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How Much Will Chip-Card Technology Affect ATM Owners?
Last week, my colleague Doug King wrote a post about the impact of the migration to chip-card technology on financial institutions that issue cards, with a focus on the smaller issuers. What happens with ATMs is an aspect of the chip-card migration that hasn't received much media attention. This may be because the liability shift timetable for ATMs—for MasterCard, it's October 2016; for Visa, October 2017—comes after the merchants' October 2015 deadline.
Of the roughly 430,000 ATMs in the country, nonfinancial institutions own just over half. The size of these independent ATM deployers (called IADs) range from two large companies with installed ATM bases of 60,000+ machines to thousands of small independent owners with a handful of ATMs. The conversion to support chip cards can cost these businesses up to $500–800 per machine. This impending ATM upgrade has echoes of the Triple DES (or Triple Data Encryption Standard) upgrade that Visa and MasterCard mandated in 2003, with a 2007 deadline. That upgrade involved strengthening ATM transaction security to better protect cardholder's personal identification numbers. Like today's chip-card upgrade, some of the older ATMs did not have the computing power necessary to support the upgrade, which meant the owners had the additional expense of replacing or decommissioning these machines. The independent-ATM installed base declined by more than 12 percent from 2007 to 2009 because many of the owners could not afford the Triple DES upgrade.
The costs of the current upgrade come at a time when the operators are seeing a constriction of their revenues. ATM usage has not kept up with the increased number of machines, which has resulted in lower average volumes per ATM and lower transaction revenues. The increased use of debit cards at retailers along with the cash-back option that many retailers offer are primary reasons for the lower usage.
The ATM owner has two main sources of revenue: interchange fees and surcharge fees. The card issuer pays the interchange fee; the cardholder pays the surcharge, which the ATM owner adds to the transaction amount. (The cardholder may also incur a "foreign transaction" fee from their financial institution for using an ATM outside their financial institution's network, but the ATM owner receives no portion of that fee.)
For 10 years, net interchange revenue to the IADs been steadily decreased. An industry survey showed that average interchange revenue per cash withdrawal dropped from $0.555 in 2006 to $0.3625 in 2012. ATM owners have some ability to raise their surcharge amount, but they have to remain competitive. (The average ATM surcharge amount for ATMs is about $2.50, according to Bankrate.com’s 2012 Checking Survey.) To offset these profitability constrictions, ATM owners are continuing to look for additional revenue sources, such as video advertising or branding their ATM with the name of a financial institution.
As the chip-card deadline for ATMs gets closer, Portals and Rails will continue to monitor and report on its impact.
By David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed.