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Cardtronics Inc. is embarking on a strategy that could expand the company's relationship with bank clients. The ATM independent sales organization wants financial institutions to let it process their ATM transactions through its in-house processing platform and manage their ATM networks.
Currently, Cardtronics' relationship with banks and credit unions involves ATM-branding agreements. Approximately 10,200 of Cardtronics' owned or operated ATMs feature bank brands, but economic conditions have caused that business to fall off sharply, according to Chris Brewster, Cardtronics chief financial officer.
"Growth in bank-branding revenues has slowed," he said during a conference call with analysts April 30. "Bank-management teams are obviously somewhat distracted by other issues."
Cardtronics' strategy to offer in-house processing has been evolving for years, but it became clearer following the ISO's first-quarter earnings' conference call.
During the quarter ended March 31, Cardtronics either owned or operated 33,040 transacting ATMs. Of those, the ISO processed most of its machines' transactions in-house, Brewster said.
"We had approximately 14,000 machines on our in-house switch as we entered the first quarter of 2008 and about 27,000 machines, or almost twice as many, as we entered the first quarter of 2009," he said.
The company expects to process all of its ATM transactions in-house by the end of this year with the exception of 3,500 cash dispensers acquired when it purchased 7-Eleven Inc.'s ATM network in June 2007, Jerry Garcia, Cardtronics chief information officer, wrote in an e-mail to ATM&Debit News.Cardtronics also purchased 7-Eleven's Vcoms, which are multifunctional ATMs.
Cardtronics will convert the balance of the ATMs to its in-house platform next year, Garcia noted.
Cardtronics outlined in the e-mail message the advantages of in-housing processing.
"We are in the process of converting our ATMs from various third-party transaction-processing companies to our own EFT transaction-processing platform, thus providing us with the ability to control the processing of transactions conducted on our network of ATMs," Garcia wrote. "In addition, our in-house processing capabilities provide us with the ability to increase the types of products and services that were are able to offer to financial institutions."
During last month's conference call, Fred Lummis, Cardtronics chairman and interim CEO, said managed services was a business opportunity Card-tronics was looking to pursue. Lummis said it was. Rick Updyke, Cardtronics president of global development, noted that in-house processing creates new business opportunities, Updyke said. "The opportunity for us is that we manage large self-service networks," Updyke said. "Today, that happens to be an ATM network. A lot of banks are looking to providers who are experts in that area, and we fit very nicely, obviously, in that space as well...."
Unlike with bank branding, some banks are willing to spend money to outsource management of their ATM networks, says Kate Monahan, an analyst with Aite Group LLC, a Boston-based consultancy. Regional and smaller banks want to outsource management of their ATMs for a variety of reasons, she says.
"There are definitely a lot of opportunities to pick up business from banks that want to outsource management of their ATM operations," Monahan says. "Small and start-up banks want an ATM channel, but they don't see ATMs as a profit center.
They feel by outsourcing ATM management, they can reduce their headcount. When upgrades or new machines are needed, the vendor will handle it."
Monahan recently completed a survey of banks that are considering outsourcing the management of their ATM networks or are doing so. Aite will release results later this year.
With in-house processing, Cardtronics can offer services, such as back-office processing and ATM driving, to bank customers, Monahan says. But while small and start-up banks are fertile ground for ATM-management outsourcing, but big banks, such as Bank of America Corp., Wells Fargo & Co. and JP Morgan Chase & Co., are not, she says.
"Large banks consider their ATM networks key to their customer-service offerings, so they process their ATM transactions in-house," Monahan says.
Lummis suggested during the earnings call that Cardtronics may follow a U.S. business model that is slightly different from the one Euronet Worldwide Inc. developed in Europe.
Euronet, a Leawood, Kansas-based payment-services company, manages ATM and point-of-sale terminals on an outsourced basis. Euronet's EFT-processing segment managed 9,205 ATMs as of March 31, most of which are deployed in 14 Eastern and Western European countries and China.
Cardtronics' in-house-processing platform would enable the company to compete with Fiserv Inc., says Franco Turrinelli, an analyst with William Blair & Co. in Chicago. Brown Bear, Wis.-based Fiserv provides banks with transaction processing as part of a wide range of service offerings. "Obviously, ATM processing is a good business for Fiserv, so it is an appealing target market for Cardtronics. But we will have to wait and see what it is that they will be able to do different to compete against the incumbents," Turrinelli says.
Monahan describes Fiserv as a formidable competitor. It is unlikely its customers will leave Fiserv for Cardtronics, she says.
But any final decisions to pursue a strategy to manage financial institutions' ATM networks likely will have to wait until Cardtronics hires a new CEO to replace Jack Antonini.
Antonini left the company in March with a $1.2 million severance package.
Lummis said during the earnings call Antonini left because the board wanted to take Cardtronics in different direction then the one Antonini advocated.
"Jack was here for six years," Lummis said. "He led the company through a period of profitable growth from a time when the company was much different than it is today. The board was focused on some changes in our direction but not significant ones."
Finding Antonini's replacement may take awhile, Turrinelli says.
"The company is focusing on current operations, and any update to the strategic plan with have to wait for the selection of a new chief executive officer, a process that is under way but that appears to us to be in the relatively early stages," Turrinelli wrote in an analyst report.
Cardtronics' in-house processing, however, already is paying dividends for the company, having reduced company expenses, according to Brewster. ATM
