Gaining Critical Mass

  There was a time when independent sales organizations operating automated teller machines were considered bottom feeders, taking small parts of various ATM services in retail locations and making a business of them.
  But operating non-bank-branch ATMs is becoming big business, and several emerging national ISOs are trying to define and refine their business models as their operations become more complex.
  The results of a new survey by CCM sister publication ATM&Debit News of ISOs found record consolidation occurring in the off-premise ATM business. In this year's survey, conducted in June, the top 10 ISOs operated some 68,400 ATMs, up 15% from approximately 59,500 ATMs last year. Most of the ISOs' ATMs are in retail locations.
  The increase comes as the largest ISOs acquired ATM contracts held by smaller organizations and banks. It did not come about as the result of significant growth in new retail deployments.
  The top ATM operator, Scottsdale, Ariz.-based eFunds Corp., for example, late last year purchased at least 3,000 ISO contracts from Evergreen Teller Services Inc. and Cash Resources Inc. to augment its purchase of several of the nation's largest ISOs in 2001, including Access Cash. EFunds' taste for acquiring ATM contracts seems to have slowed for now as it assimilates its new ATM businesses.
  EFunds sees itself as an outsourcing company for ATM services and transaction processing, and is trying to integrate its acquisitions into a larger business, says Kevin Reager, eFunds senior vice president for ATM Solutions. "We are in ATM solutions, and that is much broader than the ISO world," he says.
  EFunds has had some difficulty generating a profit through its new ISOs. The company reported a 46% decline in net income for the first quarter, to $4.6 million from $8.5 million for the same period in 2002. In the second quarter, eFunds reported net income of $5.1 million, up 13.3% from $4.5 million in the year-earlier quarter. Revenues were down 0.5% to $133 million from $133.5 million in the 2002 quarter.
  The processor expects its ATM operations to show sizeable growth as it diversifies its ATM business. Indeed, Reager foresees eFunds vying for pieces of a growing ATM-outsourcing market, including operating ATMs on behalf of small- to mid-size financial institutions, especially credit unions.
  EFunds has not promoted a national ATM brand. Reager says such branding would run counter to its ATM-services marketing scheme. "We don't want to be in competition with our customers," he says. One of the company's largest customers is Ontario, Calif.-based Co-op Network, which operates the largest ATM network for credit unions.
  Menlo Park, Calif.-based E*Trade Financial Service Inc., the second-largest ISO with 15,000 ATMs, and Houston-based Cardtronics Inc., the third-largest with 11,000, are at the opposite end of the ISO spectrum from eFunds. E*Trade and Cardtronics are using their ATM totals to bargain for lower prices for such services as maintenance, transaction processing and cash replenishment. Doug Deitel, Cardtronics executive vice president, says in most cases Cardtronics could not operate such peripheral ATM services as maintenance and processing as cheaply as can companies that specialize in such services.
  Rather, both Cardtronics and E*Trade are building strategic, geographic ATM bases from which to market nationwide services. Both companies, for example, are partnering with the new Washington, D.C.-based Allpoint surcharge-free network, which is designed for debit card issuers that have few ATMs but a disbursed cardholder base. Cardtronics and E*Trade earn a fee based on a financial institution's portfolio of cardholders who would use the ISOs' ATMs for free.
  Cardtronics and E*Trade targeted ISOs in strategic locations to make their portfolios appealing to third parties wanting a broad ATM reach. Most recently, Cardtronics purchased the Buffalo, N.Y.-based National Bank Equipment ISO, and E*Trade purchased the XtraCash ATM portfolio formerly owned by Toronto-based CIBC Bank Corp.
  Cardtronics and E*Trade also own a bigger portion of the ATMs they operate. Cardtronics now owns some 4,500 ATMs, which includes the recent purchase from CIBC of 1,000 machines deployed in Winn Dixie supermarkets, making the ISO a top-10 ATM owner as well.
  E*Trade now owns some 3,000 ATMs. Dale Dentlinger, president of E*Trade's ATM brand, E*Trade Access, says ATM ownership gives flexibility to promote network-wide services, such as the Allpoint deal, and enables the company to get a bigger share of revenue the ATMs produce.
  Some top-10 ISOs, however, are skeptical about owning the ATMs they manage. Neil Johnson, president of Euless, Texas-based International Merchant Services, says by simply managing the machines, he avoids the cost burdens of ownership, such as those incurred in having to upgrade thousands of ATMs to comply with so-called Triple DES, the stricter encryption standards for personal identification numbers.
  Yet, Johnson agrees that ISO consolidation will continue to keep costs down at a time when ATM-transaction processors also are consolidating.