WHAT IS THE ASSET?

An Automated Teller Machine (ATM) is a machine that allows customers to complete a wide range of banking transactions, such as transfers, withdrawals, paying bills, and deposits without the assistance of a bank associate. Often, they are owned by a private equity fund that pools their investors’ money to purchase a collection of ATMs, with returns shared by investors over a specified period of time.

ATM funds have one of the most unique business models out of any niche in this e-book. To illustrate, let’s do a quick review. High-equity life insurance policies provide a slow and steady approach to building wealth. Life insurance settlements are a long-term diversification play banking on the one thing in life that’s guaranteed: death. Apartment buildings are an investment on the favorable trend of renters over homeowners and usually provide a combination of appreciation and cash flow. But if you’re looking for a pure cash flow investment, look no further. ATM funds are a cash flow play on steroids, thanks to the aggressive contractual rate of return to the investor. For this reason, they are a great complement to investments that don’t provide cash flow right away.

ATMs usually operate 24/7/365, allowing customers to bank whenever is convenient for them, even outside of traditional banking hours. In exchange for the convenience of using an ATM, the operator usually charges a set fee to the customer, except in the case where fees are waived as a member benefit to existing bank customers. The same courtesy is also sometimes extended by some smaller banks and credit unions with limited locations. According to Moneyrates.com, the average fee to withdraw cash from an out-of-network ATM in 2019 was $4.61.[1] These fees can add up to $240 per year for a customer that uses an out-of-network machine weekly. According to an FDIC survey, an estimated 5.4% or 7.1 million U.S. households were unbanked in 2019, meaning that they didn’t hold a checking or savings account with a traditional banking institution. Even within the banked population, a staggering 19.5% of households preferred using the ATMS as their primary tool[2] for taking care of banking needs. This represents a large ATM customer pool for the foreseeable future.

An ATM machine may be owned by a bank, credit union, or private investment entity. Because ATMs are expensive and become technologically obsolete after only seven years, most larger retailers and even some financial institutions outsource to private entities that place ATM machines at their location and split the fees. While a private entity may be a private investor, the contracts that a single investor may procure are typically limited to a small convenience store or comparable outlet. Large corporate entities, like national pharmacy chains, contract with larger private equity funds that specialize in ATMs. As an investor, whether or not you invest in an ATM fund or individual machine, your due diligence will vary based on how the investment is structured. For the purposes of this book, we will focus on the ATM fund model.

Private equity funds pool their investors’ money to buy a batch of new ATMs, and the fund operator contract breaks out the total return to those investors into equal months payments for seven years. During this period, the operator is entitled to any profit above the contracted rate. At the end of the contract, the investor may receive a token amount of their original principal back, but in reality, they should not expect this. The investment is unique because it provides such a strong influx of cash during its investment life. For this reason, ATM funds are a great complement to investments that don’t provide cash flow right away.

ATMs are also on the cutting edge of gathering data on end users. Given the high volume of daily transactions they process, ATMs can glean an incredible amount of information that the operator can then sell or use for their own advertisement purposes.

However, since this is very much a developing trend, it should not be modeled in any investor projections.

Private equity funds pool their investors’ money to buy a batch of new ATMs, and the fund operator contract breaks out the total return to those investors into equal months payments for seven years. During this period, the operator is entitled to any profit above the contracted rate. At the end of the contract, the investor may receive a token amount of their original principal back, but in reality, they should not expect this.

While the regulations for an investor in individual ATMs and an investor in ATM funds are completely different, ATM funds should be the focus for passive investors, at least when starting out. Keep in mind that these funds are usually 506(c) Regulation D offerings, which require proof of investor accreditation when subscribing to the fund.

As in most syndications, this asset is illiquid. The business model that I’ve encountered offers a high return of capital over the first few years of the contract, and there is no incentive to sell after that point because none of your original investment is left in the deal. 

While most alternative investments—especially those related to real estate—are tax friendly, they require extensive tax planning in order to be executed properly. Investing in ATMs is probably the exception. While these funds are also very tax friendly, they require only minimal tax planning. Because the life expectancy of an ATM is only five to ten years, investors receive a substantial depreciation write-off during many of the years of their investment. At the end of the investment, because the investor receives almost nothing back, their tax liability is marginalized. Remember to consult with a tax professional to see how ATM funds would work within your specific portfolio. 

A final word of caution: ATM funds deal with a higher volume of cash transactions that lend themselves to disreputable operators looking to take advantage of investors; therefore, the ATM fund industry has a history of more Ponzi schemes compared to other alternative assets.

As a result, a stringent due diligence process is a must.

[1] Julia Kagan, “Automated teller machine (ATM),” Investopedia (January 28, 2021), https://www.investopedia.com/terms/a/atm.asp. 

[2] “How America banks: Household use of banking and financial services,” FDIC Survey (2019), https://www.fdic.gov/analysis/household-survey/.

The Pros and Cons of Investing in ATM Funds

PROS

• Potential for massive cash flow
• Backed by a contract and location
• High depreciation creates favorable tax treatment
• Provides access to cash for underbanked and unbanked demographics
• New technology facilitates new revenue streams related to data collection and advertisements
• Strategically placed ATMs fared well during the COVID-19 pandemic

CONS

• Concerns about technological obsolescence
• Targeting consumers in low-income communities can be viewed as predatory
• High prevalence of Ponzi schemes
• Business model can sometimes be murky

If you liked this article and wish to continue on your path in learning about alternative investments, please make sure to check out my other educational articles as well as my book, The Alternative Investment Almanac: Expert Insights on Building Personal Wealth in Non-Traditional Ways. 

Disclaimer: The information presented in this article is for informational purposes only and does not constitute professional financial or investment advice. The author does not make any guarantees or promises as to the results that may be obtained from it. You should never make any investment decision without first consulting with your own financial advisor and conducting your own research and due diligence. Even though, the author has made reasonable efforts to ensure that the contents of this article were correct at press time. The author disclaims all liability in the event that any information, commentary, analysis, opinions, advice and/or recommendations contained in this article results in any investment or other losses. Your use of the information in this article is at your own risk.