The retail ATM-those nonbank-based cash-dispensing machines that beckon consumers from every corner-celebrates its 10th anniversary this month, but you won't see many banks at the birthday bash.
"Initially, banks were the perfect match and they got involved from the standpoint of wanting the coverage and ownership, but they've been getting out," says Alan Falconer, svp of consulting firm Paragon Data Services. "A lot of factors have gone against that strategy," he says, noting that off-site bank-branded ATMs were not always good for the bank's brand. "There is that little sour taste in people's mouths about the surcharges," he says, noting that some banks no longer brand their off-site ATMs for that reason.
Banks, which once dominated off-site ATM ownership, now own less than half of all retail ATMs, according to Dominic Hirsch, managing director of Retail Banking Research. In most cases, the volumes of transactions at those machines don't justify it, so it's not so profitable," he says, noting that the U.S. is home to about 380,000 ATMs, or slightly less than one-third of the world's total of 1.3 million. "In terms of the retail banking system, they can't argue they are improving service to the regular banking customers and that it's a core activity." Banks' sponsorship of retail ATMs, which is now dominated by independent-service providers or retailers themselves, slowed in the 1990s when banks began eliminating low-margin operations.
"Banks built their ATM business on a business model relevant to banking, but the ISOs didn't," Falconer notes, pointing out that ISOs pursue third-party maintenance and processing services, for example, while many banks don't. "It made more sense for the ISO to look at this with a clear sheet of paper and built a business around ATMs rather than being a bank trying to fit the business model into the retail mode."
Triton Systems of Delaware was a pioneer in the birth of the retail ATM: It rolled out the first dial-up machine with a true cash-dispensing mechanism-the Triton 9500-in a convenience store in June 1994 in Diamondhead, MS, according to Ernest Burdette, president emeritus and co-founder of the ATM manufacturing giant in Long Beach, MS. Of course, there were no fees or surcharges then, he says.
Later that year, after the company shipped 75 more ATMs to the Bank of Omaha, Triton officials continued to field requests from convenience stores and other merchants who wanted more on-site ATMs to spark consumer spending. "Banks were the first to go into retail locations and that's what created all the pull we felt in the marketplace," he recalls. "But retailers were telling us that 'We'd like to get an ATM, but a bank won't come into our store to place one.'"
The company ATMs-its 100,000th came off the production line in February of this year-have evolved a great deal from their early cousins: Now they can cash payroll or government checks, add time to prepaid telephone cards, and handle cash transfers via Western Union.
Falconer says banks have found that off-site ATMs weren't as profitable as they had hoped. Not only do banks spend more on ATM rental locations, machines and maintenance than do ISOs, banks require an average of 1,500 transactions per machine per month to be profitable, while ISOs can often justify the cost with only 400 transactions. Bank ATM machines are often more high-end, costly an average of $20,000 each, while nonbank ATMs average less than $10,000 each.
Retailers, however, are less interested in transaction volume than in providing available cash for consumers. "From a retail perspective, he may be prepared to own the machine, even if he earns no money," Hirsh says.
But a handful of banks are still inking deals to get their branded ATMs at nonbank sites, including Cincinnati-based Provident Bank and Minneapolis-based U.S. Bank.
Provident Bank is renewing its agreement to operate ATMs at188 United Dairy Farmers locations in Ohio, Indiana and Kentucky for another five years. The bank, whose $2.1 billion purchase by Cleveland-based National City Corp. is expected to close in July, operates 480 ATMs in Indiana, Ohio and Kentucky, including at Wal-Mart, Sam's club stores and at Paul Brown Stadium, Great American Ballpark and Riverbend Music Center. The bank also has two mobile ATMs for deployment at summer festivals, fairs and sporting events in the greater Cincinnati area and offers 40 bilingual-Spanish and English-ATMs in Cincinnati and Dayton.
For Provident, having a bank-branded ATM off bank premises helps keep its name front and center in a highly competitive marketplace where it's No. 2 behind First Third-with U.S. Bancorp close behind. "Fifth Third has a lot more branches, so having these extra ATMs helps provides us a little more access to our customers," says Steve Walsh, evp in the Retail Banking Group at Provident. "It mitigates some of First Third's advantage. It's driven by the value to the brand."
Retail ATM business is not a major focus for the bank. however. "It's not something we're looking to grow," says Walsh. "We'll evaluate any current relationships that come up, but we're not soliciting any new ones. But that said, we're happy with the ones we have, even though we're more driven by better [customer] access and the distribution benefits than motivated by making a lot of money."
Although he declined to discuss the profitability of the line, he says it's definitely a factor. "If I could have another 500 ATMs and break even, sure, I'd do it," he says. "It's not a line of business for us. We also have ATMs in the Wal-Mart stores in Ohio and Kentucky and Indiana. Do we make any money on that? Yeah, but we don't make any material on it. The Wal-Mart deal gives us better distribution, though."
Officials at U.S. Bancorp, which has more than 4,425 ATMs in 24 states, say their moves into the retail ATM market also is all about the customer. The bank, for example, recently partnered with the St. Louis-based convenience store chain QuikTrip, to roll out 60 ATMs at stores in the St. Louis metropolitan area, which will be free to U.S. Bank customers. The news follows a similar partnership announced last month between U.S. Bank and Utah-based Smith Food & Drug Stores, in which the bank deployed in-store ATMs throughout the state.
"We really look at all of our channels as convenience for our customers and ATMs is one of those," says Mary Blegen, svp of 24-Hour Banking, who notes that more retail deals will be announced soon. "It's about brand. It's also about giving our customers access and convenience. ... We always try to run everything as profitably as we can. Customers need different access points. We look at trying to keep a nice balance."
Banks aren't likely to get back into the retail ATM game anytime soon, say observers, as they contend with emerging regulatory issues, such as mandated audio ATMs to comply with the Americans with Disabilities Act, the move toward the enhanced security of Triple DES encryption, and whether to offer check-imaging ATM capabilities. Nevertheless, Falconer says banks will always work with merchants, particularly large chains. "Many banks have strong merchant and commercial relationships and will naturally spawn those kinds of [joint ATM] relationships," he says, although now many retailers are buying their own ATMs.
