Using ATMs to Drive Profits

For many years ATMs were nothing more than large boxes hiding in the corner of convenience stores across the country. Over the years, though, that strategy has evolved as in-store real estate became more valuable and marketers looked for every edge to attract new customers.

As such, retailers these days are faced with three distinct strategies when it comes to cash machines: offer no-fee ATM transactions that drive traffic to the store; partner with a third-party provider and collect rent for housing the units; or purchase the ATMs and use the machines as a straight up profit generator.

For Bill Kent of the Kent Cos. in Midland, Texas, it’s the latter.

Bringing ATMs In-House
While attending a meeting of the National Advisory Group (NAG) about six years ago, Kent learned from an East Coast convenience store chain about the benefits of moving ATM operations in-house.

“They talked about what they were making and the numbers caught my attention, so I decided to check into it,” said Kent, who operates 28 Kent Kwik convenience stores in west Texas, Oklahoma and New Mexico. The chain had some ATM contracts that were ending, so Kent bought them. He purchased some new equipment as well as some ATMs from suppliers.

Today, the company has 40 ATMs, with some stores featuring more than one machine.

Kent Cos. had one advantage as it pursued this strategy. It operates a separate company called KF Financial, which is in the check cashing business. All company-operated ATMs now fall under KF’s jurisdiction providing routine maintenance and keeping them filled with cash.

KF Financial then shares half the profits with the c-store group, which Kent pointed out is substantially more than the c-stores earned by marketing third-party machines. “Our portion from the ATM provider before was maybe not even $40,000-$50,000 a year,” he said. “Now it’s 10 times that amount.”

What’s more, Kent said c-stores don’t need high volume stores to make the switch. In fact, he believes, if done right, stores can see a more than adequate return even in low volume stores. He advised chains to do a lot of research on equipment and compatibility with new security systems before taking a similar step.

“You don’t need a machine that has all the bells and whistles—they don’t work any better or bring in any more volume, so you don’t have to go overboard,” Kent said. “You do need to give serious thought to cash handling—be careful with that. Make sure you have good security in place. It’s nothing to be afraid of.”

Kent Kwik stores have security cameras on each ATM not only to monitor customer transactions, but also the person loading the machine and handling the cash.

The company did not align itself with a specific bank. “The thought is often that name recognition brings in customers, and then that bank’s customers can use that ATM for free. But we’re independent and we collect a fee for every transaction,” Kent said. “Some chains use their ATMs as traffic drivers by making them surcharge free. We debated that, but we didn’t think it was necessary. We thought it was an expensive marketing tool, and it’s not worth giving up the profit we’re making (from the fees).”

Kent Oil keeps its fees even with or under what the bank-affiliated ATMs charge. “If they are $3, we won’t be $1, but maybe we’ll be $2.50 or $2.75. We don’t put our service fee at a rock bottom price.”

Another issue to consider as an independent ATM operator is access to cash for the machines. “You’ll also need an adequate line of credit,” Kent added. “It takes cash to load up the machines and become secure.”

Surcharge Free ATMs
Other chains are finding ways to drive profits by allowing customers to withdraw cash for free, regardless of the institution they bank with. The thought behind this strategy is that the ATM will become a destination for customers looking to withdraw cash without an extra charge, and they’ll have cash in hand to make in-store purchases—a strategy that has increased in popularity as credit card fees have soared.

While surcharge-free ATMs have been popping up more frequently, “I don’t think I would characterize it as a nationwide trend yet,” said Wesley Wilhelm, senior analyst for Boston-based Aite Group LLC, a research firm that tracks the financial services marketplace.

Before retailers decide to try surcharge-free ATMs, Wilhelm suggested they first track the percentages of ATM customers that turn into shoppers.

York, Pa.-based Rutter’s Farm Stores did just that when the chain decided to offer surcharge-free ATMs four years ago. The company conducted field research at store level to determine how many customers stopped at its ATMs, and of those who stopped, how many made a purchase. They also evaluated how that purchase amount compared to the purchases made by the average customer.

“We found that around 50% of the customers who stopped at the ATM made a purchase and bought more than the running rate of an average purchase at that store,” said Jeff Leedy, senior vice president of marketing for Rutter’s Farm Stores, which has more than 55 stores in Pennsylvania. “We found surcharge-free ATMs were a differentiator in the market place and concluded they would draw more foot traffic, which they have. The number of customers who use the ATMs has increased substantially. We have been very pleased with the results.” 
Driving Traffic
Regardless of the ATM strategy, operators can drive traffic to the machines by promoting them at the gas pump and integrating them into marketing programs already in place, such as local media advertisements or in-store promotions.

Instead of allowing the ATM to become isolated in a corner, use signage throughout the store to promote the machine, Wilhelm noted. The coffee bar and foodservice counter are ideal high-traffic locations.

When Rutter’s began offering surcharge-free ATMs in 2006, they backed it with a substantial ad campaign that included print, billboards and radio, which helped create an immediate response from customers. Today, the chain continues to promote the machines on its Web site, as well as throughout the store and forecourt area.

When store design allows, Rutter’s also attempts to position the ATMs up by the main entrance to enhance the value proposition to customers.

While Rutter’s doesn’t charge customers to use ATMs, other banks may charge a foreign access fee. Rutter’s approached local banks and requested they waive the fees. Many of the smaller institutions agreed, helping make the service more valuable for customers.

Surprisingly, Leedy said the availability of cash hasn’t significantly reduced debit and credit transactions, which would help ease interchange fees.“Customers do not see the impact of the interchange fee since it is paid by the retailer—therefore I do not see a change in customer behavior attributable to interchange,” Leedy said. “Customers have and continue to choose a method of payment based on their needs and wants.”



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