Card sharks

Jan. 9, 2005

John McNulty wishes he didn't have to accept credit cards, but he'll trade pizza for plastic any day if that's what his customers are carrying.

"I could not operate my business without taking cards," said McNulty, a one-unit Shakey's Pizza franchisee in El Monte, Calif. "About 26 percent of my transactions come from cards, and about 65 percent of those are from debit cards."

McNulty and many merchants like him expect card use will only increase as customers grow more accustomed to their convenience and safety. What customers may not realize, however, is the inconvenience to merchants, namely the cost of accepting cards. With every swipe of a card, merchants pay 2 percent to 3 percent of the total transaction; debit card fees range between 30 cents and 50 cents. Add in fractional percentages for interchange fees paid to the card issuer, and profits shrink further.

"It adds up quickly, and in this business, a few percentage points means a lot," McNulty said. Were it legal, he said he'd consider discounts for cash purchases, but despite the "wink, wink" urging of some in the banking business, he won't ring his debit sales as credit card transactions. "That's not the way I do business."

What he has done is installed an ATM machine to provide his customers a cash option. On average, 167 people withdraw money from it monthly, and at $1.50 per use, that puts $250 back into McNulty's pocket — not enough to offset card charges, "but at least a little something," he said.

McNulty's not the only pizza operator using an ATM to reduce or eliminate card use, according to representatives of several ATM resellers.

"We have several who have them right now, but overall I think it's still just slowly catching on in the pizza market," said Duessa Holscher, a partner at FireFly Technologies, a Portland, Ore.-based POS company. FireFly also sells ATMs as part of its overall cash

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management package. "If your operation is in a high-traffic or touristy area, or if you have a lot of college students as customers, you will benefit from it."

As will customers who will enjoy the convenience, said Bruce Kreeger, president of reseller ATM Center in Mine Hill, N.J.

"If they know you've got one there, they might stop by to get money at lunch and have a slice," he said. "They also know it's probably faster to get money there than waiting in line for one at a busy place, like a supermarket."

The potential to generate added revenue from such a small segment of floor space is enticing, but it comes at a cost. Operators looking to buy an ATM can expect to shell out $3,500 to $5,000, plus the cost of a standard dial-up phone line. The operator will also shoulder the cash replenishment responsibilities and oversee service problems, such as paper jams. "It's simple, though, and if you can run a cash register, you can run one of these," said Doug Falcone, CEO of Access to Money, an ATM reseller in Whippany, N.J.

The privileges of ownership do allow the merchant to receive 100 percent of the surcharge revenue (the fee paid by the ATM user), which would allow a top-end machine to pay for itself within a couple of years — even on modest transaction traffic like McNulty's.

Leasing an ATM, on the other hand, costs less up front — around $100 per month — but terms generally include a 5-year commitment that exceeds the cost of buying one outright. Merchants can choose to service the machine themselves or hire a service company to do it. But unless the machine gets a lot of traffic, outsider assistance will take a large bite out of the profits.

The least expensive, and least profitable, option is called a placement, wherein an ATM provider supplies the machine, fills it with cash, services it and shares the transaction revenue with the merchant.

"It's a hands-off thing for them; we do the whole 9 yards," said Eric Hennings, who handles national sales for ATM Express in Billings, Mont. "The operator provides the floor space and we do everything else."

For a larger share of the action, of course.

"It would be a revenue-sharing agreement depending on volume," he said. "Generally at the low end of the scale, where there might be 0 to 200 transactions a month, the (merchant) would get 50 cents of each transaction. As that volume got higher, he'd get a larger share of those surcharges."

The secret word is "volume"

Just like in the pizza business, generating profit off ATMs depends on transaction volume. Though an ATM in every local pizzeria would be convenient for customers, not all would be profitable for operators. Some stores, especially delivery-carryout units, lack the foot traffic to sustain such an investment.

Falcone and Kreeger said an operator mulling installing an ATM should have an average of at least 250 people crossing the threshold daily. Many of their pizza clients who sell slices in urban locations, such as New York, or mall locations, see such numbers. McNulty's pizzeria gets similar traffic, but many of those diners are kids, Yet they need cash for arcade tokens, which boosts ATM transactions.

"What I'd like to see in a good location is several seats and slice sales," said Falcone. "Those people get a lot of traffic at lunch, which is good for the ATM because those people need cash to go elsewhere. They're not going home right away."

Once they're inside the pizzeria, they have to know it's there, which requires good positioning and modest signage. The well-known "ATM Inside" window sign is important also.

While Falcone's goal is to sell ATMs, he admits they're not right for every location. If he doubts an ATM is a good fit in a merchant location, he sometimes conducts short-term tests.

"We'll do a test and put one in for 30 to 45 days," he said. "We're not looking to put one in a location where the guy can't at least make his lease payment off the machine."

Probably the worst location, Kreeger said, is near a bank, where people are already used to getting their cash.

Whether it's an added customer convenience or a modest profit center, Holscher said operators can gain the most by using the ATM to keep people from using cards.

"That's a huge, huge reason for it," she said. "The pizza business is so competitive price-wise, and the cost of (accepting) credit cards really drives into operators' margins and hits the bottom line."

Both she and Falcone said some of their clients stopped taking cards altogether when they installed an ATM.

"They just say, 'We don't take cards. Go get the cash,' " Falcone said. "They'll even drop the surcharge to a modest fee like 25 cents or 50 cents to create an incentive to use the ATM."

An admitted card user himself, McNulty believes many of his customers are able to use cash, but instead use their cards to gain points for rewards. In such situations, Falcone said operators should consider stating a minimum purchase amount for the use of a debit or credit card. That may drive them to the ATM, or lead them to spend more.

At the end of the day, customers like payment options, and if operators help educate consumers on the benefits of using cash, it could work to the benefit of both parties.

"It's a decision that the store owner has to make if they want to combat cards with an ATM or just eat the cost," Falcone said. "It's an option they ought to consider."

Topics: Financial Management

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