ATMs: Sur(char)ging Ahead

Growth in off-premise ATM installations grew beyond expectations in the past two years and is set for another surge with the introduction of direct charging in 2005. But, before you rush to go with the tide, prepare yourself to negotiate a contract that works for you now - and into the future.

When Australian Convenience Store News last looked at ATMs, there were about 14,000 units in Australia, of which about 25%, or 3,500, were merchant or 'off-premise' machines. In only two years the total number of ATMs has grown by 50% to more than 20,000 machines, of which nearly 60% are off-premise and nearly 20% in convenience stores. Most prime sites of the major petrol and convenience networks have ATMs.

Source: Reserve Bank of Australia: Points of Access to the Australian Payments System

Less than 10% of off-premise machines are owned by the banks; the rest are either owned by the retailer (not many) or by an ATM deployer – a company that specialises in the supply of ATMs. The top four deployers are Cashcard (now First Data International), ATM Solutions (owned by Bank of Queensland), Banktech and Travelex. St George Bank has a network of ATMs in its branches and is a competitive supplier of off-premise ATMs through a separate merchant services group that also supplies EFTPOS and e-commerce services, in competition with other ATM deployers.

Nearly all the ATM growth is at off-premise locations driven by falling costs. Not only has the cost of equipment fallen significantly as the technology matures, but also the ongoing cost of communications is lower.

“ When we started in this industry in 2000, the first 500 transactions paid for the capital cost of the machine; now we only need 350 transactions per month,” says Tim Wildash, General Manager, ATM Solutions.

“ ATMs are now more viable in more locations,” he explains.

“ We compare it to the rings of an onion. The ‘A-ring’ (over 5,000 transactions per month) was the domain of the big banks. The ‘B-ring’ (2,500-5,000) was filled when the independent deployers started putting machines in other locations. We have just about filled the ‘C-ring’ (approximately 3,000 transactions per month), and the growth is now in the ‘D-ring’ (from 500 to 3,000). This is being filled rapidly, although the machines in the ‘B-’ and ‘C-rings’ also need replacing. The next group of locations to be considered is the ‘E-ring’ with transaction volumes less than 500 per month.”

As lower costs are making ATMs with lower transaction volumes viable, average transaction volumes are falling across the network. Transactions per ATM per month fell from nearly 4,000 five years ago to 3,000 in 2003-04. This average hides a wide disparity in transaction volumes with bank ATMs in key branch locations reaching up to 25,000 per month and some off-premise ATMs operating on 1,000 per month. Transaction volumes are expected to continue to fall until such time as the number of ATMs reaches saturation level – not easy to predict how many and when. However, from then volumes will grow with the growth in convenience sales, around 7% per year.

The average value of transactions is fairly stable at just under $180 across the network; it is closer to $80 in C-Stores. That’s $80 cash in the hands of a customer waiting to be spent. In the US, 65% of the cash withdrawn at an ATM is spent in the same stores, according to a 2002 survey by the National Association of Convenience Stores.

“ With an ATM, the store becomes a destination,” says Michael Minassian, National Manager ATMs, Travelex Limited. “It brings people through the door, and they spend more.”

“ Customers also like to use ATMs in well-lit, safe locations such as C-Stores,” adds Tim Wildash.

“ An ATM can generate up to $100,000 per month additional cash in the store. If you sell only an extra $20 worth of goods for every $80 withdrawn from the ATM, that’s nearly $7 extra profit based on a 33% margin.”

That’s before any consideration of fees, which in part depends on the number of transactions and pricing structure negotiated with the supplier. An ATM is definitely better for the retailer if it means customers do not use EFTPOS to take cash out.

Surcharge it

To the extent that you do share in the fees generated by your ATM (see section on contracts below), changes to the Reserve Bank regulations covering the surcharge are likely to make ATMs even more attractive to retailers.

Most customers pay $1.50 when they use any ATM other than their bank’s. Under the current rules, the customer’s bank charges an interchange fee (around 43.5 cents) to the switching bank. The switch cost is about 4.5 cents, the settling bank takes about 20 cents, and the cost of communication is about 7 cents. That leaves 75 cents split between the ATM deployer and you, the merchant. Although customers know it costs them to use an ATM other than their bank’s through their bank statements, it is not revealed at the time of the transaction.

There are two key aspects of this situation that concern both the RBA and the ACCC: the interchange fee and the absence of disclosure. That is why the new regulations include a shift to direct charging and the requirement for customers to be advised of the fee before they undertake the transaction.

“ St George Bank expects direct charging to be introduced within two years,” says Tim Ohlmus, Business Manager ATMs, St George Bank. “That means the fee will be set by owner/operator of the ATM and shared between all parties to the transaction by negotiation. This is good for the consumer and the industry. We expect competition to keep the fee at a reasonable level.”

With direct charging, the interchange fee is likely to go, leaving more of the fee to be shared between the deployer and the merchant (although the banks might start to charge for other services such as balance inquiries). Industry participants also expect the fee to vary between $1.00 and $2.50 depending on the location of the ATM. It also means no disloyalty fee with all ATMs charging all users a fee.

This and the requirement to notify the customer of the fee with every transaction is likely to lead to the major banks rationalising their ATM networks over time, to be replaced by off-premise ATMs.

“ When direct charging was introduced in overseas markets there was an increase in the use of non-bank ATMs and banks moved away from ATMs,” says Michael Minassian.

“ Banks do not want to be associated with charges, and this is an opportunity for deployment of non-bank ATMs by deployers such as Travelex.”

“ We expect the interchange fee to be abolished and the direct charge to be capped at $2.00 or $2.50,” says Tim Wildash.

“ The new regulation should be announced within six months, with all parties being given another 12 months to prepare hardware and software.”

To the extent that merchants and deployers can earn higher fees, it may make more locations viable, even those with volumes as low as 250 transactions per month.

Dean Talbot, Business Development Manager, NCR Australia adds: “The RBA is likely to set a maximum fee. Some recent growth in the ATM market was in anticipation of direct charging without a cap on fees. Some deployers and merchants will be disappointed.”

Don’t be disappointed

Declining average transaction volumes and fundamental changes to the regulatory regime governing fees are just two reasons to be careful when entering into an ATM contract; the third is the pending introduction of “Triple DES”, which will make some machines obsolete while others will need to be upgraded. From June 2005, Single DES (data encryption sourcing) which is the eight-digit security code that accesses the system will be replaced by Triple DES, a 24-digit code. The cost of upgrading ranges from $245 to more than ten times that amount.

All this fundamental change in an industry that locks retailers into long-term contracts for typically five years!

That means retailers must make sure there is flexibility and balance in their ATM contracts. Of particular concern are long-term contracts that provide a large up-front fee to the ATM salesperson, then pass the asset over to a third-party finance company. This means there is no incentive for the deployer to look after the ATM or the retailer.

“ We only make money when the ATM is working,” says Tim Wildash.

Similarly, Travelex retain ownership of their machines and support them.

“ We offer an end-to-end service with customised ATM packages for retailers in all channels, and all sizes,” says Michael Minassian. “Terms are negotiated with the merchant to suit – either a rental agreement or revenue sharing. This usually means no cost to the retailer, but the more the retailer is involved the better the return. Doing your own cash filling is a source of incremental return.”

If you do choose to do your own refilling, make sure the notes are good quality – not torn, wet or sticky. Also avoid brand new notes unless you run them through a counter or fan both ends because they tend to stick together.

“ The type of contract is the retailer’s choice,” says Tim Wildash. “If someone wants to buy the ATM outright they can have it; if someone wants to rent it through their own finance company they can; if they want us to provide it “free”, we will take the first 400 transactions; and if we find a great site we might offer yearly rental. This suits people who don’t want any involvement or uncertainty.”

Either way, one of the most important tasks before entering into an ATM contract is estimating transaction volumes.

“ We make a thorough assessment of transaction volume based on the location, and so should retailers,” says Tim Ohlmus. “We base it on store demographics, foot traffic, security, visibility, and the number of other ATMs in the area. We usually require a minimum of 1,000 transactions per month but it depends on the pricing structure. We try to balance the return to the bank and the merchant.

“ The retailer should have some idea of the potential number of transactions based on foot traffic and EFTPOS cash withdrawals before negotiating with a deployer.”

“ The most common deal with ATM Solutions is a ‘free’ machine, with the retailer earning 45 cents per transaction in excess of 400 transactions per month,” adds Tim Wildash.

You also need to consider what type of machine suits your customers. ‘Cash-and-dash’ is the most popular in C-Stores because they are simple and easy to maintain. ATM Solutions deploys mainly Triton machines which can be fixed remotely, and recommend single-cassette models because they are the most reliable.

Although functions such as bill payment and ticket purchasing did not take off as expected, advances in technology are increasing both the range of functions and the places where ATMs can be safely located.

“ Windows and wireless technology can increase functionality in C-Stores, providing opportunities for additional revenue,” says Dean Talbot of NCR.

NCR is the world leader in ATM shipments, supplying across the market from configurable devices designed for a high level of transactions to simpler cash-and-dash machines.

The migration from the OS2 operating system to Windows opens the way to advertising and promotions with coupons.

“ The NCR solution is independent of the switch,” says Dean Talbot. “That means the advertising and promotion function can be controlled by the retailer. Coupons can be tailored to the store and change for different times of the day. Coupon redemption can be very profitable.

“ The fear was that people did not want to watch advertising on the screen. But if the transaction does not take any longer then there is an opportunity to generate revenue without putting the consumer off. With special coupons and promotions consumer may welcome it.”

“ We are trialling coupons and advertising screens,” adds Tim Wildash. “The coupon might say ‘two for the price of one’ or other incentive to buy in the store. There is a service station in the Flinders Ranges that sells the first two-litre Coke for the normal price and with the coupon the second bottle is $1.50. That is a great earner for the owner.”

NCR’s Cash4all is a portable wireless ATM fitted with ink staining technology to deter theft. Although transaction costs are higher, they are quicker and cheaper to install. Cash4all machines can be installed in the outdoor at, for example, popular beaches, and will add to the strong growth in ATM numbers.

Travelex launched ‘dynamic currency conversion’ for all transactions, including ATMs, in September. This means foreign card holders can see how much the transaction costs in their own currency and can keep track of financial transactions in own currency while overseas.

ATM Solutions covers all communication and maintenance costs. This is important. St George and Travelex also take responsibility for maintenance as well as technical support and upgrades.

“ People have been caught in the past by not reading or understanding the contract,” warns Tim Ohlmus. “Ask yourself, ‘What is the business going to look like in five years?’ ‘What if I sell my store?’ ‘Are their out clauses if I am not satisfied with level of service?’”

Another key consideration is security. Don’t become a target for ‘ram raids’ by placing your ATM next to doors and windows. There is a lot more to this important issue which is comprehensively addressed in the ‘Recommended Security Guildelines’ prepared by the ‘ATM Security Working Group’ in the UK, and available from the ATM Industry Association (ATMIA).

ATMIA also offer good advice and can, in some instances, help you to renegotiate a ‘bad’ contract. They can be found initially at www.atmiaaustralasia.com

This is how we ended the on-site banking feature in July/August 2002:

• Shop around, talk to a range of suppliers, and ask lots questions.
• Talk to other retailers and choose a supplier with quality customers and a strong reputation.
• Discuss the decision with your accountant and have your lawyer read the contract.
• Make sure you understand the contract yourself.
• Make sure you are aware of your legal and regulatory responsibilities.
• Clarify all cost components - who pays for what - look for the hidden costs.
• Consider long-term trends and how well the supplier will meet your changing needs.
• Be aware of how the ATM provides value to the supplier - it has to make sense for both of you.

This at least has not changed.

Congratulations to Tim Wildash, General Manager, ATM Solutions and Executive Board Member of ATMIA, who won second prize in the 2004 global ATMIA awards for best contribution to promoting the interests and growth of the ATM industry. This is the first time an award has been made outside the United States.