ATM Competition: A Matter of Survival
Regional networks of automated teller machines, the fastest-growing segment of the electronic banking business in the 1980s, face what could be a Darwinian struggle for survival in the 1990s.
The business climate is being reshaped by the recent spate of bank megamergers, which is expected to intensify, and growing competitive pressures among banks, networks, and technology companies.
Pressure for Mergers
The changes are forcing banking companies that own regional ATM networks to consider whether their franchises have reached maximum value and, if so, to contemplate mergers or sales of their stakes.
"We've seen smaller networks bought by larger ones," said Ron Dennis, a consultant at Speer & Associates, Atlanta. "Now, we're seeing the larger networks being bought."
A few bankers said that regional ATM sharing arrangements will be replaced completely in this decade by national networks such as those run by Plus System Inc., MasterCard's Cirrus System Inc. But most said they believe a handful of regionals will survive.
Of the 75 to 80 shared networks, perhaps 20 of the most aggressive and innovative will remain after five years, observers said.
And as with the financial services industry in general, nonbank competition looms. New competitors for bank processors of ATM transactions may rear their heads in the form of the regional Bell telephone companies; a recent court ruling allowed the so-called Baby Bells to enter the ATM switching business.
The most recent example of such competitive pressures was CoreStates Financial Corp.'s discussion of an offer from its former chief operating officer and chief financial officer to buy its MAC ATM network for about $400 million.
CoreStates ultimately rejected the overture and is unlikely to pursue a buyer, observers said. But the talks pointed up the divergent visions of regional network franchises taking shape among banks that own networks.
During his tenure at CoreStates, Bipin C. Shah, the former chief operating officer, was known to advocate emphasizing transaction-processing businesses over traditional banking services, but CoreStates' chief executive, Terrence Larson, disagreed.
The pace of ATM network consolidation is also being driven by the recent rash of big bank mergers, observers said, especially those that cross state lines like the one proposed by NCNB Corp. and C&S/Sovran Corp. The merged company may find it makes little sense to belong to multiple networks.
C&S/Sovran, for example, is in both the Most and Honor networks. "I would not be surprised if Most and [Honor] look at merging," said Thomas O. Bennion, president of Southeast Switch Inc., Maitland, Fla., which runs the Honor network. The two systems have talked, he said, but not enough big banks were in both networks then.
Effect of In-Market Deals
"The larger players have the biggest voice in what goes on," Mr. Bennion said.
In-market mergers such as the one proposed between BankAmerica Corp. and Security Pacific Corp. probably would not force further consolidation, according to Mr. Bennion. However, such mergers do reduce the revenue stream for ATM networks because the combined company no longer needs an intermediary to exchange transactions.
It is difficult to draw an analogy for the industry from the MAC negotiations because the network is in many ways unique. MAC is not only the largest regional network in terms of switched volume but also the only major one owned by a single banking company.
MAC may have difficulty growing beyond its current franchise because of CoreStates' tight control. And that may cause problems, according to some observers.
Like many other large regional networks, MAC is facing sluggish growth rates. CoreStates said its MAC network is growing at 8% to 12% per year, which reflects a "maturing phenomenon," said Douglas D. Anderson, executive vice president and head of electronic services at CoreStates.
"In my view, MAC is at its maximum value right now," said Liam Carmody, president of the Carmody & Assocs. consulting firm in Fort Lee, N.J. "Their market is mature in terms of share transactions and process transactions."
Observers said network consolidation is likely to spread across the United States. Competition is expected to be especially intense, however, in New England, where the NYCE and MAC networks encroach on the much smaller Yankee24 system, run by New England Network Inc., Wallingford, Conn., or in the South, where small networks such as Mandeville, La.-based Gulfnet, ranked 54th in transaction volume, exist side by side with giants such as Houston-based Pulse, ranked 10th, according to 1991 figures from Faulkner & Gray.
Del Tonguette, president of Gulfnet, said he believes that regional networks will become switches on the national network but will cease to be used as brand names.
Mr. Tonguette said that national networks such as Cirrus and Plus are already cutting into transaction volumes on the regional networks.