Components: Retail ATM Deployers Look to the Future

Lauri Giesen

Declining interchange revenues are squeezing non-bank ATM owners and managers, but new revenue sources and technology could ease the pain.

It’s a challenging time for many deployers of ATMs in off-premise locations.

With higher costs caused by changing government and network regulations and declining interchange revenue, many independent ATM deployers have had to re-examine their revenue and profitability models.

A few years ago the model was pretty simple: find high-traffic retail locations and install low-cost cash dispensers, then wait for the fee revenue to roll in. With customer surcharges of $2 to $3 per transaction plus interchange fees of nearly 50 cents per transaction paid by card issuers, it was not hard to make a profit on locations that could generate sufficient use.

But all that has changed in recent years. Although consumers are still willing to pay surcharges for the convenience of getting cash somewhere else than their bank, industry executives say ATM interchange revenue has declined dramatically. Meanwhile, costs associated with getting terminals ready to accept Europay-Visa-MasterCard (EMV) chip cards as well as more stringent requirements from the Americans with Disabilities Act (ADA) have made it more difficult for ATM deployers to find a healthy profit under their old models.

“Independent deployers are under tremendous margin pressure today, pressure that is beyond the natural constraints you might expect from a maturing market,” says John Leehy, president and chief executive of Louisville, Ky.-based Payment Alliance International (PAI), a large ATM deployer and payments processor.

“It’s no secret that independent ATM deployers are under fire to develop new sources of revenue largely due to reduced interchange revenues,” adds James Phillips, vice president of sales and marketing for Triton Systems of Delaware LLC, a Long Beach, Miss.-based ATM manufacturer.

ATM deployers are examining a plethora of strategies to find those additional sources of revenue. Some are pursuing more licensing agreements with banks that eliminate surcharge and interchange revenue but replace it with direct fees from financial institutions. Others are looking to offer additional fee-based financial services in the retail locations that house their ATMs.

New Urgency

Many deployers are even taking a second look at a host of services that can be offered on retail ATMs beyond cash dispensing—selling customers prepaid cards or lottery tickets, selling advertising space on the ATM itself or its screen, or offering currency-conversion information to foreign customers for a fee.

Many of these services have been offered intermittently over the past several decades with limited or no success. But ATM experts say the new urgency to find additional revenue is causing deployers to put more effort into their promotions while advancements in ATM technology make services easier to offer at a lower cost than in the past.

While it might seem that the availability of so many options offered by surcharge-free networks has lowered overall surcharge revenue, that has not been the case.

“The average surcharge revenue per terminal is actually on the rise; consumers realize the benefits of getting cash outside their bank and they are willing to pay a fee,” says Leehy. He also notes that the recession-induced credit crunch has increased consumer demand for cash.

Still, while surcharge revenue grows overall, some individual deployers may find it harder to get those dollars.

“There is so much more competition for ATM use in the market,” says Phillips. “There are plenty of ISOs [independent sales organizations] on the Internet offering to put an ATM in stores for very little cost. That lowers the margins for everyone.”

Plus, while many ATM deployers have raised surcharges in recent years, there is some worry that government regulations such as the Durbin Amendment aimed at limiting fees on debit card use could spill over into the ATM world.

“Surcharge revenue has been steady but there are fears that someone like Durbin or Harkin could come in and put a cap on ATM surcharge fees that would be bad for the industry,” says David Tente, U.S. executive director of the ATM Industry Association. U.S. Sens. Dick Durbin of Illinois and Tom Harkin of Iowa are Democrats who have supported legislation to limit the fees that banks and other financial-service providers charge retailers and consumers for payment services.

On the surface, it appears that surcharge revenue at Houston-based Cardtronics Inc., the nation’s largest independent ATM deployer, might be down. A slide during a recent presentation to financial analysts showed that surcharge revenue as a percentage of Cardtronics’ total revenue has declined from 56% in 2008 to 45% in 2012.

But while surcharge fees have declined in relative terms, that is only because other forms of revenue have increased faster. Surcharge revenue continues to grow, says Cardtronics chief executive Steve Rathgaber.

“Only about 25% of ATM transactions in the U.S. involve surcharges while 75% are surcharge-free,” Rathgaber says. “We don’t want a business model that only addresses 25% of the market.”

One income source for Cardtronics is revenue that comes from Allpoint, the company’s surcharge-free network that financial institutions can join so that their customers can use Cardtronics ATMs located in major retail stores without paying a surcharge. Since launching in 2003 with 23,000 terminals, Allpoint today has 38,000 in the U.S. and 50,000 worldwide.

Cardtronics also has dramatically increased the number of its direct licensing agreements with financial institutions to allow them to put their brand on Cardtronics ATMs and then offer surcharge-free use to their customers. A bank then pays Cardtronics directly for its customers’ transactions. This arrangement generates additional revenue for Cardtronics and saves the banks the cost of deploying and maintaining off-premise ATMs. Already, Cardtronics has licensing arrangements with 10 of the nation’s top 15 banks. Some 17,800 of Cardtronics’ 62,000 ATMs carry various bank brands. Branding income has grown from 12% of Cardtronics’ total revenue in 2008 to 18% in 2012.

Interchange Slips

But while surcharge revenue at Cardtronics and other retail ATM deployers remains strong, that is not the case with interchange revenue—the fee paid by financial institutions to ATM deployers to allow their customers access to cash outside their banks. ATM networks owned by Visa Inc. and MasterCard Inc., as well as many of the regional electronic funds transfer networks, have gradually reduced their interchange rates. Such reductions save debit card issuers money but crimp ATM deployers’ revenues.

Leehy estimates the industry has seen the average interchange fees decline from 43 cents per transaction in 2008 to 31 cents in 2012—a 28% decline.

Similarly, Tente estimates that while interchange rates vary greatly depending on the network, nearly all the numbers have declined. He estimates most interchange fees received by deployers are in the 20-to-30 cents a transaction range, about half of what they were five years ago.

Magnifying that problem for Leehy and some other ATM executives is the fact that many of their contracts with retailers that house the ATMs specify that most of the surcharge revenue goes to the retailer while the terminal owner keeps the interchange.

“Interchange accounted for about 18% of total income for the industry in 2008 and that declined to 11% last year,” Leehy says.

Cardtronics’ Rathgaber also has noticed the lower interchange revenue, but adds this is one of the reasons his company is moving much of its transactions from receiving “unprotected” to “protected” sources of interchange revenue. With unprotected interchange revenue, Cardtronics is at the mercy of outside networks to set rates. With protected interchange revenue, such as what goes through Allpoint or through direct licensing arrangements with financial institutions, Cardtronics negotiates the rate with banks and therefore has some control over it.

And while interchange revenue is declining, the cost to maintain ATMs is rising substantially.

“The industry has had to spend millions of dollars in recent years for ADA upgrades, including installing stickers with Braille and offering headsets so that ATM prompts can be heard audibly by customers,” says Leehy. “Those are huge investments that do not generate any incremental revenue for the terminal owners.”

Meanwhile, the emergence of EMV worldwide has added to terminal deployers’ costs. Although EMV payment cards have yet to take off in the U.S., already there is pressure to convert magnetic-stripe-reading ATMs to include chip-card readers. Leehy points to MasterCard regulations that starting this month shift the burden of fraud from card issuers to terminal deployers if a customer with a chip card uses a U.S. ATM that cannot read chips.

In order to avoid this risk from foreign customers, U.S. deployers will have to make a massive investment in retrofits or replacements to include chip-card readers ahead of U.S. EMV card issuance, Leehy says.

Lower revenue from interchange, coupled with higher costs, mean ATM deployers have to come up with novel approaches.

“Deployers are constantly trying to figure out how to make as much money as possible. They are constantly trying to reinvent themselves,” says ATM industry consultant Sam M. Ditzion, chief executive of Tremont Capital Group Inc., Boston.

One way is to offer more services beyond ATM deployment.

“You cannot just put out a box to spit out cash anymore. You have to move from an ATM unit-centric model to look at your relationship with your client and how you can cross-sell them,” says Leehy.

Payment Alliance is attempting to offer additional financial services to the merchants that house its ATMs. Leehy estimates that 46% of the 80,000 retail customers his company works with have at least one additional service beyond ATM deployment. Such services include credit and debit card processing, store loyalty programs, check authorization and remote deposit capture.

Outside of expanded relationships with retailers and financial institutions, many deployers are looking at more services they can offer consumers through ATMs. Popular products include bill pay, person-to-person payments, prepaid cards, currency conversion, and lottery tickets. Also, selling advertising to product manufacturers is getting a second look as well.

Cardtronics is excited about a pilot it has going in Minnesota where customers can buy state lottery tickets from ATMs and then pay the ATM owner a fee for the convenience. Its executives also believe newly improved software creates more digital-media opportunities for ATM advertising than were available in the past. In March, Cardtronics acquired i-design, a Scotland-based company that provides technology and services to facilitate interactive communication and advertising on ATMs.

“Cardtronics has access to over 60,000 devices. That’s 60,000 mini billboards,” Rathgaber says.

A ‘Google-fying’ World

How those devices will be used to advertise products and services will be different from the past.

“We think that there is a movement over the last 15 years, the Google-fying of the world where models of advertising and digital placements has trained and educated a market,” Rathgaber says.

Still, there are skeptics who question why these new products and services will succeed now given the spotty history of off-premise ATM deployers to move beyond cash dispensing.

“A lot of people have tried to sell additional products off the ATM and it has not worked,” says Ditizon. “Will the deployers work harder because they need to find additional sources of revenue to make up for what they are losing in lowered interchange rates? Maybe, but the consumers may still not buy into it.”

But many in the ATM industry believe that just because some of these options have not worked before doesn’t mean they can’t work this time.

“Deployers have done things like selling stamps and cashing checks. Each had regional pockets of success but they lacked ubiquity,” says Triton’s Phillips. “In order for these programs to work, they have to be widespread. Dispensing cash from ATMs is successful because customers know every time they see an ATM, they can get cash. But if some ATMs offer a product and others don’t, customers get frustrated and stop expecting to be able to buy those products there.”

And new ATM technology increases the possibilities.

“As ATMs get updated, they come with newer technology that allows them to do more than cash withdrawals,” says Ed O’Brien, director of the Banking Channels Advisory Service at Maynard, Mass.-based Mercator Advisory Group Inc.

Among other proposed options is to allow customers to make charitable donations at ATMs. Alex Karetas, director of national sales for Triton Systems, notes that Wells Fargo & Co. allowed its customers to make donations to the Red Cross after hurricanes. And while the Wells Fargo offering was “on us” as part of its community-service offerings, Karetas says there are charities who will pay a fee to ATM deployers who help them get donations.

Although prepaid cards have been tried before, Tente of the ATM Industry Association notes that new prepaid cards recently announced by Visa and MasterCard make it easier to offer these cards with fewer retrofits. One technology company pursing that niche is Mesa, Ariz.-based Better ATM Services Inc. (“Prepaid Cards From the ATM Down the Street,” January).

“The new cards are thin plastic and are the same size as standard currency. They can be dispensed using standard currency dispensers so they don’t require the retrofits that prepaid cards required in the past,” Tente says.

Another older application with a new twist is person-to-person payments. Mercator’s O’Brien believes integrating P2P payments on ATMs with mobile phones offers new possibilities.

“You can use your mobile phone to send a payment to someone and then they can go to an ATM to pick up the cash,” he says.

Yet another possible hot application is currency conversion. Both Rathgaber and Karetas say there is a strong demand for ATMs that, for a fee, tell a foreign visitor exactly how much the cash withdrawal amounts to in his native currency. Such applications, however, are primarily intended for ATMs in airports, hotels, urban centers and other locations that have many foreign travelers.

Whatever the application, many believe independent deployers will be on the cutting edge.

“Financial institutions tend to be behind on this. I expect the independents to lead the industry,” says Tente.

Indeed, some deployers welcome the challenge.

“This is an exciting time to be in this business. Our customers are looking for us to step up and be more innovative. That is what makes us stronger.” says PAI’s Leehy.