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Are Coinstar Machines Ethical?

|Includes: Outerwall Inc. (OUTR)

It's not everyday you see a pre-1965 dime, or quarter in your change. They contain 90% silver, despite looking like today's currency. 1942-1945 Nickels similarly contain 35% silver, known as War Nickels.

A 1946-1964 Roosevelt dime contains $1.28 worth of silver were if it were to be melted down. Yet, it's illegal to destroy or deface US currency. Despite it being legally impossible to ever get at the scrap silver, coin dealers today will still pay you ~$1.28 for a Roosevelt dime if you're lucky enough to find one in your change. That's because there is a vibrant secondary market for "Junk" silver coins, valued near their silver melt value despite their face value being much lower.

Gersham's law has an explanation. It states that, "Bad money drives out good." The driving out of more valuable 90% silver Roosevelt dimes in favor of post-1965 (copper/nickel) dimes is just one of many historical examples of this effect. Nowadays, it's extremely rare to find a silver coin in circulation. Silver coinage began disappearing in circulation from around the time the Coinage Act of 1965 was passed, which eliminated silver from quarters and dimes.

Ever seen a person pay for a Pizza with a $20 gold piece from 1873? Gresham's law in effect.

Outerwall's Coinstar

Coinstar machines are a mechanical wonder. They sort loose change from the public, and turn it into cash or gift cards. It's a proprietary technology owned by Outerwall (Nasdaq: OUTR), with kiosks in the US, UK and Canada.

Coins are deposited on the top. A 10.9% coin counting fee is charged at the Coinstar in my location. This fee can be waived if you opt for a gift certificate instead of cash.

Ethics

Rejected coins and miscellaneous objects fall into the bottom slot (see arrow). Some circulated silver coins, which are a different weight than standard coins will end up in this slot. Treasure hunters are aware, that there is often an unusual coin which could be valuable in the bottom slot forgotten by a prior Coinstar user.

The Test

I assembled 3 silver-containing coins to test at my local Coinstar machine. The question was whether they would be rejected into the bottom slot, or if the Coinstar machine would count the coin.

The first coin I deposited, the silver dime was rejected and deposited into the slot below. The 35% Silver containing war nickel (~$1 silver melt value) was accepted by the Coinstar machine. I decided not test the silver quarter, only because the machine said at the beginning not to insert silver quarters.

  Weight (Grams) of Silver Version Weight (Grams) of Modern Version
Nickel 5.0 (War Nickel) 5.0
Dime 2.5 (Roosevelt) 2.26
Quarter 6.25 (Washington) 5.67

Judging from the chart above, it seems the reason the Coinstar machine accepted the silver war nickel is due to it's exact weight equivalence with modern nickels. For all intensive purposes, it appears the machine cannot distinguish a 1943 nickel from a 2016 nickel.

Coinstar Statistics

(Source: OUTR 2015 10-K) 2015 2014 2013
Same store sales growth 2.9% 4.7% 1.4%
Ending number of kiosks 20,930 21,340 20,900
Total transactions (in thousands) 70,760 72,957 76,120
Average transaction size 43.78 42.12 41.39

Summary

Coinstar machines are designed to return more valuable silver coins to the user, but the mechanism they employ to do so is not perfect. They cannot distinguish between more valuable 35% silver nickels and modern nickels. This isn't due to a design flaw or lack of ethical considerations, but is simply due to the limitations of the technology.