The headlines continue to remind us that automated teller machine deployers are cashing in on the retail marketplace.
Banc One just installed more than 3,000 machines in convenience stores- like BP Express, Dairy Mart, SuperAmerica, Emro, Exxon, and Conoco-and at large retailers, like Sears and Kmart. KeyCorp announced it would install 850 ATMs in Arco convenience stores in the West, and U.S. Bancorp recently announced that it had installed ATMs in Chevron stations in 11 states. The list goes on and on.
By my calculation, almost 22,000 of the ATMS installed in 1997 were at nonbank sites, or more than 84% of the units installed last year. Why are so many banks interested in the competitive retail market? The answer is fairly straightforward: money.
Though much has been made of surcharging, many store owners understand that ATMs bring customers in and increase average sales per customer. It is intuitive that anything that puts cash into consumers' hands makes it easier for them to spend. As more and more stores install ATMs, competing retailers feel they must follow suit as a defensive move.
Once people find a store where they can not only buy gas and a soft drink but also get cash and postage stamps, they are likely to visit frequently. And the store owner is generating income not only from the customers' purchases but also from lease payments (or a share of revenue) from the cash machine.
Retailers can also use ATMs to save on operating expenses. For example, about three-fourths of all supermarkets sell postage stamps, typically with no markup. This customer service is a cost with no direct income. However, an ATM can offer the same service and amass revenue for the store. Since most consumers feel pressed for time, many are willing-although grudgingly- to pay for convenience. After all, isn't it worth the common charge of 64 cents per sheetlet to save a trip to the post office?
Surcharges at off-premises ATMs must be selected cautiously. The fees must match the value to the cardholder. Also, noncash transactions-like postage stamp and gift certificate dispensing, statement printing, and phone card sales-can make a difference as ATM services grow increasingly commoditized.
Many banks consider it impossible to make money with ATMs that generate fewer than 2,000 transactions a month. But other deployers-banks and nonbanks-have found ways to skirt this problem. Some have found operating models that reduce the cost structure. Some use machines that have dial-up communications, or fewer or less expensive security features. In some cases, store employees service the machine or put in minimal store cash. Some machines bolster revenues by surcharging all cardholders.
Research has shown that consumers are more apt to use machines with recognizable brand logos. A 1995 survey by Payment Systems Inc. of Clearwater, Fla., found that 48% of active ATM cardholders do not use foreign ATMs. Indeed, three large independent sales organizations operating 4,150 ATMs reported average volumes of just 383 transactions per month.
Aside from selecting a well-known brand, another way to add value to the site is by choosing an appropriate machine format. According to Mentis Corp., Raleigh, N.C., 63% of off-premises ATMs are freestanding; 23% are installed through a wall; and 14% are drive-ups.
In a low-volume location, a lobby ATM makes the most sense, since it costs the least to install and, if necessary, to relocate. In sites with greater volume potential-for instance, a combination store like a Wal-Mart SuperCenter-high customer counts may justify the extra cost of a through- the-wall or drive-up ATM. These machines generate higher volumes because of their visibility and access.
A simple suggestion for deployers is to prepare an economic model comparing what they expect to generate with a lobby machine to what could be generated by a wall device. Determine what volume is needed to generate the same return or profit. If the additional volume needed to justify the cost of a through-the-wall machine is slight-say, under 25%-then it may make sense to try one.
How should deals be structured between deployers and site owners? In some locations, particularly older installations, the site owner can get a space rent-for instance, $500 a month or more for a shopping center location. A more popular structure these days is to have a bank or other deployer install and operate a machine, pay no rent or a token amount, and pay the site owner based on transaction volumes over a certain threshold. Some deals sweeten the pot for site owners, the higher the transaction count goes.
Another approach is for the site owner to own and operate the machines. This way, the retailer must spend the capital and assume the operating risk but keeps any profits. Thus, the site owner takes control of the machines but has the burden of operating the system.
One suggestion for banks in structuring deals is to become partners with the site owner whenever practicable. It is better to have both parties working to make the pie bigger than to fight over who gets what part of a smaller pie.
Retailers have a number of strengths to bring to the table. They generally know their stores best, control where machines and signs are placed, and can minimize costs by letting machine owners plug into their alarm systems and other utilities.
Financial institutions have different strengths: deployment expertise, infrastructure, and a brand name that can increase volume and store traffic. Retailers who want to increase sales are often swayed by banks' willingness to use their own advertising resources-statement stuffers, media spots-to bring cardholders into retail stores. This is something that nonbank deployers typically cannot do.
Who will win the war for sites? Retailers, ATM owners, ATM vendors, and- most of all-consumers, who will have convenient access to cash anywhere they go.
