Dove Consulting
For Immediate Release
May 24, 2004
For More Information
Melissa Fox
617/753-9205

New ATM Study Details a Paradoxical Industry
Analysis of banks, credit unions and ISOs provides the most comprehensive
assessment of the state of the U.S. ATM industry

BOSTON, May 24—Banks, credit unions and independent ATM deployers face new challenges in the maturing U.S. ATM industry. According to a new survey conducted by Dove Consulting on behalf of three of the nation’s leading electronic payments networks — STAR, PULSE, and CO-OP Network — the ATM industry represents a paradox. At the same time as the industry is growing (more transactions on more ATMs), individual ATM deployers are finding it increasingly difficult to financially support their ATM programs.

The ATM Paradox

On the surface, the U.S. ATM industry appears healthy. There are now over 371,000 ATMs in the U.S., or one ATM for every 296 households. These ATMs are placed in almost every conceivable location, providing tremendous convenience and ready access to cash for consumers. Last year, consumers conducted approximately 11 billion ATM transactions, up 2% from 2002 volumes.

For individual deployers, however, the situation is less rosy. Aggressive growth in terminal deployments has eroded transaction volumes per ATM - the bellwether of ATM performance for a deployer - driving down deployer revenues. At the same time, the cost to own and operate an ATM has not changed significantly over time, resulting in severe margin compression. “The current ATM business model for deployers is under considerable pressure,” said Tony Hayes, study author and a managing director with Boston-based Dove Consulting. “Deployers are increasingly incurring losses on their ATM portfolio with little relief in sight. A new model must be found where ATM revenues and costs are more equitably aligned.”

The 2004 ATM Deployer Study examines the industry’s key performance metrics including ATM placement patterns, transaction volumes, transaction mix, and surcharge rates. The study also benchmarks deployers’ ATM economics for on- and off-premise programs. Finally, the study discusses deployers’ strategies in this environment, how they are handling various compliance mandates, and their approach to Check 21.

Some of the key findings from the study include:

1. Transaction Volumes

There are three important segments in the ATM market: ATMs placed in branch locations (on-premise), ATMs operated by financial institutions in retail locations (off-premise), and ATMs owned or operated by independent sales organizations (ISOs). Each segment has very different characteristics and requires unique strategies.

In 2003, ATMs placed in bank or credit union branch locations attracted 3,484 transactions per month (on average), while off-premise ATMs operated by a financial institution yielded 1,500 transactions per ATM per month. ISO terminals, on the other hand, generated an average of 355 transactions per month. Compared to other deployers, credit unions typically generate higher average transaction volumes per ATM.

2. Transaction Mix

Over the past five years, there has been minimal change in customers’ ATM behavior; ATMs continue to be perceived and used as cash dispensers. In 1998, cash withdrawals accounted for 77% of all ATM transactions, and in 2001 cash withdrawals were still 77% of the overall transaction pie. In 2003, cash withdrawals continue to represent the lion’s share of usage, accounting for 78% of the mix, while additional services like deposits and inquiries comprise the remaining 22%.

3. ATM Surcharge Rates

For the industry as a whole, the average surcharge for an off-premise cash withdrawal rose from $1.48 in 2001 to $1.65 in 2003, or about 11%. By contrast, the average surcharge fee at on-premise ATMs was $1.57. Of all deployers, large banks have the highest average surcharge rates for both on- and off-premise ATMs.

Surcharge income and interchange income, both driven by foreign transactions, remain the key determinants of a deployer’s revenue stream. Other potential sources of income – banking services (e.g., mini-statements), non-banking services (e.g., stamps and ticketing) and third-party advertising – have yet to generate significant revenue for deployers.

Historically, deployers have increased surcharge rates with minimal impact on transaction volumes, helping to maintain total income. Hayes points out, however, that cardholders are increasingly ‘fee-savvy,’ adjusting their ATM behavior to avoid surcharge fees. “Consolidation in the banking industry has broadened cardholders’ access to their own financial institution’s ATMs, reducing the need to use foreign ATMs. Additionally, consumers are shifting their payment behavior away from cash and toward debit cards.”

4. ATM Operating Expenses

In the off-premise market, deployers have managed to reduce their per-ATM operating expenses by 8% over the past two years. In 2001, the monthly operating expense for off-premise ATMs was $1,298; today, it has declined to $1,194 per ATM per month.

Rent was the only line item expense that increased from 2001 to 2003, providing evidence of the heightened competition for prime retail locations. Depreciation declined by 13%, as deployers purchased lower cost equipment and some of the early placements (1996/7) were fully depreciated.

“While deployers have had some success in reducing ATM costs, revenues are declining at a faster rate,” explains Hayes. The study found that on average, ISOs are the only deployer segment earning a profit on their owned ATM base.

5. Deployer Strategies

Over the next two years, deployers will have to determine which opportunities to pursue and how various challenges will be met. Both financial institutions and ISOs indicate that bringing their ATMs into compliance with regulations (such as Triple DES and ADA) is a top priority for their ATM networks.

While there are some differences between financial institutions’ and ISOs’ priorities, neither type of deployer sees any one approach as a panacea for the ATM industry. All deployers intend to pursue multiple initiatives in an attempt to find a more robust and sustainable business model for themselves and for the industry.

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About the 2004 ATM Deployer Study
Building on the 1999 and 2002 Studies, the 2004 ATM Deployer Study was conducted this Winter by Dove Consulting to provide a comprehensive analysis on the state of the ATM industry in the U.S. The 2004 ATM Deployer Study was sponsored by STAR, PULSE, and CO-OP Network—three of the leading EFT networks in the U.S.—as part of their ongoing commitment to industry research. The Study is available exclusively through these networks.
134 deployers in all geographic regions of the United States were surveyed. Respondents included 24 of the top 50 bank deployers, 5 of the top 25 credit union deployers, and 8 of the top 10 ISO deployers. As of November 2003, these respondents had a combined ATM base of 144,301 terminals. These 144,301 ATMs represent approximately 39% of the estimated total installed U.S. ATM base of 371,000 (based on Cirrus and Plus data).
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About The Study Sponsors

CO-OP Network is a wholly owned cooperative, controlled by its credit union shareholders, and the largest full-service credit union electronic funds transfer (EFT) network in the country. CO-OP Network fulfills its credit union members' EFT requirements by providing volume discounts through an economy of scale. CO-OP Network members benefit from the collective bargaining power of group participation, which results in lower costs for all members ranging from card printing to hardware. CO-OP Network now boasts 1,500 member credit unions, a nationwide system of more than 18,000 surcharge-free ATMs across all 50 states, and a lengthy roster of financial products. For more information, visit www.co-opnetwork.org.

PULSE® is the nation's leading independent financial industry-owned and controlled electronic funds transfer network, currently serving more than 4,600 bank, credit union and savings institution members across the country. It is the only major network solely owned by financial institutions. The network links an estimated 90 million cardholders with nearly 250,000 ATMs and 3.3 million POS terminals at retail locations nationwide. In recent years, PULSE has become known as a valued resource for consumer research related to EFT services and an effective national voice on public policy issues relevant to the financial services industry. For more information, visit www.pulse-eft.com.

Star Systems®, a First Data Company, is a pioneering electronic payments network and an expert in secure, real-time electronic transactions. In addition to processing ATM and PIN-secured debit transactions, STAR develops market-expanding innovations in areas such as check debit, Internet and telephone bill payments, deposit risk management, small-value payments and ATM check imaging to help financial institutions better meet their customers' and members' needs. STAR processes nearly 7 billion transactions a year at 6,100 participating financial institutions and more than 1.2 million ATMs and retail locations nationwide. For more information, visit www.star.com.

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