Bank of America Corp.s decision to move its electronic funds transfer switching operations from the Star network to Visa U.S.A. may be the first major sign of fallout from the frantic consolidation among EFT networks over the last two to three years.
The patchwork of regional networks that switched and processed automated teller machine and point of sale transactions has largely been replaced by a handful of national networks that, with the exception of those run by Visa and MasterCard International, are no longer directly controlled by banks.
The Star network now a combination of the former Star Systems, MAC, and Cash Station networks is owned by Concord EFS, a public company based in Memphis. NYCE Corp., which had run one of the last independent bank-owned EFT networks, has been bought by First Data Corp., another large public company that is building its own alternative to the networks run by Visa and Concord.
Without the direct ability to steer policy at these networks, there seems to be less incentive for banks to stick with them. The services they offer are largely duplicates of those offered by Visas Plus and Interlink networks, which also give banks more favorable prices.
Brad Russell, a Bank of America spokesman, said that since Interlink and Star are both national networks, there was no reason to use both. Bank of America chose Interlink over Star because of the added customer protection against fraud that Visa brings to the table, he said.
Moreover, he said the move allows for competition to exist in the marketplace, which we believe will lead to increased innovation, both for merchants and consumers.
Mr. Russell disputed the idea that Bank of America joined Interlink to increase its revenue through higher interchange.
No, absolutely not, he said. This is a business decision that is about customer service and consistent experience. We want to support and be a part of a strong national network thats going to benefit both the merchants and consumers.
Bank of America will remain part of two smaller regional networks, Pulse EFT Association of Houston and Shazam Inc. of Johnston, Iowa. Mr. Russell said these networks provide some unique services and benefits for our customers in their markets.
The fact that Visa, Pulse, and Shazam are run by banks and Concord EFS is not mattered to Bank of America, he said. That is not the sole reason for exiting, but the benefit of being part of an organization where you can have input into the experience is definitely attractive, Mr. Russell said.
Concord, which will continue to provide processing services to 1,100 Bank of America ATMs and point of sale processing to 1,500 of its merchants, sought to downplay the significance of the defection.
On Thursday, Concord announced that its board of directors had approved a two-for-one stock split that reflected the companys confidence. It also announced a new uniform pricing structure for the three networks it has melded under the Star name.
Last month Visa increased the interchange charged by its Interlink network such increases are beneficial to its bank members, but not to merchants, who must pay more for transactions.
Concord said its new pricing plan in which some prices were raised, and others lowered represented a competitive reaction to Visas move, one aimed at balancing both its bank and merchant constituencies.
In an interview Wednesday in Wilmington, Del., with American Banker, Edward A. Labry 3d, Concords president and Stars chief executive officer, said the new prices would benefit 95% of the banks within the Star network.
Mr. Labry stressed that Bank of America had been edging away from Star for a while, and its loss would have little financial effect on Concord. The company, which connects to 800,000 merchant point of sale locations, is trying to gain parity with Visa, which has just under five million locations in the United States.
If we become too retailer-friendly, then we get those [five million] locations, but we wont have anybody that issues our cards, Mr. Labry said. On the other hand, if you become too financial institution-friendly, retailers wont continue to see the value and continue to rollout PIN-based debit.
He said he was surprised by Visas aggressive Interlink hike, particularly at a time when Visa is defending itself in a class action brought by the nations retailers over that very issue. The antitrust case is pending in U.S. District Court for the Eastern District of New York.
Kelly Presta, a spokesman for Visa, said the Interlink interchange increases were necessary to ensure profitability. Some of the regional networks do not make a profit at the point of sale because their prices are too low, he said.
Interlink offers protections that the regional networks do not, such as zero liability, and those protections were part of what Bank of America looked at when they made these determinations, Mr. Presta said.
Stan Paur, the president and chief executive officer of Pulse, said his network has not raised fees recently. He credited his Pulses bank-oriented governance as a reason for Bank of Americas decision to stick with it. I believe their decision was predicated on a desire to participate in an organization over which they have control or influence.
Ronald A. Congemi, the president of Star, said that while banks no longer dictate the networks decisions, Concord maintains an advisory board of bankers, and it listens to their suggestions.
The companys new fee structure which includes a hike in point of sale interchange was a response to Visas move, in which it raised interchange on PIN-based debit processing to a maximum of 45 cents for merchants and a flat 22 cents for grocery stores, Mr. Congemi said. When the new Concord fees go into effect on Jan. 1, the network will charge a maximum of 34 cents per transaction for merchants and a flat fee of 19 cents for grocery stores.
No one likes to be in a reactionary mode, Mr. Congemi said. But it is a response to competition. The uniform pricing is the latest step in Concords consolidation strategy, which includes unifying all the networks under the Star brand, integrating multiple operating platforms, and implementing uniform operating policies across its debit network.
Lloyd Constantine, the lead attorney for the merchants in their lawsuit against Visa and MasterCard over interchange, said the increases in Concords fees were predictable. Visa has always used Interlink as of a way of moving up the regional rates. Theyve used it as a way of changing and perverting the pricing structure of PIN-based debit in the United States.
Mr. Constantine went as far as to say that Visa, which acquired the Interlink network in the early 1990s, when it was one of the dominate debit networks in the country, did so not to make money on it, but to use it against the other regional networks.
A bank goes to the other networks and says, I can get X from Interlink. Youre only giving me peanuts, and if you dont raise your rates, Im out of here, he said. And frankly, they dont even care if merchants drop out of Interlink, because if they drop out of Interlink, the transactions default to offline debit. If Visa really had its way, there wouldnt be a single PIN-based debit transaction in the United States.
Concord, which announced its new fee plan Thursday morning and its stock split in the midafternoon, said it expects its network acquisitions will produce cost synergies and cross-sell opportunities. Ramkrishna P. Kasargod, a senior analyst for Morgan Keegan & Co. in New York, said a stock split usually implies confidence in the outlook for the future. No management would split a stock if they thought their earnings would be weak.
However, Concords stock was hit hard Thursday, dropping 4.60% to close at $52.21. Mr. Kasargod attributed the drop to the weakening economy and the fact that any news that people dont understand properly can hurt a companys stock. As the market stabilizes, Concord should come back." 
