How many potentially profitable undeployed off-site automated teller machine locations exist today? People differ in their opinions, but few dispute that this is the key question facing the off-site deployment market.

There are 190,000 ATMs in the United States, 90,000 at nonbank locations. Various industry groups, manufacturers, and consulting firms predict that in three to five years ATM deployments will number 250,000 to 350,000. Historically, growth in the market has been fueled by off-site deployment; the annual growth rate at off-site locations has exceeded that of bank locations by a factor of five. This gap may narrow in the future, but off-site deployment is expected to continue to drive overall market growth.

Many of the initial off-site ATMs were placed at convenience and grocery stores. The early thinking was that a successful location required substantial foot traffic and long hours of operation. Although ATM deployment has now branched out into just about every type of off-site location imaginable and site selection has become dramatically more scientific, it is still the tried-and-true merchant segments that make up most off-site deployments. More than 80% of off-site ATMs are located in convenience or grocery stores.

For banks weighing their deployment options, it is important to evaluate all location segments. Opportunities may lie not just in convenience stores, grocery stores, or other primary segments, but in less traditional locales, such as movie theaters, lodging establishments, casinos, bars, and nightclubs.

Using the most recent data available from trade groups and government sources, there are approximately 535,500 locations available for ATM deployment in these industry segments. This estimate is based on the number of retail outlets in the United States in the categories evaluated (620,000), minus the number of ATMs currently deployed (84,500).

Although traditional deployment segments such as convenience and grocery stores account for most off-premises ATMs, these segments still have relatively low penetration rates (52% and 14%, respectively). Several other major location categories, such as fast food and lodging, seem to represent potentially large opportunities too, as they each have penetration rates significantly less than 5%.

There is a world of difference between an undeployed location and an undeployed location that could support a profitable ATM. To date, interested industry parties have focused on the former. Based on available data on average retail sales per outlet, total retail sales, average transaction size, and several other variables, we estimated monthly foot traffic at locations of various sizes in each of the segments evaluated. Based on these estimates and an assumed transaction penetration rate, we determined the percentage of undeployed locations in each segment that could support a profitable ATM on a stand-alone basis (750 transactions with a $1.25 surcharge per transaction was assumed to represent the break- even point).

Based on this methodology, as few as 11% of the 535,000 undeployed locations are qualified; that is, able to support a profitable ATM.

Opportunities to deploy profitable ATMs are dwindling quickly. The off- site market is approaching saturation, and growth rates over the next few years will be a fraction of the 30% seen in each of the past four years. Leading deployers will have to work that much harder to expand their businesses, with growth likely coming at the expense of smaller, less- sophisticated players.

Convenience and grocery stores still represent a substantial portion of the remaining deployment opportunity. Qualified locations in these segments account for 45% of the total.

Although only a relatively small number of the undeployed locations in the fast-food segment can support a profitable ATM, the sheer number and growth rate of outlets in this industry makes this segment attractive for a low-cost deployer with marketing savvy.

Other possible locations-including shopping malls, bars, and casinos- represent very small opportunities. There may be profitable opportunities in these sectors-for instance, casino locations tend to be extremely profitable-but it will be difficult to exploit such opportunities in a systematic fashion to allow for efficient terminal deployment and servicing.

So, are opportunities for deployments really as limited as the data suggest? Yes and no. Yes, in the sense that in the current ATM world, there simply are not that many undeployed locations capable of supporting profitable terminals.

But no in the sense that that world is changing. A number of factors could significantly expand the number of deployment opportunities and spark growth:

The introduction of ATMs that cost less than $5,000 and can turn a profit on fewer than 300 transactions a month.

Interest from merchants who install machines to boost incremental sales, not to generate transaction-based revenue. For example, at least two convenience store chains, Wawa and Dairy Mart, do not surcharge.

Deployers motivated to lock up "real estate" in key locations in order to secure the next generation of ATM-based transactions.

Today's off-site ATM deployment market is within two to three years of saturation, but emerging trends have the potential to dramatically expand it. Mr. Karp is a senior associate at First Annapolis. The Linthicum, Md., firm specializes in credit cards.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.