News

Looking to the Future

What trends are emerging for the ISO

April 7, 2002

The state of the ISO marketplace today might be compared to that of the video rental industry ten years ago: mom-and-pop, single-location video stores flourished. In fact, it was the mom-and-pops who invented the business in the first place. Then, slowly at first but more and more rapidly as the years progressed, stores began consolidating into chains, certain chains growing into behemoths. As the years passed, the single-location video store became more and more rare, as the Blockbusters and West Coast Videos of the world continued to expand. Now, it is a major accomplishment if a single-location video store is able to succeed.

While the ISO business is probably not at this point yet, some experts see such a time not far off.

"I think the trend that we see in the ISO business is one of consolidation - some of the largest ISOs are the survivors from those consolidations," says Ann Schmitt, a director for Dove Consulting's Financial Services Practice. "A very significant percentage of total ISO terminals deployed are concentrated in the top 10. What we are seeing is that when you get below that top 10, many of those don't have the scale to continue to compete in the marketplace, which is only getting more heated."

"Heated" is an understatement. The ISO community is moving at lightning speed, jockeying for position in remaining "prime placement locations" and working to gain the upper hand in new channels. If recent trends have been an accurate indication, the move toward consolidation will continue.

"I see moves in that direction," Schmitt says. "The challenge for the small ISO is continuing to find profit locations that work within their business model. And what we're finding, depending on the business model, is that many ISOs are in locations that generate 200-250 transactions per month. And for large ISOs with great economies of scale, those locations probably work. But when you're dealing with ISOs that don't have that kind of scale, they can't compete for those locations. And given the saturation of the marketplace, those locations are the ones that are available. Smaller folks can get turned upside down pretty quick."

"Saturation" is almost a naughty word in this business - it speaks to the idea that all of the good locations for ATMs have already been taken, i.e. there's not any room in this industry for a newcomer. Clearly, most ISOs would beg to differ, as would manufacturers: in a speech to the ATM Industry Association's 2001 convention, Tidel executive vice-president Mike Hudson said that when you add up potential placements in retail, hospitality, foodservice, and real estate leasing offices, you get a total of two million potential new deployment locations.

According to Schmitt, the market is definitely not saturated, but ISOs have to learn to approach the business differently in the future in order to find creative new channels for their products.

"We still think there's room for deployment, but it will be on a selective basis within the geographic region, as well as by channel," she says. "There are certain channels of distribution for ISO deployment that really haven't played out - for instance, the fast food industry. But when we look at other channels, there are locations still available. Certainly the lower volume locations are still available, and ISOs are really competing among each other for those locations, because banks don't tend to go for those types of opportunities."

As ISOs look to the future, they not only consider new locations for new machines, but new ways to reap benefits from existing machines. There is much speculation currently about the future of ATM advertising; some pundits feel it will become a major revenue stream - perhaps the major revenue stream - while others say it will be just a few bucks in the grand scheme of things. But the industry is taking the prospect seriously: for instance, at this year's ATMIA convention, manufacturer Tidel announced an alliance with advertising content provider Ten Square. Such partnerships could eventually mean that new ATMs will become reliable delivery channels for nationally-purchased ad content, just as television is today.