By Tracy Kitten
ATMmarketplace.com
This story was originally published on ATMmarketplace.com, April. 2, 2007; reprinted with permission. © 2007 NetWorld Alliance LLC. All rights reserved.
Editor's Note: The following is an excerpt from a new guide, Controlling the Cash: A Guide to Effective ATM Cash Management, posted on ATMmarketplace.com.
The ATM industry has changed since its U.S. explosion began in 1996. The market's multitude of ATMs, coupled with pressures from regulatory bodies, the card networks, the Federal Reserve and the industry at large, has put many ISOs in a precarious position.
Additionally, the U.S. market is struggling with ever-rising and turbulent fuel costs, which have adversely impacted armored-carrier fees, as well as security breaches and threats, such as ram raids, which have led to increased insurance costs.
Some ISOs have opted to cut their losses and sell their portfolios in the wake of industry pressures. Others have deepened their roots by acquiring smaller players and absorbing more locations. Attaining a size of relatively mammoth proportions has its benefits, as the world's largest ISO, Houston-based Cardtronics LP, has proven.
But as ATM portfolios grow, so, too, do profit-margin pressures. To leverage growth, ISOs must free capital to invest in new locations. And that's where the cash-flow quandary comes into play.
Those which once were able to squeak by on merchant-loads and a handful of sites they replenished themselves find that today's market requires a much more sophisticated approach.
As ISOs come face to face with shrinking margins, every penny counts. Surprisingly, however, many ISOs have not done a good job of keeping their minds on their money. If not watched closely, vault cash can easily slip through the cracks, especially as ISOs expand their geographic reaches.
"Market changes are causing pretty significant profit pressures on ISOs of all sizes — from rising fuel costs and the rising cost of cash to market saturation and rising insurance rates," said Tom Stevenson, President of Wilmington, Del.-based vault-cash and ATM service provider Cash Connect.
"Profit pressures are hitting every ISO. Working with vault-cash providers allows the ISO to focus on its core business — sales."
The outsourcing advantage, Stevenson said, is that ISOs don't have to maintain, develop or purchase forecasting software. They also can move employees, who were once focused on monitoring ATM cash levels, to sales positions.
"Even if you aren't filling all of the ATMs with your cash — you have a merchant-fill — you'd have to have some way to manage and track your system," he said. "So even if you're a smaller ISO, you still have to have pretty sophisticated back-office software to monitor your network — and that gets expensive and time-consuming."
Ron Schuldt, President of Dallas-based Columbus Data Services LLC, a transaction processor that provides vault-cash and cash-management services to ISOs, agrees market pressures are making cash-management more attractive to ISOs of all sizes.
"Normally, your cash providers are going to have a cash-tracking mechanism, and that's attractive to all ISOs," Schuldt said. "You see the small guys that start with their ATMs, replenishing their own vaults, and then they get bigger, and sometimes what happens is they run out of cash. That's typically why they decide to outsource the service."
But industry pressures, which are squeezing ISOs from all angles, have led some smaller players to take cash-management back in-house, Schuldt said.
"You've seen a bit of a backlash," he said. "At some ATMs, because of these changes, they've stopped using vault-cash providers — so it's raised the threshold. In order to make using a vault-cash provider make sense, you have to use it at your higher-transacting ATMs."
Enrolling in Vault Cash 101 would behoove most ISOs, said Mitch Lancaster, a Partner at Morrisville, N.C.-based ISO ATM USA LLC.
Lancaster said his portfolio's growth necessitated a move to a more robust cash-management solution.
In 2002, ATM USA signed with Cash Connect to replenish 400 of its 600 ATMs. Since then, ATM USA's portfolio has grown to a network that includes about 2,900 machines, primarily in the Southeastern United States. Cash Connect now replenishes about 900 of those 2,900 terminals.
"Five years ago, when we signed with Cash Connect, we were loading about 400 of those machines ourselves," Lancaster said.
"When we went with Cash Connect, we wanted to move all of the ones we were loading over — which was about three-quarters of our portfolio. The rest were merchant loads."
ATM USA soon realized it had to balance cost with service.
"We found ourselves struggling with access to cash," Lancaster said. "It's a lot easier to lease that money, rather than going out to get it yourself. By leasing it, you can go out and borrow money to invest in growth. If you're tying it all up in vault cash, you don't have much to work with."
That said, using an armored carrier and signing with Cash Connect has cost the ISO between 30% and 40% more per machine, said Tony Mercer, ATM USA's Cash Manager.
"It is more expensive," he said. "But it's hard to qualify the cost, because you have to take the service element into account. And then there's the safety of our techs, which also was a consideration."
Like Lancaster, Mercer said the primary advantage for ATM USA came in the form of expanded access to cash.
"What's helped us the most is that it's allowed us to expand. We don't have to have a relationship with a bank in Arizona, for instance, if we want to go there. Cash Connect has the banking relationship," he said. "We have about 100 vaults throughout the United States through Cash Connect that would have been impossible for us to set up on our own."
But what works for one does not work for all, said Columbus Data's Schuldt.
Smaller ISOs, he said, are more likely to make decisions on a per-ATM basis. If certain ATMs within their portfolios pull high transaction volumes, then it might make sense to sign with a cash provider. Otherwise, the expense of signing with a third party might not be justified.
"Rising fuel prices have really impacted a lot of ISOs," Schuldt said. "Most [armored] carriers have some lines in the plan where they can factor in fuel ratings, so their prices are higher now than what they quoted two years ago.
"Because of those changes, some ISOs that used to use vault-cash providers have stopped. It's raised the threshold. In order to make using a vault-cash provider sensible, you have to use it at higher transacting ATMs."
Jerry Gregory is the Chief Development Officer for Richardson, Texas-based ATM service provider Cash Carriers USA. He said he's been forced to implement a fuel surcharge, just to ensure his company's profitability.
"Fuel costs are having a huge effect on service companies and, as you know, everyone in America," Gregory said. "There is no doubt in my mind that service companies of any nature are suffering, and pricing to provide such deliveries will incline."
Cash Carriers picked up 1,000 new ATM contracts in 2005, but it operated at a $267,000 loss, he said.
To offset that loss, Cash Carriers placed a surcharge on new contracts. For its larger ISO customers, the company offered an option: Accept a fuel surcharge of 8.67% or accept an increase in the per-call price. All of Cash Carriers' customers opted for the fixed-price increase, Gregory said.
Approximately 30,000 ATMs in the United States use vault-cash providers, according to Boston-based consultancy Celent LLC. For some ATM operators, the expense associated with paying a third-party provider for vault-cash replenishment isn't always worth it, particularly during times of inflated gas prices and interest rates.
But it's a Catch-22. Those same factors, industry insiders like Stevenson argue, are pushing ISOs to outsource cash management.
"They can't afford not to," Stevenson said.
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