The electronic funds transfer industry has witnessed a flurry of transactions recently that signal a fundamental change in the traditional industry model-and in the way financial institutions and processors view shared networks.

These transactions include:

The pending merger of Honor and Star.

The announced merger of NYCE and Magic Line.

Electronic Payment Services Inc.'s acquisition by a leading merchant acquirer, Concord EFS.

American Express Co.'s purchase of several thousand ATMs from Electronic Data Systems Corp., and others.

Citibank's contract with Blockbuster Video to deploy more than 3,000 ATMs.

These network deals create a new class of superregional networks. Based on switch volumes reported in Bank Network News, NYCE/Magic Line will be only the third-largest shared network - behind Honor/Star and MAC - but will be almost 50% larger than the next largest switch.

The Big Three, with more than 60% of the regional market among them, will have an enormous advantage in scale and scope over the other regional networks. Each of the new powerhouses has unique characteristics, however.

Honor and Star will form the largest network by far, switching almost 2 billion transactions annually, coast-to-coast. They may be able to compete on a national level with Visa, MasterCard, and large nonbank processors. Importantly, the merged company will be owned by likely bank consolidation survivors such as BankAmerica/ NationsBank, Norwest/Wells Fargo, and First Union.

NYCE/Magic Line represents the largest network combination not driven by overlapping geography or common ownership. This merger may lay the groundwork for the long-predicted consolidation of the Midwest network market.

Further, both NYCE and Magic Line have built significant revenue streams from sources other than core switching, such as terminal driving, home banking, and off-line debit processing. Like Honor/Star, NYCE/Magic Line also boasts a strong group of financial institution owners - Citibank, Chase, and Bank One, for example.

Finally, the Concord/Electronic Payment Services deal brings regional electronic funds transfer networks into the public markets. This access to capital may hasten consolidation in this sector, much like what happened in the merchant acquiring industry when its leading players became public companies.

Electronic Payment Services again will blaze a trail in the industry by attempting to generate the synergy between merchant acquiring and EFT processing. The other significant aspect of its was that five large financial institutions apparently cashed out their network ownership positions, although at huge profits.

The other recent deals are equally intriguing. American Express has moved boldly to expand its cash access and other delivery capabilities beyond the point of sale. How it intends to integrate ATMs with its card business, if at all, remains to be seen.

On the other hand, Electronic Data Systems appears to be refocusing on core EFT processing while de-emphasizing ATM deployment. This is surprising, because the firm pioneered large-scale off-site ATM deployment through its relationship with Southland - still one of the most visible and successful deployment contracts.

Citibank intends to deploy ATMs at Blockbuster locations primarily as retail distribution points. While this move seems less bold since the bank decided to surcharge non-customers out of its branch footprint, the Citigroup subsidiary is also pursuing space in high-profile, off-premises locations for future sales of financial services.

What impact will these deals have on financial institutions, networks, and processors? Some potential effects:

Higher valuations. The Electronic Payment Services transaction set a benchmark for regional network valuations, although the company is more than an EFT network. This will drive up the values of all networks and processors with strong franchises and good growth characteristics.

As the company - and possibly other networks - leverage their access to public capital, tax-advantaged deal structures will also increase prices for networks. Also, the largest networks and processors will need to consolidate the excess capacity in the market to support their growth mandates.

More competition. Network consolidation will actually increase competition in many markets. Historically, most regions have had one network with dominant market share.

With consolidation of banks and networks, more regions will have multiple strong competitors. For example, Honor/Star, MAC, and Pulse each will have a significant presence in Texas after the deals are completed. This competition will surely benefit financial institution customers of the networks competing for business.

Tougher competition. Smaller networks and processors will find it increasingly difficult to compete with the largest providers as they move out the shallow scale curve of EFT processing. Furthermore, smaller networks are generally more susceptible to customer attrition through bank mergers. Customers will demand more sophisticated value-added services from their vendors as well.

Emerging proprietary strategies. The deals may signal a move toward more proprietary electronic delivery strategies by the largest institutions.

Big retail financial institutions such as Bank One, Citibank, and American Express may choose to compete on the basis of their broad delivery capabilities and to reduce their reliance on shared networks. The EFT industry may return to its roots, serving as a means by which smaller institutions can compete with the superior delivery systems of their larger competitors.

More consolidation. Stiff competition, continued bank consolidation, and high network valuations will prompt many network owners to sell or merge. These owners will also be attracted by the potential of making their network investments liquid, as did the former owners of Electronic Payment Services.

We expect three types of networks to remain when the dust settles: bank- owned cooperative networks; processor-owned networks (such as Concord EFS and EDS); and public/semi-public owned.

A small number of traditional networks will likely remain by pursuing niche strategies in a small geography, probably gaining access to scale through outsourcing arrangements. Others will be acquired by current or future processor owned networks.

Finally, the largest bank-owned networks will likely make public offerings to gain capital for continued growth. Others, by virtue of more stock-for-stock mergers, will expand their ownership bases to include hundreds of financial institutions.

As individual bank ownership is diluted, these semi-public networks will operate more and more like public companies.

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