hat were you doing 10 to 12 years ago? To most of us, it feels like yesterday. But think of all that has changed since then, especially in terms of technology: Personal computers were on the verge of becoming mainstream; the Internet was a relatively new concept; very few, if any, teenagers had cell phones; and most people made ATM transactions right outside banks on very expensive machines.

Decreasing cost and increasing convenience are two main drivers for the widespread adoption of any new technology, and this has certainly been the case for retail, or off-premise, ATMs—devices not located at a bank—that were first introduced 10 years ago.

"The vast amount of the growth in terms of new ATM deployments in the U.S has been at retail locations," said Brian Kett, President of Triton. "Banks are upgrading, but for many years have almost been in a retraction mode. Most of the banking market is a replacement market, whereas the retail market continues to grow quite strongly."

In the past two to three years, off-premise ATM placement has been stronger than ever. "It's not a saturated market," said Bill Dunn, Vice President of Sales for Tranax Technologies, Inc. "There is still a lot of opportunity and a lot of places are still susceptible to having ATMs; there are also more people out there selling them."

Banks pioneered the concept of ATMs about 25 years ago to provide an automated interface to their customers. These devices were large, through-the-wall-style ATMs and very costly to build, install, run and maintain—around $50,000. However, transaction levels averaged anywhere from 10,000 to 20,000 a month, so the cost of the machines was justified.

When banks began adding surcharges to ATM transactions in 1996, financial institutions dashed to place more ATMs. ISOs also entered the market, which completely changed the industry, according to Dove Consulting.

And also right around this time, several ATM manufacturers began offering lobby-style, or standalone, ATMs. These were significantly less expensive than their through-the-wall counterparts and fit nicely at off-premise locations such as convenience stores, grocery stores, gas stations, bars, truck stops—anywhere customers might need ready access to cash without having to make a trip to the bank.

"It's just as important to have an ATM in your store as it is to have a credit card terminal," said Michael Guthrie, Vice President of Automated ATM Solutions, a Washington-based ISO. "It's about convenience; if you aren't going to provide this convenience for your customer, a store a block down the road will."

With an ATM on the premises, merchants can benefit from revenue generated from transactions/surcharges, increased foot traffic, customers spending a portion of the cash from the ATM in the store and the building of customer loyalty.

There are more than 371,000 ATMs in the United States, about one ATM for every 296 households, according to the latest research from Dove Consulting released in a report titled, the 2004 ATM Deployer Study. (Dove conducted this study on behalf of electronic payments networks STAR, PULSE and CO-OP Network.) Last year, consumers conducted approximately 11 billion ATM transactions, up 2% from 2002.

The main way for a merchant to obtain an ATM is through an ISO—most of the ATM manufacturers do not sell directly to merchants.

"Or they can buy it on eBay," joked Guthrie. "But what merchants don't understand is that there is a lot of money spent to get bank sponsorship and to stay in compliance with network regulations.

"The value the ISO brings to the merchant is the ability to make the transaction happen and to stay up to speed with the compliance issues. ISOs serve as a gateway for the processing and provide service for the ATM."

Dove reported ISO-owned and placed terminals average about 355 transactions a month (financial institutions average about 3,500 transactions per month for on-premise ATMs and 1,500 for off-premise); and on average, ISOs are the only deployer segment earning a profit on their owned ATM base.

However, most ISOs do not make money off the sale of the equipment itself because similar to the bankcard industry, it's become very competitive. "I have a competitor who is selling machines at $500 under cost," Guthrie said. "Why do this? The residuals. You can make up that $500 initial loss in probably the first six to eight months of a contract, and most merchants sign up for a five-year agreement."

Revenue Opportunities

Income earned from surcharges and interchange is the key element of a ISO's revenue stream. Other potential sources of income—such as stamps, ticketing, wire transfers, check cashing and third party advertising—are not generating much revenue for them right now.

There are, however, opportunities now and on the not-so-distant horizon that look to open up new sources of revenue for ISOs and ATM owners. These include new developments in ATM technologies, making ATMs compliant with the latest security mandates from Visa and MasterCard—and of course, Check 21.

"There is exceptional opportunity (for revenue) with more and more regulations that we have to abide by," Dunn said.

The latest security compliance requirements such as Triple DES (3DES) and PIN pad encryption have resulted from changes in technology and recent cases of fraud.

3DES is a data-encryption standard algorithm that encrypts input data three times (versus only one time) so it raises the level of fraud protection for PIN-based transactions initiated at ATMs.

Visa, MasterCard and the ATM networks have all set deadlines in order for equipment to be compliant with 3DES. PULSE, STAR and NYCE want all ATMs to be 3DES compliant by the end of 2005; MasterCard has set an April 2005 deadline; Visa's deadline is July 2007.

"Mostly, the ATM manufacturers will offer upgrade programs for virtually all of their ATMs, and these will be marketed to an ATM owner through their ISO," Kett said. Ready for Check 21?

Check cashing might not be a significant revenue-generator at off-premise ATMs today, but this could all change after Check 21 takes effect in October 2004. Check 21 legislation, signed into law in October 2003, allows financial institutions to use electronic images of checks in the same way they use paper checks: funds can be transferred without requiring possession of the paper check, allowing for faster check processing.

The idea of cashing paper checks and making paper check deposits at off-premise ATMs only works for a certain type of location because of the expense associated with picking up checks from ATMs, Dunn said.

Typically an armored car service or ATM courier service is hired to remove checks from the ATM, and checks must be picked up within a certain amount of time—usually within 24 hours—to send through the Federal Reserve System. This is not cost effective for locations where ATMs receive only a handful of checks a month.

With Check 21, customers will potentially be able to make deposits at image-capturing ATMs. The checks would be truncated, then shredded all at one location—the ATM. Armored car services would only have to be used for replenishing cash at the machines.

Right now changes brought about by Check 21 are mostly happening on the back-end of financial institution operations, but change will be phased-in gradually on the front-end, Dunn said.

"When you talk about applications like self-service check cashing, you open a whole new door of possibilities for revenue generation on an ATM," said Matt Johnson, Vice President of Marketing for Tidel Technologies. "Anytime you can provide a service that's as big as check cashing through some existing hardware and add-ons to existing ATM hardware, it's going to benefit everyone."

"There's billions of dollars in potential for placing a new ATM or an ATM upgrade for Check 21 between now and 2010, shared by banks and retail locations," Dunn said.

Other changes in technology in ATMs are happening right now. Most ATMs in the field use dial-up connections to process transactions, but expect more to move to TCP/IP-based and wireless, Johnson said. In addition, Triton, Tidel and Tranax have all introduced PC-based ATMs in the past year, ATMMarketplace.com reported. These types of upgrades and replacements will allow ATM owners to add more capabilities to their ATMs.

"With PC-based ATMs, it's an open scalable future, you don't know what the next big-revenue generating application will be," Johnson said. "The machine is not an embedded, closed system that you will have for a couple of years until the next thing comes along; it's something you can build on that technology."

As new technologies including Internet processing and check imaging become more prevalent and affordable solutions, expect to see more of them being used with ATMs.

"Everybody wants to provide the next thing on an ATM that makes money besides surcharge and interchange," Dunn said. "Everybody's looking for that pie in the sky deal."

"Anytime you can provide retailers with a simple process, it's going to be that much more attractive to them," Johnson said.