Understanding the ATM Business
Transcript of Understanding the ATM Business
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UnderstandingtheATMBusiness
AimeeLeeper,MarketingManagerTritonSystemsandATMGurus
Nearlyevery
adult
(with
the
exception
of
afew
Senators)
has
used
an
ATM,
probably
without
much
thought
about
whoownsandoperatesit.ManyATMsbelongtoFinancialInstitutionsFIs(Banks,CreditUnions,etc.),andthese
FIstypicallyoffertheATMasaconveniencefortheircustomerbaseandevenfornoncustomers. Thisprovides
afterhoursaccesstoahostoftransactionssuchascashwithdrawals,deposits,andtransfers.Thisisaservicethat
consumersexpect,andonethatFIsarecompelledtoprovidetoadiscerningcustomerbase.Inadditiontothe
traditionalFI,thereareotherATMs,nottypicallyfoundonbankproperty.Thesearetheonesyouseeinairports
andhotels,atconveniencestores,inshoppingmalls,etc.Someofthesemaybeplacedbyabankforthe
convenienceoftheircustomers,butmanyareplacedbyindependentbusinessesthatoperateATMsforprofit,
muchinthesamewayvendingcompaniesplacesodamachinesinsimilarlocations.
ThesetwodifferenttypesofATMinstallationscanbecategorizedasonpremiseandoffpremise,orasFI
brandedand
independent.
On
premise
ATMs
are
typically
more
advanced,
multi
function
machines
that
complementanactualbankbranch'scapabilitiesandthusaremoreexpensivehardwarepurchase.ManyFIssee
thesemachinesasanextensionoftheirbranchofferingssincetheyprovidemultipletypesoftransactions.Off
premisemachinesaredesignedtotypicallybedeployedbyfinancialinstitutionsandalsoISOs(orIndependent
SalesOrganizations)inareasthatarelimitedbyspace.Withasmallerfootprintandlimitedfunctionality,these
unitsareacosteffectivesolutiontolarger,fullfunctiondevices. Althoughlowerincost,thereareanumberof
innovativetechnologiespresentintheseoffpremiseunits. Advancesinsecurity,communicationsand
transactionofferingshavehelpedtomakethewhitelabelorindependentATMacommonsitevirtually
everywherewego. Conveniencestores,sportingvenues,theworkplaceATMsarepartofthefabricofourlives.
UsinganATM,customerscanaccesstheirbankaccountsinordertomakecashwithdrawals(orcreditcardcash
advances)and
check
their
account
balances,
or
even
in
some
cases
to
purchase
other
services
such
as
gift
cards
or
cellphoneprepaidcredit.IfthecurrencybeingwithdrawnfromtheATMisdifferentfromthatwhichthebank
accountisdenominatedin(e.g.withdrawingJapaneseYenfromabankaccountcontainingUSDollars),themoney
willbeconvertedatawholesaleexchangerate.Thus,ATMsoftenprovidethebestpossibleexchangeratefor
foreigntravelersandareheavilyusedforthispurpose.
Everyonecanagreethatpayingfeesissomethingwedallliketoavoid.Folkswhotendtoplanaheadeither
withdrawenoughcashfromtheirbankduringregularbusinesshours,orusethefreeofchargeATMthattheir
bankoffers.Everyonecanprobablyalsoagreethattheyarehappytopayafeeforaccesstocashwhenadvance
planningisntpossible.Imaginetravelingbycarandbreakingdowninaremotearea.Theonlymechanicavailable
doesnttakeplastic,andyoudidntbringyourcheckbookonthistrip.PayingacoupleofbucksatanearbyATMto
getthe
cash
necessary
to
get
you
rolling
again
is
abargain.
Independent
ATM
operators
are
the
ones
who
make
suchconveniencespossibleforconsumers.SeeFigure1,abreakdownofATMIA(AutomaticTellerMachine
IndustryAssociation)membershipsintheU.S.,forthemakeupoftherangeofbusinessrelatedtothisindustry.
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Figure
1
Asconsumers,eachofusmakesdecisionseverydayregardingconvenience. DoIdrivemycartowork,takemass
transit,oracab? Theconvenienceofacab,forexample,providesanindividualwithpointtopointpersonalized
service.Whnweselectataxiasaformoftravel,weexpecttopayapremiumforthis,sinceweareweighingthe
valueofconvenienceandpersonalizedserviceoverthecost/timeofmasstransitorwalking. Takethisastep
further,thinkofthevalueofaconveniencestore. Howmanyofyouhavewalkedintoaconveniencestoreto
purchaseapackofgumorasoda?Whenyoumakeadecisionlikethat,youaretakingconvenienceovercost. A
sodaatthegrocerystoreordiscountstorecanbepurchasedforafractionthecostofonethatissoldata
conveniencestore.Why? YouarethirstyNOW.Hereisahandymarketnearby,wellstockedwithavarietyof
beveragestypicallycold,andConvenient!Consumersmakedecisionslikethiswhenaccessingcashaswell.
Conveniencecomesataprice,whetherfortravel,goodsorevencash.
HowdoesoneoperateanATMforprofit?Therearemanythingstoconsiderwhenansweringthisquestion.Costsvary
by
the
type
of
ATM
and
by
the
location.
Machines
vary
widely
in
price,
ranging
from
$1500
$15,000,
dependingonfunctionality.Then,thereareongoingmaintenancefeestokeeptheunitoperational,likeensuring
receiptpapersupplyremainsconstantandotherrepairsandmaintenancemuchlikeacarmighthave.The
communicationsline,whethercable,phone,orwirelessmustbepaidformonthly.Dependingonthelocation,
operatorsmaycompensatethestoreownerforrentalofthespacetheunitoccupies.Someoperatorshire
armoredcarsforcashreplenishment.Then,thereareeverchangingsecuritymandatesthatcompeloperatorsto
complywithorbefined.Finallyaprocessingbankmustbepaidtocompletethetransaction.
ReturnoninvestmentinanATMdependsontheusageandtraffic.KeepinmindthatanATMlocatedina
nightclub,amusementpark,orcasinowilltypicallyhavehightransactioncountsbecausecustomersfrequentlyrun
outofcashanddonotwanttoleavethepremisestofindanATM.AnATMlocatedinthelobbyoflargeapartment
orcommercial
building
with
lots
of
tenants
or
employees
typically
does
well
because
of
convenience.
People
are
creaturesofhabitandliketocombinetrips.ATMsinconveniencestoresandfastfoodrestaurantsdowell
becausetheyaredestinationestablishments.PeoplegothereforsomethinganywayandtheATMsavesthema
triptothebank.
Whatistheprocessforcompletingatransaction?MostATMsareconnectedtointerbanknetworks,enablingpeopletowithdrawanddepositmoneyfrommachinesnotbelongingtothebankwheretheyhavetheiraccount
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orinthecountrywheretheiraccountsareheld(enablingcashwithdrawalsinlocalcurrency).Someexamplesof
interbanknetworksincludePULSE,PLUS,Cirrus,Interac,Interswitch,STAR,andLINK.
ATMsrelyonauthorizationofafinancialtransactionbythecardissuerorotherauthorizinginstitutionviathe
communicationsnetwork.ThisisoftenperformedthroughanISO8583messagingsystem.
ATMstypically
connect
directly
to
their
host
or
ATM
Controller
via
either
ADSL
or
dial
up
modem
over
atelephone
lineordirectlyviaaleasedline.LeasedlinesarepreferabletoPOTSlinesbecausetheyrequirelesstimeto
establishaconnection.LeasedlinesmaybecomparativelyexpensivetooperateversusaPOTSline,meaningless
traffickedmachineswillusuallyrelyonadialupmodem.ThatdilemmamaybesolvedashighspeedInternetVPN
connectionsbecomemoreubiquitous.CommonlowerlevellayercommunicationprotocolsusedbyATMsto
communicatebacktothebankincludeSNAoverSDLC,TC500overAsync,X.25,andTCP/IPoverEthernet.
Inadditiontomethodsemployedfortransactionsecurityandsecrecy,allcommunicationstrafficbetweenthe
ATMandtheTransactionProcessormayalsobeencryptedviamethodssuchasSSL.
Howaresurchargesdetermined?TheaverageATMtransactionis$60.Abankingrulestatesthatacardholdermust
be
able
to
withdraw
a
maximum
of
$200
when
paying
a
surcharge.
The
operator
may
set
a
limit
on
how
muchcanbetakenout,butitneedstobeatleast$200.
Theaveragesurchargeistypicallysetbetween$1.75 $2.50.TheATMsetsthepriceatwhatthemarketwillbear.
However,somestateshavespecificmaximums.
AllofthemoneytakenoutofanATMisusuallydirectlydepositedbackintoacheckingaccounteachbusinessday
frompreviousdaysusage.AllfundsgothroughtheFederalReserveACH(automatedclearinghouse).Fundsfrom
surchargeincomearedirectdepositedintothecheckingaccountalso. It'sjustlikehavingcreditcardcharges
directdepositedintoacheckingaccount.
TheaverageATMinaretailenvironment(notabank)doesabout610transactionsperday.Keepinmindthat
thereare
ATM
owners
only
doing
two
or
three
transactions
aday
on
an
ATM,
but
there
are
also
ATM
owners
that
haveATMmachinesthatcomplete30 40transactionsperday.SomeFARexceedthisincertaincircumstances
imaginetheactionATMsgetatChurchillDownsonDerbyDay.
Inascenariowitha$2.00surcharge,anATMprocessing10transactionsperdaywouldearnatleast$560per
month. At25transactionsperdayitwouldearn$1400permonth.
Howdoestheprocessingwork?WhenanATMtransactionisprocessedthemachinemakescontacttobegintheauthorizationprocess.TheATMmachinehasaTID(terminalIDnumber).Thisisthenumberthatidentifiesit
uniquelywithintheprocessingsystem.Thisishowthenetworksallowthetransactiontobecompleted.ThisTID
alongwithotheridentifyinginformationletsthecardholder'sbankknowthatthetransactionistakingplaceon
thatparticularATM.
NowtheATMcanconnecttothenetworksthroughourprocessingcenterandthentothecardholdersbank.If
therearesufficientfundsintheATMcardholdersaccountforthewithdrawalrequest,thetransactionwillbe
completed.
OncetransactionsareapprovedtheATMreceivestheauthorizationanddispensesthecashrequested.TheATM
canalsobeusedifsomeonejustwantstochecktheiraccountbalanceortransferfundsbeforeorafter
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withdrawingcash.Thereistypicallynosurchargeplacedonnoncashwithdrawaltransactions.
WhatisanATMnetwork?IfyoutakeyourATMcardoutofyourwalletnow,youwillseenetworklogos(alsoknownasbugs)ontheback:
NoticethattheCirrusbuglookssimilartotheMasterCardlogo.That'sbecauseitstheATMprocessingnetworkof
MasterCard.ThePlusnetworkistheATMsideofVisa.PlusandCirrusaretheNationalATMnetworks.Allother
logosandbugsareregionalnetworks.
WhatdoATMsofferbesidesconvenientaccesstocash?MikeLee,CEOofATMIA,isanexpertonthesocioeconomicbenefitsthatATMsprovidetosociety.Figure2onthenextpageshowsanexcerptfromhiswhitepaper
onthesubject.
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Figure2
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Whatwemustunderstandaboutthisbusiness,justlikeanyother,isthatconsumershavechoices. ATMoperators,
justlikeinanyotherbusiness,willchargefortheirservicesbaseduponanumberoffactors. Convenience,
location,competition: allofthesedeterminethefeesATMoperatorscharge.Ifafeeissettoohighonamachine,
transactionvolumegoesdown,andtheoperatormakesanadjustmenttogetthatmachineoperatingprofitably.In
afreesociety,themarketsetsthepriceforgoodsandservices.Consumersaskfordemandorientedandcost
effective
solutions:
i.e.
more
applications,
bandwidth,
graphics,
intelligence,
flexibility,
and
reliability.
All
of
this
costsmoney,andconsumersdontexpectittobefree.
ATMusersspendmuchofthecashtheywithdrawrightattheestablishmentwherethetransactiontakesplace.
Thisdrivestheeconomy.Whodoesntsupportthat?
Sources:ATMDepot.com http://www.atmdepot.com/resources/howatmmachineswork/
Wikipedia
ATMMarketplace
ATMIAMikeLee TheManySocioEconomicBenefitsofATMs
NotealsothatinconjunctionwithTremontCapital,ATMIAhasalsopublishedanewpaperanalyzingthebusinessmodeloftheoff
branchATM.Fordetailsonhowtopurchase,visithttp://www.atmia.com/unitedstates/
www.atmgurus.com www.triton.com