NATL 12.8.25
Analyst 2
One of the things I've heard that I think is really interesting is the idea that over time, the branch becomes like the ATM. The ATM essentially handles many low-value banking transactions, not just cash withdrawals and deposits, but also check deposits, etc. It becomes like the teller. The only thing you're staffing the branch with is people who are handling higher-value financial products, such as mortgages.
That's an interesting idea to me. I don't have a very strong viewpoint on it, but it's definitely a more bullish outlook that you could espouse. If you are a bank and still want to have that customer relationship, taking ATM-as-a-Service off the table for a second, you still want to keep most of that function in-house. You need the hardware to service your customers. You plan to give it more responsibility. Not only is that not going away, in theory, but it's also a higher-value product. When I think about what could be the bull case outside of just traditional ATM-ing, that is interesting to me. Three, five, and seven years out, these are the touchpoints for customers and a significant portion of their banking transactions. Sure, you're depositing checks using your phone, but maybe you're doing something else with the machine that you would’ve done at a branch. So yeah, I see that as a possibility where there's more to be done through the ATM.
Analyst 1
For me, it's more like even if 90% of customers make the change in-app, you still need to offer availability to customers who don't know how to do it. There will always be that type of customer. For example, where I live, banks are closing many of their branches. Although most people conduct their activities digitally, older people and certain other groups have begun to complain more frequently. That has made headlines, and it has been particularly negative press for the banks. To avoid negative press, having an ATM with minimal service in an area is a cheaper option for a bank.
Analyst 2
Do you subscribe to the view that ATM-as-a-Service is a growth vector? Is that something that makes you bullish on the stock? I'd love to dive into that for a few moments.
Analyst 1
Yeah, I think that's interesting. ATM-as-a-Service is interesting, first of all, due to the economies of scale it creates. Second, it actually provides some significant cost savings to banks. I think it's around 20%. By the way, I have a friend who shared this idea with me, and he has done a lot of expert calls. He runs a fund specializing in small- and mid-cap stocks. He verified this information with an industry expert. It's not only the presentations; they actually deliver the savings. The ATMs are really useful for banks to replace branches. That seems like something I've been able to verify.
I believe the composition of competitors in the industry drives the opportunity for ATM-as-a-Service. You mentioned the other competitor, Diebold. Diebold was in Chapter 11 in 2023. They’re basically focusing on delivering and returning capital to shareholders. If you take a look at their competitors, they’re not doing ATM-as-a-Service. I think we have a smaller one that is trying to go after ATM-as-a-Service, but they’re not as significant as NCR.
The thing is, you have a main competitor, such as Diebold, that isn’t pursuing this opportunity for internal reasons, including their high debt load and the situation they’re in following Chapter 11. They’re focusing on having better technology rather than offering this service. In my view, you have an oligopolistic market in which NCR Atleos is the only one pursuing this opportunity all in. Right now, not a lot of people are happy to invest in this industry to change things. NCR is trying to do this. If they’re successful and actually grow it 2x or 3x over the next five years, they will have a substantial moat and high-margin recurring revenue for many years.
Analyst 2
I definitely agree you're dealing with a bit of an oligopoly here with Diebold, Hyosung, and NCR. I do think Diebold offers a managed service. I'm not sure how robust it is. However, my understanding, and I should caveat this with the fact that I haven't done extensive work on Diebold, is that they've emerged from Chapter 11. I think they actually have a cleaner balance sheet today, possibly cleaner than NCR's. I'm pretty sure they have a managed services offering. I'm not sure if it's a "our competitor has it, we have to have it too" situation, but I think the service is available. I don't know their win rate, but I think they’re in a position to mount a competitive threat post-Chapter 11.
What I don't know, and this is what I need to do deeper work on, is how the market splits up. I'd love to get your take on this as well. Do certain banks prefer Diebold over NCR? Do the big banks tend to go with Diebold or NCR? Do regional banks tend to opt for NCR or Diebold? Do you have a sense of how they're positioned relative to competitors? What I'm trying to understand is who their core customer is for ATM-as-a-Service. For instance, JPMorgan Chase is unlikely to outsource its ATM function. What’s the TAM? Which banks are interested in outsourcing this function?
Analyst 1
The main point here is that when you have a network and service it, it's costly in the short term, but actually delivers long-term benefits. If you’re a large bank, basically, it's completely nonsense to source that. If you’re not in a recession and want to achieve quick cost-cutting, consider outsourcing to improve your long-term net profit.
But regional banks, smaller banks, and even some larger ones might benefit from a short-term reduction in costs. You have to buy the equipment, the trucks to service this, and you need personnel on your own payroll. The larger the NCR network is, the more sense it makes for a bigger player to outsource, as the larger the network, the lower the cost. If you have a large network, you can offer JPMorgan lower costs than they’re currently paying because you’ve built the network with their competitors. If you’re already going with a truck for replenishment or servicing, stopping one more time incurs a very low marginal cost. Once you’ve built the network, the additional cost of servicing one extra ATM in the same area is relatively low. The thing here is you have to build up slowly, and then you can put the larger players into the system. That’s what I understand.Analyst 2: I think the challenge they probably run into is that historically, this business has sold the hardware, services, and software to the ATM department at a bank. Now, what you're effectively trying to do is replace that ATM service at a bank. This is almost like a board-level decision, or probably close to it. You essentially have to go above the sales department you've been dealing with, so they probably just have a go-to-market challenge of trying to replace the people they've been selling their hardware to.
Analyst 1
Yeah, that's true. But in my opinion, the thing here is that most banks don’t have a Jamie Dimon on board. So if you’re actually offering them that over the next 5 years, your costs will decrease by 10% or 20%. I think that's the figure for ATM servicing. Essentially, you’re providing them with a more effective way to achieve their targets. That's actually quite good because most banks are led by short-minded managers.
With NCR Atleos and ATM-as-a-Service, in the long term, you lose some control. You benefit from the lower cost on an annual basis, but you lose control over your own network. In the end, 5 years go by, and you have basically no servicing capabilities. Then, NCR Atleos has the power to increase pricing every year by a margin slightly greater than the inflation rate. That's a risk that some banks might face, and they might decide that they’re not willing to do so. But in my opinion, for this to work, they don't need to onboard every bank in the country. They have already been doing quite successful deals. Even if they just continue at the current rate, the story works on the current growth.