Is there money in ATMs?

PORTFOLIO POINT: Investors can buy automatic teller machines, usually in batches of five, to collect the transaction fee.

Recent reforms paved the way for small investors to own their own automatic teller machines. But what hope do they have of beating the Big Four banks at their own game?

Spearheaded by the Reserve Bank in March 2009, the sweeping reforms were designed to boost competition within the banking industry. But they also saw the rise of a number of companies seeking to exploit the changes. But they also saw the rise of many private ATM operators.

The actual reforms changed the way fees are charged and have dissolved the “interchange” fee that ATM users were once charged by their own banks for using a “foreign” ATM.

Greater transparency for the card user was also part of the reform. Now, when users insert a card into a non-bank ATM to proceed with a transaction, a screen flashes up asking whether they accept the $2 charge paid direct to the ATM deployer. If the user accepts, they are charged directly by the deployer.

There are a number of companies in the space including the listed operator Customers (CUS) which has been sold down savagely in response to weaker-than-expected earnings, as well as GRG International which plans to list soon.

Aside from the owner-operators listed above, MyATM and Own Your Own ATM have a different model which relies on selling the machines to private investors.

They are known as ATM deployers and could be favourably compared to the equivalent to a property manager. It is this opportunity that we will explore today.

How does it work?

Investors usually buy the ATMs in batches of five from a retailer, but this minimum number can be negotiated, depending on the type of machine.

“They want you to buy a minimum of five machines,” says Adelaide-based Rob Williams, an IT service provider to various bank ATMs, who recently investigated the option of ATMs as a cash flow investment.

“My gut feeling is that because they can’t be sure that all will have a good rate of transaction volume they mix and match some 'dogs’ with some better performing ones. If they sold them individually, some investors would get good ones and others would get the dogs and start making a lot of noise about their low transaction volumes. It's a business model that’s totally transaction volume dependent.”

There are three types of ATMs available.

The premium choice is the “through the wall” machine, which cost about $37,500 plus GST. The middle range is the “level one” machine, for about $20,000 plus GST. It’s a robust standalone ATM with a sophisticated alarm system and is often placed in shopping centres with limited supervision. Then there’s the “business hours” ATM, which appears very similar to the “level one” machine but is not as heavy duty, and has more limited access. They cost about $14,000 plus GST.

The retailer sells the machine to the investor, who then enters into a joint venture agreement with one or more deployers, often for 10 to 12 years, or for a five-year lease rolled over into another five-year lease. From here on, apparently, it’s set and forget for the investor. But not always, says Williams.

“I feel the greatest risk is being at the mercy of the deployers when software or firmware upgrades are required. They can effectively charge whatever they like for these upgrades and maximise their profit in doing so,” he says.

“The other thing that happens with technology is that manufacturers have what they call 'end of life’. They tend not to support every model of equipment they’ve ever made. That forces people to upgrade,” says Williams.

Williams adds that it could be costly to adapt machines to satisfy legislative changes. “The generation of ATMs being refreshed now are being refreshed as they can't be upgraded to cope with the legislative requirement to have them display the transaction fee to the user.

“Who can predict what technological and legislative changes will occur and whether these machines can cope with them? I know that some changes can be addressed with software/firmware upgrades, but at what cost? There is also a chance that some changes can't be addressed at all.”

Corr Piccone, a director of Own your Own ATM, counters this by saying that many of the machines can be easily adapted for legislative changes. For example, the Queensland and Victorian governments have debated introducing a transaction limit for users at pokie machine venues. “To update this it could easily be done at the flick of a switch,” he says.

Location, location, location

In what might be a deal breaker for some investors, you don’t get to choose where your ATM will be located, but if you have objections to making profits from an adult entertainment venue or a gaming area, then the deployer will respect your wishes.

The point must be made, however, that these businesses often have the highest frequency of transactions, with some venues delivering more than 300 transactions a month. Other high-traffic ATMs are located in supermarkets, clubs, bars and convenience stores.

Investors are assigned machines by the deployer through an electronic numbering system and often won’t know where they’re located until a monthly statement arrives by email or post, detailing the ATM’s location, number of transactions in a given month and payment.

For a property investor, not being able to choose the location can come as a bit of a shock, as it did for Rob Williams, who has concerns about the ability to continually generate profits.

“ATMs have been around for 20-plus years,” he says. “The banks make a lot of money out of them. Are we to believe that the best locations are still waiting to be discovered?”

“This situation will get better not worse as these promoters sell more and more machines to private investors. As they put more machines into various locations, then the 'per-machine transaction’ will reduce, in my opinion.

“Given the money they make selling these machines, there is a huge incentive for them to sell more rather than try to restrict how many machines go into a particular area.”

Piccone says that to maintain a supply/demand balance, when lease agreements are drawn up for a site, they include exclusive rights to the site or territory. The deployer covers maintenance costs and often shares the insurance responsibility with the site. The site owner usually supplies the cash for the machines.

What demand exists?

Increasingly, Australians will pay for convenience. You only have to look at how people are prepared to pay a premium in convenience stores or use a taxi instead of public transport to reach a destination. But that demand can evaporate in an economic downturn.

In the RBA’s June-quarter Bulletin, authors Brendan Filipovski and Darren Flood point out that since greater transparency for customers on ATM fees was introduced in the reform last year, cardholders have become more money-conscious.

“The number of foreign withdrawals (when the user withdraws from an ATM not owned by their account-holding bank) fell by 18% from the preceding year, while cardholders’ withdrawals at their own financial institutions’ ATMs ('own’ transactions) increased by 9%,” they say.

Consequently, EFTPOS “cash outs” were 9% higher in the first full year of the reform, Filipovski and Flood, “given that these are typically free to the customer”.

However since the reform, ATM owners or deployers can now charge what they like. They’ve started with a $2 fee because that was the benchmark for “interchange fees”. Filipovski and Flood say while some ATM owners may choose to increase fees, competitive pricing could attract traffic to the cheaper machines.

The RBA Bulletin also reports that ATM supply numbers have increased by about 1500, or 6%, since the reform.

For the full report, see this month’s Australian Property Investor magazine. Reproduced with permission.