For the last two years, automated teller machines were like Beanie Babies, flying out of factories as fast as buyers could take them in.

Now that ATMs are routinely placed in grocery stores, office buildings, hotel lobbies, and countless other nooks and crannies, machine makers and deployers are beginning to face the consequences of market saturation.

Such alarms have been sounded several times over the last 10 to 15 years, but this may be the real thing.

"Supply far exceeds demand," said Jerry Hergenroeder, vice president of Speer & Associates, the Atlanta consulting firm. The industry has "reached that lull where things need to settle down a bit."

The market for ATMs away from bank premises soared in 1996, when the Cirrus and Plus networks lifted their bans on surcharging. The new revenue stream led some banks to get aggressive. In 1997, at the height of the trend, Banc One Corp. revealed plans to install 20,000 ATMs within five years-a number more likely to be associated with the larger multibank networks.

Banc One continues to cut deals with major retail chains. Citicorp recently announced an agreement to put 3,000 ATMs in Blockbuster Video stores.

"Our goal is to continue to build in an aggressive way an off-premises ATM program," said David Thomas, general manager, electronic delivery, Banc One. "The speed with which that program builds and the total number of machines are dependent upon the ability to find and develop relationships with host retailers."

But with the rapid growth, transaction volumes per ATM are down, the profit windfall harder to sustain. In a sign of the times, Diebold Inc. announced last week it would lay off as many as 600 workers because fewer banks are ordering its ATMs.

The Canton, Ohio, manufacturer said its bank customers are too preoccupied with mergers and year-2000 compliance to expand their ATM empires. BankAmerica Corp., NationsBank Corp., Banc One, First Chicago NBD Corp., Wells Fargo & Co., and Norwest Corp. are all Diebold users.

"A lot of these mergers have been positive for Diebold," said John Kristoff, a company spokesman. "But they have certainly created a near-term slowdown in orders."

Diebold's closest rival, NCR Corp. of Dayton, Ohio, has also seen orders from major customers decline. Banks are "reevaluating the profitability" of off-premises ATM deployments, said Andy Orent, vice president for self- service at NCR.

While Diebold's business is concentrated in the United States, 70% of NCR's is in other countries, where ATMs are less pervasive. Mr. Orent said NCR sees growth coming from foreign markets and from smaller convenience store chains and retailers, which continue to order batches of 100 to 300 machines.

Matthew Wolfersberger, an analyst at McDonald & Company Securities Inc., Cleveland, said Diebold has suffered internationally from the termination last December of its distribution agreement with International Business Machines Corp.

Ernest L. Burdette, president of Triton Systems Inc., which makes compact ATMs for the off-premises market, said he remains optimistic.

April was "the second strongest month in the history" of the Long Beach, Miss., company, Mr. Burdette said. Triton's major, nonbank customers are still buying. And the company is expanding into Canada, the Caribbean, and Latin America.

An annual American Banker survey of ATMs at the top 100 banks showed that deployments had increased 20% in 1997, bringing the total number of machines to 68,727. A Bank Network News survey reported 165,000 bank-owned ATMs at midyear 1997, and The Nilson Report said 48,901 ATMs were shipped in the United States last year.

Average transactions per machine per month dropped to 5,545 in mid-1997, from 6,580 in 1995, said Bank Network News. Industry experts said volume has now dipped below 5,000.

Banks have also had to fight bidding wars with nonbanks for prime retail space. Savvy retailers, recognizing the value of their property and the revenue potential, are installing their own machines.

Add up these factors, and banks' ATM margins are "being cut thinner and thinner," Mr. Hergenroeder said.

Meanwhile, growth in ATM cardholders is not keeping pace with the numbers of machines.

And as major banks merge, transactions that once yielded "foreign" transaction fees and surcharges will be considered "on-us"-the fees will go away.

Banks have "put a whole lot of ATMs out there," said consultant Alanna Kellogg, president of Kellogg Group in St. Louis. "There comes a point where you have to add users, figure out ways to further reduce costs, or increase income from nontraditional sources"-all open questions at the moment.

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.