UnderstandingtheATMBusiness

AimeeLeeper,MarketingManagerTritonSystemsandATMGurus
Nearlyeveryadult(withtheexceptionofafewSenators)hasusedanATM,probablywithoutmuchthoughtabout
whoownsandoperatesit.ManyATMsbelongtoFinancialInstitutionsFIs(Banks,CreditUnions,etc.),andthese
FIstypicallyoffertheATMasaconveniencefortheircustomerbaseandevenfornoncustomers.Thisprovides
afterhoursaccesstoahostoftransactionssuchascashwithdrawals,deposits,andtransfers.Thisisaservicethat
consumersexpect,andonethatFIsarecompelledtoprovidetoadiscerningcustomerbase.Inadditiontothe
traditionalFI,thereareotherATMs,nottypicallyfoundonbankproperty.Thesearetheonesyouseeinairports
andhotels,atconveniencestores,inshoppingmalls,etc.Someofthesemaybeplacedbyabankforthe
convenienceoftheircustomers,butmanyareplacedbyindependentbusinessesthatoperateATMsforprofit,
muchinthesamewayvendingcompaniesplacesodamachinesinsimilarlocations.
ThesetwodifferenttypesofATMinstallationscanbecategorizedasonpremiseandoffpremise,orasFI
brandedandindependent.OnpremiseATMsaretypicallymoreadvanced,multifunctionmachinesthat
complementanactualbankbranch'scapabilitiesandthusaremoreexpensivehardwarepurchase.ManyFIssee
thesemachinesasanextensionoftheirbranchofferingssincetheyprovidemultipletypesoftransactions.Off
premisemachinesaredesignedtotypicallybedeployedbyfinancialinstitutionsandalsoISOs(orIndependent
SalesOrganizations)inareasthatarelimitedbyspace.Withasmallerfootprintandlimitedfunctionality,these
unitsareacosteffectivesolutiontolarger,fullfunctiondevices.Althoughlowerincost,thereareanumberof
innovativetechnologiespresentintheseoffpremiseunits.Advancesinsecurity,communicationsand
transactionofferingshavehelpedtomakethewhitelabelorindependentATMacommonsitevirtually
everywherewego.Conveniencestores,sportingvenues,theworkplaceATMsarepartofthefabricofourlives.
UsinganATM,customerscanaccesstheirbankaccountsinordertomakecashwithdrawals(orcreditcardcash
advances)andchecktheiraccountbalances,oreveninsomecasestopurchaseotherservicessuchasgiftcardsor
cellphoneprepaidcredit.IfthecurrencybeingwithdrawnfromtheATMisdifferentfromthatwhichthebank
accountisdenominatedin(e.g.withdrawingJapaneseYenfromabankaccountcontainingUSDollars),themoney
willbeconvertedatawholesaleexchangerate.Thus,ATMsoftenprovidethebestpossibleexchangeratefor
foreigntravelersandareheavilyusedforthispurpose.
Everyonecanagreethatpayingfeesissomethingwedallliketoavoid.Folkswhotendtoplanaheadeither
withdrawenoughcashfromtheirbankduringregularbusinesshours,orusethefreeofchargeATMthattheir
bankoffers.Everyonecanprobablyalsoagreethattheyarehappytopayafeeforaccesstocashwhenadvance
planningisntpossible.Imaginetravelingbycarandbreakingdowninaremotearea.Theonlymechanicavailable
doesnttakeplastic,andyoudidntbringyourcheckbookonthistrip.PayingacoupleofbucksatanearbyATMto
getthecashnecessarytogetyourollingagainisabargain.IndependentATMoperatorsaretheoneswhomake
suchconveniencespossibleforconsumers.SeeFigure1,abreakdownofATMIA(AutomaticTellerMachine
IndustryAssociation)membershipsintheU.S.,forthemakeupoftherangeofbusinessrelatedtothisindustry.
Figure
1

Asconsumers,eachofusmakesdecisionseverydayregardingconvenience.DoIdrivemycartowork,takemass
transit,oracab?Theconvenienceofacab,forexample,providesanindividualwithpointtopointpersonalized
service.Whnweselectataxiasaformoftravel,weexpecttopayapremiumforthis,sinceweareweighingthe
valueofconvenienceandpersonalizedserviceoverthecost/timeofmasstransitorwalking.Takethisastep
further,thinkofthevalueofaconveniencestore.Howmanyofyouhavewalkedintoaconveniencestoreto
purchaseapackofgumorasoda?Whenyoumakeadecisionlikethat,youaretakingconvenienceovercost.A
sodaatthegrocerystoreordiscountstorecanbepurchasedforafractionthecostofonethatissoldata
conveniencestore.Why?YouarethirstyNOW.Hereisahandymarketnearby,wellstockedwithavarietyof
beveragestypicallycold,andConvenient!Consumersmakedecisionslikethiswhenaccessingcashaswell.
Conveniencecomesataprice,whetherfortravel,goodsorevencash.
HowdoesoneoperateanATMforprofit?Therearemanythingstoconsiderwhenansweringthisquestion.Costs
varybythetypeofATMandbythelocation.Machinesvarywidelyinprice,rangingfrom$1500$15,000,
dependingonfunctionality.Then,thereareongoingmaintenancefeestokeeptheunitoperational,likeensuring
receiptpapersupplyremainsconstantandotherrepairsandmaintenancemuchlikeacarmighthave.The
communicationsline,whethercable,phone,orwirelessmustbepaidformonthly.Dependingonthelocation,
operatorsmaycompensatethestoreownerforrentalofthespacetheunitoccupies.Someoperatorshire
armoredcarsforcashreplenishment.Then,thereareeverchangingsecuritymandatesthatcompeloperatorsto
complywithorbefined.Finallyaprocessingbankmustbepaidtocompletethetransaction.
ReturnoninvestmentinanATMdependsontheusageandtraffic.KeepinmindthatanATMlocatedina
nightclub,amusementpark,orcasinowilltypicallyhavehightransactioncountsbecausecustomersfrequentlyrun
outofcashanddonotwanttoleavethepremisestofindanATM.AnATMlocatedinthelobbyoflargeapartment
orcommercialbuildingwithlotsoftenantsoremployeestypicallydoeswellbecauseofconvenience.Peopleare
creaturesofhabitandliketocombinetrips.ATMsinconveniencestoresandfastfoodrestaurantsdowell
becausetheyaredestinationestablishments.PeoplegothereforsomethinganywayandtheATMsavesthema
triptothebank.
Whatistheprocessforcompletingatransaction?MostATMsareconnectedtointerbanknetworks,enabling
peopletowithdrawanddepositmoneyfrommachinesnotbelongingtothebankwheretheyhavetheiraccount
orinthecountrywheretheiraccountsareheld(enablingcashwithdrawalsinlocalcurrency).Someexamplesof
interbanknetworksincludePULSE,PLUS,Cirrus,Interac,Interswitch,STAR,andLINK.
ATMsrelyonauthorizationofafinancialtransactionbythecardissuerorotherauthorizinginstitutionviathe
communicationsnetwork.ThisisoftenperformedthroughanISO8583messagingsystem.
ATMstypicallyconnectdirectlytotheirhostorATMControllerviaeitherADSLordialupmodemoveratelephone
lineordirectlyviaaleasedline.LeasedlinesarepreferabletoPOTSlinesbecausetheyrequirelesstimeto
establishaconnection.LeasedlinesmaybecomparativelyexpensivetooperateversusaPOTSline,meaningless
traffickedmachineswillusuallyrelyonadialupmodem.ThatdilemmamaybesolvedashighspeedInternetVPN
connectionsbecomemoreubiquitous.CommonlowerlevellayercommunicationprotocolsusedbyATMsto
communicatebacktothebankincludeSNAoverSDLC,TC500overAsync,X.25,andTCP/IPoverEthernet.
Inadditiontomethodsemployedfortransactionsecurityandsecrecy,allcommunicationstrafficbetweenthe
ATMandtheTransactionProcessormayalsobeencryptedviamethodssuchasSSL.
Howaresurchargesdetermined?TheaverageATMtransactionis$60.Abankingrulestatesthatacardholder
mustbeabletowithdrawamaximumof$200whenpayingasurcharge.Theoperatormaysetalimitonhow
muchcanbetakenout,butitneedstobeatleast$200.
Theaveragesurchargeistypicallysetbetween$1.75$2.50.TheATMsetsthepriceatwhatthemarketwillbear.
However,somestateshavespecificmaximums.
AllofthemoneytakenoutofanATMisusuallydirectlydepositedbackintoacheckingaccounteachbusinessday
frompreviousdaysusage.AllfundsgothroughtheFederalReserveACH(automatedclearinghouse).Fundsfrom
surchargeincomearedirectdepositedintothecheckingaccountalso.It'sjustlikehavingcreditcardcharges
directdepositedintoacheckingaccount.
TheaverageATMinaretailenvironment(notabank)doesabout610transactionsperday.Keepinmindthat
thereareATMownersonlydoingtwoorthreetransactionsadayonanATM,buttherearealsoATMownersthat
haveATMmachinesthatcomplete3040transactionsperday.SomeFARexceedthisincertaincircumstances
imaginetheactionATMsgetatChurchillDownsonDerbyDay.
Inascenariowitha$2.00surcharge,anATMprocessing10transactionsperdaywouldearnatleast$560per
month.At25transactionsperdayitwouldearn$1400permonth.
Howdoestheprocessingwork?WhenanATMtransactionisprocessedthemachinemakescontacttobeginthe
authorizationprocess.TheATMmachinehasaTID(terminalIDnumber).Thisisthenumberthatidentifiesit
uniquelywithintheprocessingsystem.Thisishowthenetworksallowthetransactiontobecompleted.ThisTID
alongwithotheridentifyinginformationletsthecardholder'sbankknowthatthetransactionistakingplaceon
thatparticularATM.
NowtheATMcanconnecttothenetworksthroughourprocessingcenterandthentothecardholdersbank.If
therearesufficientfundsintheATMcardholdersaccountforthewithdrawalrequest,thetransactionwillbe
completed.
OncetransactionsareapprovedtheATMreceivestheauthorizationanddispensesthecashrequested.TheATM
canalsobeusedifsomeonejustwantstochecktheiraccountbalanceortransferfundsbeforeorafter
withdrawingcash.Thereistypicallynosurchargeplacedonnoncashwithdrawaltransactions.

WhatisanATMnetwork?IfyoutakeyourATMcardoutofyourwalletnow,youwillseenetworklogos(also
knownasbugs)ontheback:

NoticethattheCirrusbuglookssimilartotheMasterCardlogo.That'sbecauseitstheATMprocessingnetworkof
MasterCard.ThePlusnetworkistheATMsideofVisa.PlusandCirrusaretheNationalATMnetworks.Allother
logosandbugsareregionalnetworks.
WhatdoATMsofferbesidesconvenientaccesstocash?MikeLee,CEOofATMIA,isanexpertonthesocio
economicbenefitsthatATMsprovidetosociety.Figure2onthenextpageshowsanexcerptfromhiswhitepaper
onthesubject.

Figure2

Whatwemustunderstandaboutthisbusiness,justlikeanyother,isthatconsumershavechoices.ATMoperators,
justlikeinanyotherbusiness,willchargefortheirservicesbaseduponanumberoffactors.Convenience,
location,competition:allofthesedeterminethefeesATMoperatorscharge.Ifafeeissettoohighonamachine,
transactionvolumegoesdown,andtheoperatormakesanadjustmenttogetthatmachineoperatingprofitably.In
afreesociety,themarketsetsthepriceforgoodsandservices.Consumersaskfordemandorientedandcost
effectivesolutions:i.e.moreapplications,bandwidth,graphics,intelligence,flexibility,andreliability.Allofthis
costsmoney,andconsumersdontexpectittobefree.
ATMusersspendmuchofthecashtheywithdrawrightattheestablishmentwherethetransactiontakesplace.
Thisdrivestheeconomy.Whodoesntsupportthat?

Sources:
ATMDepot.comhttp://www.atmdepot.com/resources/howatmmachineswork/
Wikipedia
ATMMarketplace
ATMIAMikeLeeTheManySocioEconomicBenefitsofATMs
NotealsothatinconjunctionwithTremontCapital,ATMIAhasalsopublishedanewpaperanalyzingthebusinessmodeloftheoff
branchATM.Fordetailsonhowtopurchase,visithttp://www.atmia.com/unitedstates/

www.atmgurus.com www.triton.com