Industry Evolution
Script vs ATM:
What’s In A Name?

by Dennis Ehling

   Shakespeare asked, “What’s in a name? That which we call a rose by any other word would smell as sweet” (Romeo and Juliet, Act II, Scene 2). Can you make a rose into something else by simply changing what you call it? Shakespeare thought not.
   Many in the ATM industry have been asking the same questions – albeit slightly differently – for several years now: “What’s in the name, ‘ATM’? If the terminal acts in every appreciable way like an ATM, it should not matter what you call it.” Can you turn an ATM machine into something else by simply calling it by another name?” Many in the ATM industry seem to think not, but the debate is apparently still ongoing, and one ISO, E.B.T. International (“EBTI”), is asking a California court to answer the question once and for all.
   More specifically, EBTI is asking whether the large ATM networks, including STAR (which now is part of First Data Corporation as a result of the recent merger between First Data and Concord EFS) can, by calling a particular type of ATM a point-of-sale (“POS”) terminal instead, change the fundamental nature of the terminal and treat it differently than any other ATM. At issue in the lawsuit (E.B.T. International, Inc. v. STAR Systems, Inc., Los Angeles Superior Court, Case No. BC 312430) is the question of whether one of the larger ATM networks in particular, the STAR network, can determine that a Scrip ATM (a machine that, rather than dispensing cash automatically to the cardholder, issues a receipt which the store clerk redeems for cash) is not an ATM at all and, therefore, treat the machine as a POS terminal instead of as an ATM. The answer to that question is not insignificant. If Scrip ATMs should be treated like regular ATMs then, among other things, the owner or ISO who places a Scrip ATM is entitled to receive interchange from the ATM networks for each ATM transaction run through the Scrip machine. On the other hand, if Scrip ATMs can be treated like POS terminals, then the ordinary rules of interchange in the credit card industry would apply – i.e. the terminal owner and/or merchant would be responsible to pay interchange to the ATM networks (including the acquiring bank and the issuing bank) for each transaction conducted at the terminal.
   There is no shortage of opinions on this question. Proponents of Scrip ATMs point out that, like any other ATM, Scrip ATMs provide the cardholder with the option to perform any number of traditional ATM transactions – including cash withdrawal from any type of bank account linked to the ATM card, balance inquiry, and account transfer (i.e. the transfer of funds between two accounts linked to the same card) – all initiated by the cardholder and all without requiring the cardholder to make a purchase. POS terminals, on the other hand, cannot provide a number of these features – POS terminals ordinarily do not allow the cardholder to make withdrawals from anything other than a checking account, do not allow balance inquiry or account transfer transactions, are initiated by a store clerk, and require the cardholder to make a purchase to receive any cash back (if the merchant is willing to offer cash back at all). Proponents also point out that, like the owner of any other ATM, the owner of a Scrip ATM must make what amounts to a short term loan to the cardholder – a loan that is repaid if and when the ATM network refunds the withdrawn amount to the ATM owner (usually within a couple of days) – without any guarantee that the cardholder will use those funds to make a purchase from the store location.
   Opponents point out, however, that Scrip ATMs do not provide for cash to be automatically dispensed to the cardholder – a store clerk is involved to actually dispense cash to the cardholder – and therefore might have lower operating costs that would put them at a competitive advantage over traditional ATMs. Opponents also argue that Scrip ATMs, because they are almost exclusively located in retail stores (such as convenience stores or quick-service restaurants), promote sales in those stores and, therefore, provide the store owner the same type of benefit which the store owner would receive – and pay the card networks for – with a traditional POS terminal. Of course, by that same reasoning, every off-premises ATM (i.e. ATMs located somewhere other than a physical branch of the acquiring bank) should be treated as a POS terminal – from that perspective, at least, there is no substantial difference between a traditional ATM located in a fast food restaurant and a Scrip ATM in the same location – both theoretically encourage purchases by making cash more readily available to potential customers.
   In fighting EBTI’s lawsuit, STAR has argued that its member banks have a good justification for treating Scrip ATMs as something other than an ATM. STAR has argued that, in order to comply with rules of the Federal Reserve (“Regulation D”) restricting the number of payments or transfers per month which an account holder can make out of a money market account to a third-party, banks need to be able to track whether a transaction is a withdrawal by the cardholder (for which there is no limit under the Federal Reserve rules) or a direction by the cardholder to the bank to transfer funds or make payment on the cardholder’s behalf to a third-party (for which there is ordinarily a 3 transaction per month limit under Regulation D). Citing to certain introductory comments made in a 1986 Federal Reserve publication, STAR has argued that the Federal Reserve requires banks to treat Scrip ATMs like POS terminals, and not like traditional ATMs, for purposes of Regulation D. However, when the question was put directly to the Federal Reserve in 1989, the Federal Reserve gave the exact opposite answer. In what is known as an Interpretive Letter/Ruling – where the staff of the Federal Reserve gives its opinion on how it will enforce a particular aspect of a regulation – the Federal Reserve staff stated:
   “Staff does not believe that the use of personnel of the retail establishment in dispensing cash, as opposed to dispensing cash through the terminal itself, so distinguishes these transactions from withdrawals at ATMs as to warrant different treatment under Regulation D. In effect, staff of the retail establishment will substitute for the cash dispensing mechanism of the ATM.”1
   From the perspective of the Federal Reserve, at least with respect to Regulation D, there does not appear to be any reason that Scrip ATMs need to be treated any differently than traditional ATM machines.
   Whether or not the Federal Reserve – or even any individual cardholder – can see a meaningful difference between a Scrip ATM and a traditional ATM with an internal cash dispensing mechanism may be irrelevant. STAR argues that it is a private membership organization – one established by and for its member banks – that is entitled to set its own rules for anyone who wants to participate in the network. Regardless of the technical legal merit of that argument – which is a question before the court in EBTI’s lawsuit and is not the subject of this article – the question remains whether STAR and/or any other ATM network can afford to continue to try to uphold a rule which treats Scrip ATMs differently from traditional ATMs. There is clearly a segment of the marketplace that finds Scrip ATMs (with their reduced space requirements, lower security costs and lower operating costs) more palatable than traditional ATM machines, which can be subject to “smash-and-dash” crimes and take up more space in a store location than Scrip ATMs require. Retailers willing to offer to dispense cash to cardholders also have significant incentives – in the form of customer convenience and an increased opportunity for profit from the receipt of interchange – to prefer Scrip ATMs over traditional POS terminals. In an era where price competition is steep for all forms of electronic commerce, driving transaction volume – particularly at locations such as fast food outlets and convenience stores, where individual per-sale profit is relatively low – is widely recognized as a significant key to industry growth. If competitive forces work, the demand for and distribution potential of Scrip ATMs could very well be too tempting a source of transaction volume (and, thus, revenue) for one or more of the ATM networks to leave on the table.