Are there too many ATMs?
By Bob Sullivan
If it seems like there are neon ATM cash machine signs everywhere, well, there are. In fact, there's 370,000 automated teller machines across the United States right now, about 1 for every 296 people. That may be too many, according to a recent study by Dove Consulting. There's just not enough fee-paying, cash-starved consumers to go around.
"The fact is, this is a real estate business, it's about location. And all the good locations are gone," Hayes said. There are perhaps 50,000 machines now that perform fewer than 100 transactions each month, he said, and they are all in peril.
Every technology has its heyday. ATM technology arrived with much fanfare in the 1970s and has since changed the way people think about keeping cash in their wallets. In 1996, new rules made it easier for banks and independent service operators to charge withdrawal fees, and the ATM gold rush was on. The number of cash machines in the country has jumped 250 percent since then -- with 100,000 machines added just in the last four years, according to ATM & Debit News. Most of that growth has been in non-bank, privately-operated ATMs, and today, two-thirds of the machines aren't owned by banks.
But those who study the rapidly expanding ATM business say we're now at its zenith, and may already have begun its decline.
"What's happened is there are lots of ATMs everywhere, so there are less transactions per machine," Hayes said. "In addition, consumers don't like paying fees, so people use their own banks' ATMs more now. Third, people are using cash less in general and using debit cards more."
Making matters worse, ATM operators are facing costly upgrades, too. Most machines must implement a more sophisticated encryption format by 2005, and also add voice commands to comply with the Americans with Disabilities Act. Despite braille markings, most ATMs are useless to the blind right now, as they have little idea what screen prompts say.
Not enough fees to go around
Consumers who don't have much sympathy for greedy, fee-charging ATM machines -- known to a New York consumer group as "Always Taking Money" machines -- may be even more frustrated to learn the profit squeeze hurts them, too. As the business struggles, costs to consumers go up. Average ATM withdrawal fees at non-bank ATMs crept upward last year, from $1.48 to $1.65. And -- no surprise -- two thirds of non-bank ATM operators plan to hike fees again this year.
While the total amount of transactions for all ATMs continues to slowly rise, the critical transaction-per-machine average fell last year, from an average of 2,509 in 2002 to 2,432 in 2003. Transactions per machine have been in steady declines since the gold rush began in 1996, and are off 60 percent since then, according to Dove.
Perhaps the appearance of late-night TV infomercials hawking easy earnings from owning an ATM network should have served notice that the end of the gold rush was near.
"It's a tough business right now .. We are reaching saturation levels in areas of the country," said David Gosnell of ATM & Debit Card News. "The locations that have high transaction volumes, they're all gone. There was this idea that you're going to automatically make money by buying an ATM, but I would be very wary of buying an ATM right now."
Consumers are getting smarter
"There are far fewer fee-based transactions to go around," he said. "It all adds up to declining margins, and a lot of ATM programs are losing money." In fact, according to the Dove report, banks lose about $260 per ATM machine each month. They don't necessarily mind: financial institutions see cash machines more as a customer retention tool than a money-maker at this point, analysts say. The cash crisis is really hitting independent cash machine operators.
Underscoring the challenges of the business -- online broker ETrade just completed the sale of its portfolio of 12,000 ATMs to Cardtronics LP. Cardtronics, the largest independent ATM operator, declined to be interviewed for this story, citing a mandatory quiet period imposed since the firm filed for an initial public offering,
But not everyone agrees with the pessimism surrounding the market. Kevin Reager, senior vice president at independent ATM operator Efunds, concedes the economics are difficult, but he still believes the ATM market is thriving. Cash machines often serve as loss leaders for small businesses, he said.
"A convenience store of any size, it's expected they will have an ATM in there as much as they have cigarettes and soft drinks," Reager said. And often, the cash withdrawn from the machine is spent at the store, he said, making gas stations and other small retailers willing to tolerate thin margins from their ATMs.
eFunds, which both sells machines to retailers and operates its own network of machines, says a smaller, cheaper generation of ATM machines will also help the industry stay afloat.
"A full-service ATM run by a financial institution can cost $1,200 a month. But for an ATM that's loaded and filled with cash by a merchant, the cost can be one-third of that," he said.
Star Systems, a division of First Data Corp., is also hard at work cutting ATM operating expenses and pushing for new revenue streams. Star's Barbara Span says a new system her firm has developed will allow banks and other institutions to change advertisements in the machines more frequently. Currently, ads must be changed individually, and manually, at each terminal, necessitating a costly $200 trip by a service operator. Star's new technology allows the ads to be changed from a central location, meaning they can be updated daily, or even more often, with discount offers from the retailer and other more relevant marketing materials.
A coming software upgrade -- away from an old-fashioned IBM operating system -- to a new Windows-based system, will allow operators to more easily add other products to the machines. Stamp sales have already been tried; but consumers should expect to see concert ticket sales, cell phone minute "top-up," and other creative revenue models.
The silver bullet may be a concession that ATMs are going back where they came -- away from a source of revenue, and instead, back to a key convenience tool for consumers.
"This is really part of an ongoing cycle, a pendulum swing," Span said. "Originally, the focus for ATMs was really on the customer service aspect of banking: providing consumers with access to their funds. Then the pendulum started to swing with the advent of surcharging. But now, with the pendulum swinging back, this is a customer service tool more than a revenue tool again."
But ATM operators should beware adding too many bells and whistles, says Ann All of ATM Markeplace. ATM machines are among a dying breed of simple, single-function, easy to use technologies.
"Any proposals they have are untested," All said. "It's not obvious if customers will love it or be annoyed by it."
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