Cardtronics Inc. has nearly completed the transition to in-house processing for its automated teller machines and is planning to offer the same service to banks that want the company to manage their ATM networks.
The Houston ATM operator's main service for banks now is permitting financial companies to place their brands on its machines, but that business has declined sharply this year, according to Chris Brewster, Cardtronics' chief financial officer.
"Growth in bank branding revenues has slowed," Brewster said during a conference call with analysts last month to discuss the company's first-quarter earnings results.
"Bank management teams are obviously somewhat distracted by other issues," Brewster said.
About 10,200 of Cardtronics' 33,000 ATMs currently bear financial companies' logos. The branding deals are generally seen as a low-cost way for banks to extend their ATM networks without purchasing and installing the machines themselves.
Brewster said Cardtronics is radidly moving its ATMs to its in-house processing system.
"We had approximately 14,000 machines on our in-house switch as we entered the first quarter of 2008 and about 27,000 machines, or almost twice as many, as we entered the first quarter of 2009," Brewster said.
Jerry Garcia, Cardtronics' chief information officer, wrote in an e-mail that the company expects to be processing almost all of its ATM transactions in-house by yearend, except for 3,500 cash dispensers it picked up when it purchased 7-Eleven Inc.'s ATM network in 2007.
The balance of the ATMs will be moved to the Cardtronics processing system next year.
"We are in the process of converting our ATMs from various third-party transaction processing companies to our own EFT transaction processing platform, thus providing us with the ability to control the processing of transactions conducted on our network of ATMs," Garcia wrote.
"In addition, our in-house processing capabilities provide us with the ability to increase the types of products and services that were are able to offer to financial institutions."
Rick Updyke, Cardtronics' president of global development, said during the earnings call that offering processing services creates new business opportunities for his company.
"The opportunity for us is that we manage large self-service networks," Updyke said. "A lot of banks are looking to providers who are experts in that area, and we fit very nicely, obviously, in that space."
Kate Monahan, an analyst with the Boston research company Aite Group LLC, said regional and community banks would consider handing off the management of their ATM networks.
"There are definitely a lot of opportunities to pick up business from banks that want to outsource management of their ATM operations," Monahan said. "Small and start-up banks want an ATM channel, but they don't see ATMs as a profit center. They feel by outsourcing ATM management, they can reduce their head count. When upgrades or new machines are needed, the vendor will handle it."
With its in-house capabilities, Cardtronics can offer banks such services as back-office processing and ATM driving, Monahan said. But while small and start-up banks are fertile ground for ATM management outsourcing, big banks are probably less interested in outsourcing such services, she said.
"Large banks consider their ATM networks key to their customer service offerings, so they process their ATM transactions in-house," Monahan said.
Cardtronics' in-house processing platform would help the company compete with Fiserv Inc., said Franco Turrinelli, an analyst with William Blair & Co. in Chicago. Fiserv provides banks with transaction processing as part of a wide range of services. "Obviously, ATM processing is a good business for Fiserv, so it is an appealing target market for Cardtronics," he said.
However, Cardtronics may delay its push to offer ATM processing to banks until after it has found a new chief executive to replace Jack Antonini, who left the company in March.
Fred Lummis, Cardtronics' chairman and interim chief executive, said during the earnings call that Antonini and the Cardtronics board disagreed over its strategic direction.
"Jack was here for six years," Lummis said. "He led the company through a period of profitable growth from a time when the company was much different than it is today. The board was focused on some changes in our direction."
Finding Antonini's successor may take some time, Turrinelli said.
"The company is focusing on current operations, and any update to the strategic plan with have to wait for the selection of a new chief executive officer, a process that is under way but that appears to us to be in the relatively early stages," Turrinelli wrote in a research report.
