The Economics of Everyday Things - 36. ATMs
Episode Date: February 12, 2024Why do you have to pay $4 to get $40 cash at a bar? And who does it go to? Zachary Crockett checks his balance. SOURCES:Bernardo Batiz-Lazo, professor in the Newcastle Business School at Northumbria ...University.Patricia Tuz, president of New York ATM.Jon Weilbaker, general manager of New York ATM.Sasha Weilbaker, freelance writer and daughter of Patricia and Jon. RESOURCES:"The Number of ATMs Has Declined as People Rely Less on Cash," by Jim Carlton (The Wall Street Journal, 2023)."Survey: ATM Fees Hit Record High While Overdraft and NSF Fees Fell Sharply," by Karen Bennett and Matthew Goldberg (Bankrate, 2023)."More Americans Are Joining the ‘Cashless’ Economy," by Michelle Faverio (Pew Research Center, 2022)."Thieves Target ATMs Flush With Cash During Covid-19," by Scott Calvert (The Wall Street Journal, 2021),"Locational Study of ATMs in the US by Ownership," by Lian An, Christopher Baynard, Chriadip Chatterjee, and Chun-Ping A Loh (2018)."A Brief History of the ATM," by Bernardo Bátiz-Lazo (The Atlantic, 2015). EXTRA:"Why Are We Still Using Cash?" Freakonomics Radio (2016).
Transcript
Discussion (0)
Imagine that you're out at a dive bar on a Saturday night.
You order a drink and take out your credit card, and the bartender, she tells you they
only take cash.
And because you're living in the 21st century, you don't have any cash in your wallet.
Just as you're about to go grovel to your friends, the bartender points to a dimly
lit corner where you see your salvation.
It's an ATM.
ATM stands for Automated Teller Machine.
The name is a reminder that long ago, people used to have to get their cash from a human
teller at a bank branch.
Today, there are around half a million ATMs in the US.
And most of them are those little standalone models that you find at nail salons, corner
stores, and bars.
They're owned and managed not by banks, but by individual operators who earn a living
off the surcharges that you have to pay to withdraw money.
And anyone can get into the trade.
It's not regulated, you don't need a license.
You just go out and buy one of these ATMs
and find a spot at a barbershop and you're in business.
For the Freakonomics Radio Network, this is the economics of everyday things.
I'm Zachary Crockett.
Today, ATMs.
America's very first bank opened its doors in 1782.
And for the next 180 years or so, pretty much anything you did involving a bank
happened inside of a branch.
If you wanted to check your balance, make a deposit, or withdraw some cash, you'd mosey
on in and talk to someone behind the desk.
But by the 1950s, this labor-intensive model was no longer a good fit with the way Americans
were living.
You see this move to the suburbs and moving away from city centers.
So reaching out to these people with the old branch model was expensive.
That's Bernardo Bates Lazo.
He's a professor at Northumbria University in the UK, and he studies the history of financial
technology.
He says that at the same time that people were moving away from the city centers, the economy was booming, which meant the banks were getting a lot of
new customers. And they started having trouble serving them all.
Who were they? Broadly speaking, working class people who are getting into manufacturing
and another big group of people were women.
This is a little bit of the context of what is going on within banks and thinking how
they're going to reshuffle their business.
Banks in other countries were also facing challenges. In Europe, tellers were unionizing.
also facing challenges. In Europe, tellers were unionizing. Customers wanted to get their money on weekends when banks were required by law to close.
A crazy idea started to percolate in the banking industry. Why not replace the bank teller
with a machine? That vision first became a reality in 1967 when a bank in London introduced
the first ATM.
Two years later, Chemical Bank brought the idea
to the US with a machine in Rockville Center Long Island.
Those early machines were a far cry
from the ATMs you see at banks today.
They were activated with tokens rather than cards.
They jammed easily, they sometimes dispensed
the wrong amount of money, and they were just weird looking.
The first devices were very silly almost.
You can think of a science fiction movie of the 1950s where you have literally lights and switches.
They are really clunky to use and it takes about 15 years for the devices to be really working on a regular basis.
15 years for the devices to be really working on a regular basis. Over the next two decades, technological improvements transformed the ATM from a rare
gimmick into a ubiquitous utility.
The machines got video display screens, better cache dispensing mechanisms, and a lot more
functionality, like the ability to check your balance or move money from one account to
another.
At first, ATMs had to be connected to a dedicated phone line,
which meant that they could only be built at bank branches
or other places with the right infrastructure.
But in the late 80s, ATMs shifted to digital telephony and Windows operating systems,
which enabled much more powerful networking.
You could access your money through any ATM,
not just the ones associated with your bank.
At the same time, all of this was happening,
cheaper portable ATMs became available for the first time.
A machine that typically cost a bank upwards of $15,000
could now be had in smaller and simpler form
for around 2000 bucks.
This opened up a whole new market for independent ATM operators. be had in smaller and simpler form for around $2,000.
This opened up a whole new market for independent ATM operators.
Yeah, we were, Pat, we did some crazy shit back then.
You know, Pat was bringing home $100,000 on the subway.
And I put the brick of cash in a backpack and I would go load these machines like somewhere
in midtown.
Yeah, I think growing up I really thought it was normal.
That's John Wildbaker, his wife Pat Tuz, and their daughter Sasha.
Together, they run a family firm called New York ATM.
It's one of hundreds of companies in the US that own a fleet of ATMs, the kind
you see in the corner at the bar. These independent operators run the gamut from 18-year-old kids
who just own one machine up to Cardtronics, a publicly traded company that owns and operates
more than 100,000 ATMs. By contrast, Bank of America only has around 16,000. Once only in offering at major
banks, ATMs have been democratized.
Weillbaker and Tuz were among the earliest entrants into this business back in the late
90s. At the time, they were both working in advertising in Manhattan. One of Weillbaker's
clients was Chase Bank. When I saw that a chase was closing
across the street from our house, I figured out how to put an ATM in the drugstore next door. I
asked Ivan, the pharmacist, you know, Ivan, do you want to put an ATM in here? And he said,
I'd like you to do it. We put an ATM in his drugstore and it took off like crazy.
The larger ATM companies, like Cardtronics, had a near monopoly on putting machines at
major retailers like CVS.
So, Wild Baker went after small businesses with high-foot traffic in areas where banks
didn't have local branches.
Restaurants, delis, 24-7 gas stations, no location was off limits.
My dad also had the ATM at my high school. Yes, another embarrassing location for me.
Today, New York ATM oversees 1,500 cash machines in New York and surrounding states.
We'll do what we call a full service placement.
We'll put an ATM in a grocery store.
We buy the ATM, we load the cash,
and then we pay rent or per transaction fee
to the owner of that grocery store.
Now, if the owner of the grocery store
wants to load his own cash,
we will also sell him an ATM
and handle just tech service, support,
and processing.
When you think about the surcharges you have to pay to use that ATM, owning 1,500 ATMs
might sound like a pretty good gig, and it is.
But it's also a job that involves staving off thieves, fishing rodents out of machines, and finding customers
in an increasingly cashless economy.
That's coming up.
When you put your card in that ATM at the bar and request a $20 withdrawal, there's
a computer inside the machine connected to the internet.
This computer routes your request to a processor.
That processor then sends it to an ATM network that is associated with your bank.
When your bank receives the request, it debits your account and
sends the transaction data back across the network.
The ATM operator's account gets credited and the machine spits out your money.
After more than 20 years in the ATM business, John Wildbaker still marvels at the process.
All that back-end takes place now in about 30 seconds.
And it's just amazing that it can do that, you know, millions of transactions every day.
And you can't make any mistakes.
But this transaction, it doesn't come for free. Independent ATMs charge you a fee for the privilege of using the machine,
usually around $2 to $3. Many banks also charge you a $2 to $3 fee on their end for using an
ATM outside of their network. So getting that $20 bill out of the ATM
might cost you five or six dollars.
Most of Wild Baker's ATMs charge around $2.50.
He finds that anything higher than that
tends to piss people off.
It's whatever the market will bear basically.
People just are not tolerant.
They get crazy, start screaming.
I don't want to pay to take out my own money.
Why am I paying to take out my own money?
I'm sorry, but I'm not doing this for free, you know.
In some venues, operators can get away with charging much higher fees.
Highest fee that I personally know about is a legal brothel in Nevada, which is $100.
A lot of the strip clubs now are 10%, so you take out $800, you're going to pay $80 for
your fee.
Depending on how you look at it, ATM fees are either exploitative or part of a necessary
lifeline.
Independent ATMs tend to be located in underbanked neighborhoods, and the people who use them
are disproportionately lower income and unemployed.
But Weillbaker says he's not the one collecting the lion's share of the money.
Many ATM operators have to pay commission to the bar or convenience store.
That can be anywhere from 20 to 50% of the surcharge.
While Baker also gives a cut to a third party service that provides the
cash and reloads the machines each week.
So the customer comes in, he puts his card in the machine, he pays $2.50 to
the ATM operator, which is me.
pays $2.50 to the ATM operator, which is me.
And then I divide that $250 up, $1.25 to the store,
75 cents to my cash loader, and I keep 50 cents.
That 50 cents comes from the customer. Wild Baker also gets around 20 cents from the bank
that the money gets withdrawn from.
That's called an interchange fee.
As you can imagine from those numbers, earning any real money in the ATM
business is a game of volume.
70 cents or so on a single transaction isn't too exciting, but across
1500 machines with hundreds of thousands of transactions a month, it adds up.
hundreds of thousands of transactions a month, it adds up. We're looking to make between $100 and $200 per month per machine.
That's our goal.
Less than $100, you want to kind of move it, if you can.
Over $200, it's a keeper.
Our single busiest location is in City Island, the Bronx.
It's a cash-only restaurant.
It's a large restaurant, but there's no bank.
There's no other ATM within a quarter mile,
probably, of that location.
So we have four machines at that one restaurant.
How many transactions happen at that restaurant every month?
It's about six to 7,000 a month.
Give or take, that's around $4,500 a month for one restaurant.
Of course, ATM operators have other costs that they have to cover.
For starters, the machines themselves.
For starters, the machines themselves. Most standalone ATMs are made by two Korean companies, Hiyosung and Jenaega, and the cheapest
models go for around $2,300 new.
You can also go on Craigslist, eBay, or an ATM Facebook group and find a used machine
for sale for a fraction of the price.
They're fairly inexpensive.
It's basically just a couple computer boards
and a modem and a cash dispenser.
You also have to have access to a lot of cash,
bricks and bricks of the stuff.
You could put a lot of money in a small machine.
There's different size cassettes that you can buy depending on how
much capacity you want. The smallest one holds 16,020. There's a two cassette machine that
holds 80,000. It's Saratoga Racetrack. We have 20 of those machines and the cassettes are set for
hundreds and 20s.
So each machine has about a quarter million dollars in it.
Some smaller operators choose to use their own cash and load their own machines.
New York ATM now outsources this job to a third party for 75 cents per
transaction.
For some machines, they use cash from a bank sponsor, which means paying for an armored
car and an armed guard to transport it across the city.
That service runs a wild baker around $1.35 per transaction.
And it comes with an additional cost.
I'm required to have insurance on those locations. And in the last three years, we filed three claims,
and all three of those were from fires,
where the store burned down,
and the ATM burned down with the store.
Theft is another big risk.
Sometimes robbers will roll up to a store, Theft is another big risk.
Sometimes robbers will roll up to a store, throw the entire machine into a truck, and
drive away.
Other times, they'll use explosives or hand tools to crack it open on site.
Many of these attempts are ill-fated, but when they work out, the haul can be sizable.
The gangs that are stealing them, they know what they're doing,
that's very easy to crack open.
There's amazing tools out there now,
you could buy at Home Depot, that you can open anything.
They're stealing 50, 60, 70 machines,
you know, over the course of a couple months.
Robbing an ATM at a bank is a felony.
You could face up to a $250,000 fine and a 20-year federal prison sentence.
But robbing a privately owned ATM with non-bank money isn't treated nearly as seriously.
In some municipalities, it's just a property crime.
If somebody stole one of my ATMs that I called call up the cops they don't really even care anymore.
And unfortunately robbers aren't the only creatures breaking into atms of the mice.
Yeah the rodent issues not much fun what happens is.
Insects and mice and rats are attracted to the inside of ATMs because they're dark and warm.
And then somebody comes up and wants to use the ATM
and the belts trap the rat and the thing dies in there.
So it's not a pretty picture.
I don't, I don't do that.
She sends me on those cases.
In recent years, ATMs have become a popular side hustle for younger folks.
On YouTube and TikTok, there are countless ATM evangelists who promise to make you rich.
In these videos, you rarely hear about the thieves and the dead rats.
It's just a lot of people holding up fat stacks of cash and trying to get you
to buy their courses.
Weihlbaker enjoys the enthusiasm for a business that hasn't always felt particularly sexy.
But he also says it's hard to break into today.
It was a lot easier when we started, you know, when that first ATM at Ivan Pharmacy, when that bank closed next door,
that went to 1,000 transactions in one month.
You know, today these kids are finding locations
that do 100, 150 maybe, 50, you know, it's terrible.
You don't just find 1,000 transaction spot anymore.
Most of the good locations are already taken,
either by a regional operator like
New York ATM or a national giant like Cardtronics. And there's a bigger threat that looms over the
business. The shift to a cashless economy. According to a recent Pew survey, 41% of Americans now
say they don't use cash in a typical week. That's up from 24% less than a decade
ago. Many banks are closing physical branches and reducing their fleets of onsite ATMs.
Independent ATM operators have even experimented with reverse ATMs. You put your cash into the
machine and it gives you a preloaded card. These haven't quite caught on yet.
But Weill Baker thinks the threats that ATMs face
are a little overblown.
Some states still have laws preventing businesses
from going cashless.
He says the nature of the trade has just shifted.
In the 20-something years that we've been in the business,
all the people say, oh, we're going cash, you know, we're going to a cashless economy, you know,
ATMs are dead. This is not our transaction volume is exactly the same today
across all our fleet than it was 10 years ago.
It's just the type of stores that are busy today are different or it's a different
of stores that are busy today are different or there's a different mix of stores than it was 10 or 15 years ago.
A nice hotel does a hundred transactions a month now that used to do it thousand.
But the corner bodega in Brooklyn did a thousand ten years ago and
it does a thousand today.
For the economics of everyday things, I'm Zachary Crockett.
This episode was produced by Sarah Lilly and mixed by Jeremy Johnston. We had help from
Daniel Moritz Rapson.
Sasha will tell you, you know, when she was growing up,
she was so confused because I would come home
and there'd be $200,000 on cash on the dining room table.
And I'd be yelling that, you know, we were broke.
Yeah, I grew up with major class confusion.
The Freakonomics Radio Network, the hidden side of everything.
Stitcher.