Off-premises automated teller machine operators have two ways to take business away from competitors.
One is going to the merchants that own ATMs and persuading them to switch processing networks after their contracts expire. The second way is persuading merchants to networks before their contracts expire.
Anecdotal evidence suggests that the latter tactic, often referred to as "poaching", is a practice on the rise, insiders and analysts say.
Leon Majors, the president of Phoenix ESP Payments Research Group, says that thousands of ATM processing contracts are near expiration, and that the stiff competition for these contracts makes for fertile ground.
It is hard to measure the effect of poaching on the competition for those contracts. There are apparently no figures available on the number of machines that are rerouted in this way, and it is not clear whether the issue has ever led to any legal cases.
The mechanics of the practice are relatively simple, said Jeff Sonnek, an analyst with Friedman, Billings, Ramsey Group Inc.; an ISO simply reprograms a machine to route transactions through their processing platform instead of the original operator's grid. ATMs do not have a special control that can lock the programming and prevent poaching, he said.
"If you know how to work with ATMs," he says, "it's a five-minute deal."
The Portland, Ore., ATM operator TRM Corp. said that the number of machines it was operating at the end of the third quarter dropped 11% from the same point last year, to 17,588. Jeffrey Brotman, TRM's president and chief executive, attributed the drop to attrition - when a merchant either switches to a different processor or gets rid of its ATM.
When poaching does occur, said Mr. Sonnek, the machines will show up in the poached company's attrition figures. "One day an ATM operator will look on its grid and see that that a machine no longer is there."
ATM operators are often reluctant to discuss poaching, because it is tough to stop, and because seeking legal remedies can be difficult and costly. The expense often does not justify the gains that can be made, according to operators, unless a single vender has made deep inroads into an operator's customer base.
Mr. Sonnek said that part of the problem is that some merchants who knowingly violate their contracts before they have expired do so because the deals offered by competitors may include processing fees low enough to cover the penalties they would have to pay to their current processor.
"It's an issue that we deal with on a regular basis, like other ATM deployers," said Dawn Thompson, the director of marketing for Cardtronics Inc. "But I wouldn't call it significant, because our customers are very pleased with the services we provide them."
The Houston ATM operator operates more than 25,000 ATMs, in national retail chains and mom-and-pop stores.
Ms. Thompson said merchants that have several ATMs and processing deals with multiple operators are most likely to be approached. The independent sales organizations that operate other ATMs frequently attempt to take away Cardtronics' business by offering merchants a higher share of revenue from the ATMs' surcharge fee, even if a contract with Cardtronics is still in effect, she said.
Contracts in the industry typically last for five years, though they can vary significantly. Mr. Sonnek said money is usually the key motivation for merchants to break their contract, since processing is a "pennies business."
Mr. Brotman said, "Poaching is a problem, but not a material problem. It's part of the overall attrition and retention of these merchant contracts. You're going to get some players who don't play fair. It's a part of the business we need to manage."
TRM has been more aggressive recently about enforcing its merchant contracts, usually by assessing penalties that are written into the contracts, Mr. Brotman said.
He said he hopes that word of TRM's new stance will spread among merchants and dissuade them from allowing other vendors to take over their machines.
"We have to make sure our penalties disincentivize that type of behavior," he said.
