Retail ATM Deployers Look for New Revenues As Interchange Declines

Interchange rates on ATM transactions are falling and may not have hit bottom yet, so independent distributors of ATMs need to look for additional sources of revenue. That is the conclusion of a recently released white paper entitled, “The Future of Interchange in the United States,” sponsored by the the ATM Industry Association (ATMIA) and Kahuna ATM Solutions.

“While I don’t think interchange will disappear completely, rates could continue to erode even further,” David Tente, ATMIA U.S. executive director, tells Digital Transactions News.

That puts pressure on the independent sales organizations that provide off-premise ATMs to retailers. “They need to be prepared for the possibility that interchange revenues could continue to fall and they need to look for additional sources of income,” says Bryan Bauer, president of Kahuna, an independent distributor based in Bloomington, Ill.

In ATM transactions, interchange is the fee that financial institutions that issue debit cards pay the ATM owner in exchange for the convenient access to customers’ bank accounts. It is set by the ATM networks. Interchange flows the opposite way, from merchant acquirer to card issuer, for debit and credit card purchases. Various forces have contributed to the ATM interchange fall-off, one of which is pressure by banks and credit unions on the networks to reduce their interchange expenses.

Based on an industry survey, the average interchange fee per withdrawal has declined from 55.5 cents in 2006 to 36.25 cents in 2012, according to the report. The report described the reduction in interchange to be the biggest concern of independent ATM distributors today, and it echoes concerns retail ATM executives voiced in this month’s Digital Transactions magazine.

In response to declining rates, the paper suggests ATM distributors find additional sources of revenue. They include charging for additional services, such as ongoing service and technical support; increasing surcharge fees; increasing transaction volume by working with retailers to grow customer traffic, and upselling retailers and financial institutions through advertisements on ATM screens and wraps, or through coupon offers on receipts.

Other tactics include providing outsourcing services to merchants and banks that had been operating their own ATMs; negotiating with retailers and other parties that benefit from the ATM to balance or offset the fees the ATM distributor has to absorb, and updating service and sales agreements to compensate for fluctuations in interchange and allowing for flexibility with price changes.

Bauer says no single strategy may be the answer for all ATM distributors. “This is a well-balanced approach to the problem of falling interchange,” he says. “There is no silver bullet. But ATM operators need to get out of the mind set that interchange and surcharge revenue are the only sources of revenue.”

Still, Tente says the strategy that may have the most appeal to many distributors is outsourcing. “There are a lot of financial institutions that are operating a small number of ATMs and would like to get rid of the headache of handling them. This presents a lot of opportunity for the independents to pursue,” he says.

Raising surcharge fees to compensate for lost interchange may be the most difficult strategy to pursue, Tente says. With Congress and federal regulators closely watching financial-services fees and more states looking to ban surcharging altogether, he says there are questions as to whether more surcharge revenue is possible.

“Independents need to explore other options to increase revenue,” he says.

The report notes that many financial institutions have increased their foreign ATM fees, the fees an institution charges its customers when they use ATMs not owned by the bank. But raising these fees can be detrimental for ATM owners because some consumers are then less likely to use ATMs in retail locations, Bauer says.

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