Payment Alliance International Inc. wants community banks to put their brands on its automated teller machines — a strategy that is popular among large financial companies but has gotten little use by small ones.
The Louisville payment processor, which vaulted into the top ranks of ATM independent sales organizations this month by buying NetBank Inc.'s payments business, recently formed a business unit dedicated to pursuing branding deals and says the sheer number of potential customers will support the strategy.
Observers say the work required to pursue deals with so many customers could eat into profits, though the deals also could offer higher margins than big-bank ones, because they likely will involve fewer machines.
John J. Leehy 3rd, the president and chief executive of Payment Alliance, said branding merchant ATMs is "an absolute bargain" for community banks. "They don't have to buy the hardware. They don't have to manage the network. Their customers get the benefit. It's not a branch, obviously, but it gives them that presence, which for a community bank is invaluable."
These are much the same arguments behind the big-bank branding deals, but Payment Alliance is pursuing smaller customers because its processing operation already has more than 300 community bank customers, and Mr. Leehy hopes to leverage those relationships.
Steve Kenneally, the vice president payments and technology policy for America's Community Bankers, said that Payment Alliance is an early mover in this field. ATM branding among community banks is "not real prominent" now, but it is "a great opportunity if the terms of the deal are right."
On May 1, Payment Alliance bought all the assets of NetBank Payment System for about $18 million. These assets were mostly servicing contracts to operate about 8,500 merchant-owned ATMs; NetBank owned just 5% of the machines.
Payment Alliance previously owned and operated about 400 ATMs, but buying the NetBank business made it the No. 3 ATM operator, behind Cardtronics Inc. of Houston, which has 25,000 machines, and TRM Corp. of Portland, Ore., which has nearly 11,000.
Over the next year Payment Alliance expects to replace the NetBank signage on the acquired machines with the names of "banks and other companies that are looking to create more brand recognition for themselves."
Deploying merchant ATMs is tough business, because the ever-increasing number of money machines in the country is driving down volume (and transaction fees) per machine. People using debit cards to receive cash back at the point of sale is also affecting ATM volume. Branding arrangements typically allow a bank's customers to use the machine for free; the bank pays the machine's operator a monthly fee to cover the lost revenue.
Mr. Leehy said a bank partner would share in the cost of installing and maintaining the ATMs.
"Branding is a promising revenue stream, independent of whatever cost realities you might face," he said. "I see branding as an opportunity to leverage this presence, even if there weren't pressures on surcharge, and even if there weren't occasional reductions on interchange income."
JPMorgan Chase & Co., Sovereign Bancorp Inc., Washington Mutual Inc., PNC Financial Services Group Inc., and Huntington Bancshares Inc. have signed contracts to put the their names on machines operated by Cardtronics.
NetBank Payment Systems also had some branding agreements with community banks, Mr. Leehy said. (In recent months NetBank has shed several units to focus on its core banking operations.)
Jeffrey F. Brotman, TRM's chief executive and president, said that the community banking market is ripe for branding deals, and that his company already has some contracts with small banks.
"Absolutely, positively you can make money. No question about it, it's a good business opportunity," he said.
In fact, small banks could be easier to land than big ones, he said. There are only so many big banking companies, but there are thousands of community banks, so "there's a lot more opportunities" for branding arrangements.
Furthermore, supporting big-bank customers can be "more challenging," because they require both a certain level of "density" in their ATM placements and long-term contracts with large merchants, Mr. Brotman said. "The community bank model may have more possibility, because you don't need to have as many stores, or long-term contracts."
Leon Majors, the president of ESP Payments Research Group, a division of Phoenix Marketing International of Rhinebeck, N.Y., said that when it comes to small-bank branding deals, the devil is in the details.
Because ATM volume could fall every year, the owner needs to make sure the banks' fees are high enough to support the machines, he said. The strategy has the potential to make money, "but it's going to take a while to see if those relationships pay off."
Tim Sloane, director for debit advisory services for Mercator Advisory Group Inc. of Waltham, Mass., said that pursuing community banks would require the ATM owner to manage numerous contracts, all with different terms, and to connect its machines to many different banks' networks.
All this work will drive up the cost of servicing those deals, he said. Branding is "a scale game."
Mr. Leehy agreed with that assessment but said that small-bank contracts typically will involve fewer machines than big-bank deals and therefore are likely to have higher profit margins.
Gwenn Bezard, a research director at Aite Group LLC in Boston, said he has his doubts about the entire community bank branding strategy. "The fact is the number of transactions at ATMs are going down, and community banks won't have enough money for branding," he said. "I have a hard time seeing how they're going to make money."
Payment Alliance was formed about two years ago. It is backed by the private-equity fund Inverness Capital Partners LP.
Eventually, Payment Alliance hopes to move beyond basic ATMs and offer payment kiosks, which can handle a wide variety of transactions. 7-Eleven Inc. already has such kiosks in some of its stores, and U.S.Bancorp is developing them.
"Some of the things" that a kiosk might do "are predictable — people are talking about not just spewing coupons, but running marketing programs, interactive programs, lotto tickets, and other services," Mr. Leehy said. "I think those are the things that are easy to see coming, but I don't think those represent the greatest incremental lift in value that you get from that customer relationship."
He hopes to develop capabilities that will pull "customers from out in the lot and bring them inside in a way that simple access to cash historically hasn't."
Mr. Bezard, again, said he was dubious. "Very few companies will make money off of these kiosks, because of the costs of the hardware, and so far we haven't seen any killer applications."
