hy are merchants forced to either keep a cash box on their premises or pay for POS-based ATM transactions?

A scrip machine is the size of a typical POS device, and it is used instead of an ATM at a merchant location. Customers swipe their debit cards in the scrip machine, enter their PIN and then carry out typical ATM-type transactions such as transfers, bill payments, cash withdrawals, etc.

When customers want to make cash withdrawals using a scrip machine, they key in transactions as they would at an ATM. The scrip machine prints a record of the transaction, and when customers present it, the merchant hands the cash over to them from the merchant's till.

In conversations with ISOs/MLSs in the ATM sales business, I learned that on a technical interpretation of the various ATM network provider rules, merchants might not be permitted to use scrip machines on ATM networks because these networks prefer that scrip machines operate on standard POS networks.

Merchants are required to pay transaction fees on ATM transactions made with a scrip machine operating on a POS network, while their customers pay the fees on ATM transactions on ATM networks.

It's easy to assume that merchants would generally prefer to have customers carry the cost of ATM fees (rather than bear the costs themselves) by putting transactions through a POS network. In other words, for financial reasons, merchants would prefer that scrip machines operate on ATM networks rather than on POS networks.

I've also learned that ATM transactions experience an approximate 50% decline rate when transmitted through POS networks. Therefore, in addition to financial incentives for merchants to place scrip machines on ATM networks rather than on POS networks, there is a quality of service consideration, which leans strongly in favor of merchants using scrip machines on ATM networks.

I've also been told that there are perhaps 10,000 scrip machines running on ATM networks today. The ISOs/MLSs who placed these machines and, to my knowledge, the merchants offering them to their customers are imminently happy with them.

Unlike earlier technology, scrip machines offer customers the same level of security as ATMs offer when transmitting personal debit card information over computer networks. My understanding is that there is no security-based reason to keep scrip machines off of ATM networks.

Despite the popularity of scrip machines operating on ATM networks, some ATM networks have begun a practice of terminating such merchant accounts, and with particular vigor in recent weeks.

As a consequence, hundreds, if not thousands, of merchants are left, to their great surprise, without ATM services, and the ISOs/MLSs who placed those machines find themselves losing significant portions of their residuals.

Any way you slice this topic, there is a veritable minefield of legal issues that arise. Some of the legal questions that should be resolved for the benefit of all involved in the ATM business in America today include:

• What exactly do the ATM network rules dictate concerning the right of a merchant to plug a scrip machine into an ATM network rather than the POS network?
• If the ATM network rules forbid the operation of a scrip machine on an ATM network, what is the basis of those rules?
• Would a competent court of law enforce those rules, given that they may very well be contrary to the interests of merchants, customers, ISOs/MLSs and processors?
• Would merchants, ISOs/MLSs and processors be able to recover damages from ATM networks because of the mass termination of merchants that is going on now?

The debate over scrip machines is a very good example of how larger organizations involved in the payment processing business, such as ATM networks, data processors and bank associations occasionally carry a great deal of influence that may not always take into account the real business interests of merchants and customers using the equipment, services and networks that they provide.

Some participants in the ATM sales business have already resorted to legal action to address the issues raised in this column. One example of such a business is Santa Ana, Calif.-based EBT International, Inc. (EBTI). EBTI, headed by Tom Lidell, stands to loose a substantial portion of its ATM business from the termination of ATM network scrip machines by an ATM network.

EBTI, a relatively small player in the ATM business, is taking the lead in an action that could benefit hundreds of other businesses, including many that are much larger than EBTI. Dennis M.P. Ehling, of the firm Kirkpatrick & Lockhart LLP in Los Angeles, is assisting EBTI in this matter.

Hopefully, the scrip machine issue will be settled in the near future for the benefit of all concerned.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law by e-mail: atlas@adamatlas.com or phone: 514-842-0886.