gearing up to offer a host of new services aimed at the unbanked and the offers-obsessed.

 

 

 

Increasing ATM transaction volume is a tall order these days. Growth in total transaction volume has slowed to a crawl, 0.8% annually from 2006 through 2009, according to Boston-based Aite Group LLC.

 

After all, the best locations were staked out years ago. And consumers are relying more heavily on their debit cards to get cash back at the point of sale and are going online with greater frequency to check their account balances.

 

Nor is the outlook for the next several years any better. “Year over year ATM withdrawal growth is pretty much on a straight line now,” says David Albertazzi, a senior analyst for Aite Group. “That’s significant because withdrawals account for about 71% of transaction volume.”

 

While Albertazzi’s research focused on bank-owned ATMs, he expects growth rates for independent ATM networks to be about the same.

 

Rather than continue inching along a flat growth plane, independent ATM networks, which operate about 115,000 of the more than 400,000 U.S. ATMs, are reinventing themselves to find new sources of transactions. These are the deployers that put ATMs inside convenience stores and other such locations that depend crucially on foot traffic, so anemic growth is especially problematic for them.

 

The independent networks’ plan of action includes offering more services that will appeal to non-traditional users, such as the unbanked. Among the new services being offered or tested are money transfers, bill payment, person-to-person payments, currency conversion, and couponing and loyalty programs intended to stimulate sales for the hosting merchants.

 

No Surcharges

 

“Cash is a still a strong payment option, especially among the underbanked, and that means there are a lot of opportunities to use ATMs to reach this demographic and provide additional revenue-generating services that consumers value,” says Donna Embry, senior vice president for strategic development at Payment Alliance International, a Louisville, Ky.-based independent ATM operator.

 

Boosting ATM revenues is also crucial for the independent networks because over the past decade merchants have been steadily negotiating more lucrative deals to rent out their space to ATM deployers.

 

Paying higher rental fees was not as big an issue when transaction volumes were growing at a faster clip and consumers were not getting hit up for hefty surcharges for using an ATM outside their bank’s fleet of machines. But with surcharges running between $1.75 and $2.50 for foreign transactions—on top of the foreign-transaction fees the debit card holder is charged by their own bank—cardholders are making it a point to seek out their banks’ machines to spare themselves the added cost.

 

That has caused some pain for the independent networks. On-us transactions, or transactions made by a bank’s own customers, rose 1.8% between 2006 and 2009 and totaled an estimated 3.8 billion in 2009, according to Aite Group. In comparison, foreign transactions, those made by a debit card holder at another bank’s machine, totaled 2.1 billion in 2009.

 

Dropping surcharges is considered to be a critical first step in getting consumers to use independent network ATMs more frequently. Between 25% and 30% of ATM transactions performed in the U.S. are hit with a surcharge, according to Chris Brewster, chief financial officer for Houston-based Cardtronics Inc., operator of the Allpoint surcharge-free ATM network, which has more than 43,000 ATMs. Cardtronics and its subsidiaries own and operate 75% of the ATMs in the network.

 

“If an ATM operator is only offering a surcharge-based model, essentially they’re ignoring 70% to 75% of the market,” says Brewster. “Consumers don’t seem to particularly like to pay ATM convenience surcharges. But if they weren’t hit with a surcharge for using an ATM outside their bank’s network, they would most likely use those ATMs.”

 

Cardtronics, which operates more than 37,500 ATMs in the U.S., Mexico, and the United Kingdom, says same-store ATM transaction volume is growing 3% to 5% a year, depending on location, through a combination of initiatives, including waiving surcharges.

 

Research conducted by the company shows that, while consumers like ATMs for the convenience they provide in accessing their checking and savings accounts, they prefer to conduct an ATM transaction in locations where they are already running errands, such as the grocery store or a retail storefront. They’re less keen on going to their bank’s nearest branch to withdraw cash they intend to spend while running errands.

 

Placing surcharge-free machines in these retail locations can generate additional transaction volume and interchange revenue, Brewster contends. Surcharge-free ATMs can also attract transactions from consumers who carry payroll cards, a.k.a. the unbanked.

 

This is a huge demographic. In 2009 about 25.6% of U.S. households, or 30 million consumers, either had no bank account or a limited banking relationship, according to the Federal Deposit Insurance Corp. Many unbanked consumers are paid with a payroll card because they lack a checking account.

 

Funds loaded onto a payroll card can be used at ATMs and at the point of sale. Recipients have the option of a PIN-debit card or a prepaid Visa or MasterCard card. Because the primary recipients of payroll cards are hourly wage workers who hold multiple jobs to make ends meet, a surcharge to access money can be an expensive proposition.

 

“A lot of employers want to see their employees access their earnings on a payroll card without a surcharge,” says Brewster. “Offering surcharge-free transactions for payroll cards is a good opportunity for us to grow ATM volume.”

 

Cardtronics offsets the loss of surcharge revenues through interchange paid by the card issuer (in ATM networks, interchange flows from the issuer to the deployer) and branding fees for transactions on bank-branded cards issued on the Visa or MasterCard networks.

 

Watch out, Western Union

 

But dropping surcharges is only part of the puzzle. To generate significant volume increases, independent ATM networks need to reach a broader base of consumers who do not regularly use ATMs. This includes unbanked consumers who typically pay their bills in cash through currency exchanges, a service for which they are charged a fee.

 

Since many unbanked consumers are issued payroll cards or load funds on to a prepaid Visa or MasterCard card after cashing their paycheck, offering bill payment through ATMs is a way to provide them greater convenience in paying their bills, and at the same time generate additional transaction revenues by charging for the service. Fees can be deducted from the user’s prepaid or payroll card.

 

Cartronics, for example, operates 2,220 ATMs that perform bill payment, in addition to accepting checks without an envelope.

 

Unbanked consumers also tend to initiate and receive money transfers. While this lucrative business has historically been dominated by Western Union, independent ATM networks see an opportunity to grab a share of it.

 

Payment Alliance International (PAI) is working with two third parties to offer receipt of money transfers through ATMs. Recipients would be provided a six-to-10-digit authorization code that they would enter at an ATM operated by an independent network to receive their cash.

 

“The companies we are working with already offer this service at the point of sale,” says Embry. “Offering bill pay and money transfers are a way to expand the functionality of the ATM to reach non-banked consumers where it makes sense.”

 

The same concept can be applied to person-to-person payments, Embry adds. Both independent and bank-owned ATM networks are looking at ways integrate the ATM as a vehicle to deliver the cash being transferred to the designated recipient.

 

“Person-to-person transactions through mobile phones are gaining traction and integrating the ATM into the process is a big priority for us because of the added value it can bring to the transaction,” says Dan Kramer, senior vice president of marketing and merchant operations for the Shazam EFT network based in Des Moines, Iowa.

 

As with the independent ATM networks, Shazam’s per-machine transaction growth has been relatively flat the past five years, averaging 1% to 1.8% per machine, depending on the location, according to Kramer.

 

All Talk?

 

As part of their quest to boost transaction volume, some independent ATM networks are turning to consumer loyalty and couponing programs linked to the store where their ATMs are located. The belief is that using ATMs to issue coupons or enroll consumers in loyalty programs will entice those consumers to use the machines more often. More frequent use will also make the machines more valuable to the merchant, giving the independent networks a lever to negotiate more favorable rental deals.

 

Coupons, for example, are viewed as a way to get consumers to shop at the merchant where the consumer used the ATM immediately after they have made their withdrawal. Cardtronics is testing the concept with several merchants in the eastern U.S. The network is also looking at printing QR codes on receipts that can be scanned by a smart phone to receive exclusive offers from that merchant.

 

“Couponing is a value-added service that can drive more sales at the merchant location where the ATM is located,” says Tom Pierce, chief marketing officer for Cardtronics. “Offering that kind of value is helpful in negotiating merchant ATM contracts.”

 

Loyalty programs are based on a similar concept. In this instance, however, the consumer conducting an ATM transaction is asked whether she wants to enroll in the merchant’s loyalty program. Upon accepting the offer, the consumer is asked to enter her mobile phone number and whether she prefers to receive text messages highlighting special offers, such as an exclusive four-hour sale, or electronic coupons on her phone.

 

“A lot of big-box retailers are good candidates for this type of service because the wraparound marketing opportunities it provides make deployment of the ATM in their store more compelling,” says PAI’s Embry.

 

Key to rolling out loyalty and coupon programs on ATMs is whether the merchant will actually profit from them. “There are a lot of economic challenges with these types of programs and it comes down to whether the program is right for the merchant’s customer base,” says Sam Ditzion, chief executive of Tremont Capital Group, a Boston-based consulting firm specializing in the ATM industry.

 

Still, loyalty programs and coupons on ATMs have been kicked around for years without much actual support, critics say. And network operators, up til now at least, have talked more than acted on added functions, these observers say.

 

“A lot of ideas about how to add functionality to ATMs have been talked about for years but have never blossomed because no one seems to follow through on them,” says Richard Brennes, president of the Brennes-Jones Group, a Dallas-based independent sales organization. “Adding bill payment is probably the best bet, because it helps fill a need. Plus, some big-box merchants have shown interest in it.”

 

New Services

 

Beyond adding more functionality to the ATM, independent networks can increase transaction volume by operating bank-owned machines. Many small and mid-size banks lack the financial and information-technology resources to operate and upgrade large fleets of ATMs.

 

Partnering with an independent network to operate their branded ATMs can lower a bank’s operating expenses and ensure that its machines are upgraded to meet the new requirements of the Americans with Disabilities Act. Independent networks can also move faster to install new technology.

 

“Banks have a lot of regulatory and financial issues to be concerned about, so they are not as likely to move as fast as independent operators on upgrading to the latest technologies that are not mandated,” says Embry.

 

Still, the most sure-fire way to grow is through acquisition. In August Cardtronics acquired Access to Money Inc., a Cherry Hill, N.J.-based retail ATM network operator with 10,350 U.S. machines under management for $21.2 million in cash.

 

“Acquisitions have always been a growth strategy for independent networks and it is expected that rapid consolidation will continue,” says Ditzion.

 

Ultimately, transaction growth will be fueled in large part by new services that appeal to consumers and merchants that have yet to deploy an ATM. With more and more consumers relying on cash in the current economy, the opportunities for independent ATM networks to become a key intermediary for accessing that cash appear plentiful.

 

“Independent networks are innovative, nimble operators that can find merchant locations and offer new services banks can’t or won’t,” says Bruce Renard, executive director for the National ATM Council, a Jacksonville, Fla., trade association. “Their future looks bright.\”