Generating Income through ATM Funding

thePoint
December 29, 2004

Banc Investment Group has launched a first-of-its-kind ATM funding program to help independent banks generate fee income from excess liquidity on their balance sheets. ATM Cash Advantage enables banks to advance up to $400 million in currency to more than 17,000 nonbank ATMs around the nation, including those based at convenience stores, airports, gas stations, and casinos. In return, member banks can generate fee income equal to 50 basis points above the Federal Funds rate.

Banc Investment Group, the broker-dealer unit of the Pacific Coast Bankers' Bancshares (PCBB) of San Francisco, matches local ATMs with participating regional banks to keep the machines stocked with cash.

"Before banks had to struggle to use their liquidity," says Chris Nichols, who is a co-CEO, along with Steve Brown. "The beauty of this flexible program is that banks can make a good spread. Bank ABC takes their money and puts it in 25 ATMs in their area. The ATM provider keeps the surcharge, but they also get charged a fee to use the cash."

And if Banc Investment Group has its way, these banks may soon be allowed to reduce their own vault cash balances under Regulation D. PCBB recently requested the Federal Reserve to review the regulation. The program may also help banks comply with the Community Reinvestment Act under the service-test provision, say PCBB officials.

Banc Investment Group and PCBB will raise cash from participating banks and manage the partnership with Palm Desert National Bank, which supplies cash and management services to more than 10,500 ATMs nationwide. PDNB's local and national operations use its proprietary ATM Trakker, which tracks activity at each of its ATMs. PDNB has ATM service centers in California and Louisiana. PCBB handles collection of assets from individual banks, which is transferred electronically, provides on-line access to accounts, and generates monthly reports to member banks. Palm Desert National Bank manages the program's operational issues, as well as armored car and ATM security issues.

All 12 of the banks signed up for the ATM program have been enthusiastic, says Nichols. "They all think it's great," he says. The participating dozen include Pacific Capital Bank in Santa Barbara, California, and Butte Community Bank in Chico, California.

"ATM Cash Advantage unlocks frozen assets on the balance sheet without incurring credit risk and enables banks to generate fee income in this challenging environment," says Nichols. "By pooling money from many institutions, Banc Investment Group is creating a powerful syndicate of independent banks that can provide substantial liquidity for ATMs, while giving bankers a low risk opportunity to increase revenue." By leveraging the collective network of independent banks, the program allows "owners of ATMs to take advantage of immediate economies of scale," points out Kevin McGuire, chairman of Palm Desert National Bank, in Palm Desert, California. PDNB declined to discuss how Palm Desert is compensated.

Participating banks retain the title and interest to their cash, which can legally be treated as an asset until it is dispensed from the ATMs. They can also monitor cash disbursement, check advance status, and get individual ATM reports on-line. PDNB's software predicts when certain ATMs will run out of cash, based on past behavior at that machine. And since the biggest risk in keeping ATMs stocked with cash is that of theft when the delivery trucks are on the road and the handlers are doing the actually filling, tapping local banks makes a lot of sense.

ATM locations will vary by geography, vendor selection, and type to offer the greatest diversification and the lowest risk possible, says Nichols, who notes that the program's risk is similar to that of banks' in-house ATM programs and can be summarized in terms of settlement and insurance. To mitigate operational risk, the program has multiple layers of insurance from AAA-rated national insurance carriers and uses PDNB's proprietary software platform, which provides near real-time reconciliation of ATMs, armored carriers and cash vaults. In addition, the program uses technology from vendors like Concord EFS, Genpass, Fiserv, Brinks, Loomis, Bantek and Premium-EF Mark.

"Casino ATMs are some of the most highly transacted machines," says Nichols. "They carry a lot of money, and before one bank would have to take the risk in the event of earthquake or whatever. But this program helps spread the risk throughout the financial system."

Gayle Lee, vice president and controller at Chico-based Butte Community Bank, says the bank has been involved in the program since September 5. "Fifty basis points over Fed funds is nothing to sneeze at, especially in this market," she says, noting the bank had passed on the offer when it was first approached last spring.

What surprised her most is how uncomplicated the program has been to administer. "It's been very easy to manage," she says. "We get our reports from them every afternoon saying how much we're earning in fee income. Then we get a payment once a month. They basically do everything."

So far, she's glad the bank has signed on. "Looking at the extra money we'll be earning, it's going to make a difference. It sounds like it's going to work well."

This article first appeared in The Point for Credit Union Research and Advice at http://thepoint.cuna.org and is reprinted with permission