eFunds Says It’s Not Done Buying and Building in ATMs

Two major acquisitions in less than six months have made eFunds Corp., a processor of debit transactions for retailers and about 450 banks, the nation’s largest independent players in merchant automated teller machines.

And it plans to get bigger still — bigger than Bank of America Corp. in this category — with at least one more deal this year.

Last week the Scottsdale, Ariz., company, announced it had bought management contracts from Hanco Systems Inc., an independent service organization based in Atlanta, for an undisclosed amount. The contracts cover about 2,500 automated teller machines in 30 states, predominantly in the Midwest and Southeast.

In September eFunds bought Access Cash International LLC, another independent service organization, for about $44 million and assumed management of its 8,400 ATMs. It is keeping the Access Cash brand and plans to integrate the Hanco Systems ATMs into that brand. (The deal does not affect Hanco Systems’ continuing business in the United Kingdom.)

The Hanco deal, announced Feb. 4, means that eFunds now manages nearly 11,000 ATMs in all 50 states. It furthers a push into ATM management begun nearly two years ago with its $20 million purchase of a 24% stake in Access Cash.

Now that it has more clout in the market, eFunds plans to market a branding agreement with banks and other financial services institutions, one that features surcharge-free teller machine transactions.

Though eFunds owns only about 2,000 of the 11,000 machines it manages, it controls one of the country’s largest ATM systems, rivaling Charlotte, N.C.-based Bank of America, which owns all the 12,000 machines in its ATM network. And eFunds executives have said the company plans to make another acquisition this year that would give its system 15,000 ATMs.

Until last year, when it filed for bankruptcy, Credit Card Center was the largest ISO in the United States. But the Philadelphia company unraveled last year and is in Chapter 11 bankruptcy protection, leaving the retail ATM industry in upheaval.

Hundreds of merchants lost thousands of dollars in surcharge fees as well as their leasing agreements because of Credit Card Center’s collapse. Two ATM manufacturers, Tidel Technologies Inc. and NCR Corp., lost millions of dollars.

But eFunds differs from Credit Card Center and other typical ISOs of teller machines. Most of these organizations buy terminals from manufacturers such as Triton Systems Inc. and Tidel and resell them to merchants, frequently convenience-store owners, and then manage them on the retail buyers’ behalf.

Nikhil Sinha, executive vice president for product management at eFunds, said: “One of the biggest differences between eFunds and the other ISOs is that we do all of our own processing as well. Most other ISOs have to contract with third parties to do their processing.”

Craig Peckham, an analyst who covers eFunds for Jeffries & Co. Inc., gives its stock a “buy” recommendation. He said the company’s strategy is eventually “to control the ATM transaction from the point of occurrence to the point of settlement,” which increases its revenues per transaction.

Mr. Sinha said eFunds now can share in surcharge fees, generally $1.50 to $2 per transaction — compared with the pennies per transaction it garners in the back-end processing and settlement of those same transactions.

eFunds is not quite like a electronic funds network, such as NYCE or Pulse EFT Association, which have their brands on both the machines and the cards and can process the transaction from beginning to end. But Debi Ford, director of investor relations at eFunds, said that having control of these management contracts enables her company to “pick up multiple pieces of the revenue stream.”

The purchase of these ATM networks also fortifies the company’s core business — debit processing. When it bought the 24% stake in Access Cash, eFunds had about 2,000 processing contractual agreements with merchants of those ATMS. But by May of this year, it will have converted all the processing contracts with those former Access Cash merchants — including contracts with Concord EFS Corp. and Metavante Corp. — to its own.

“We’re going to do the same thing with Hanco,” Mr. Sinha said. The company has no processing agreements yet with Hanco merchants.

The Hanco acquisition has three benefits, Mr. Sinha said: “It increases the number of ATMs that we manage, it increases the number of ATM transactions we process, and it takes business away from our competitors.”

eFunds also plans to market its ATMs to banks and other financial institutions as a way for them to extend their surcharge free ATM networks in exchange for a fee. The company already has such an agreement with Co-Op Network of teller machines, which serves credit unions.

“We’re taking the same model to our banking customers and giving them the same ability,” Mr. Sinha said. Only five brands are permitted on any one ATM.

Mr. Sinha said that, though eFunds aims to leapfrog Bank of America, “we see Bank of America as a potential customer for our services, not a competitor. This is another channel in which to increase their network.”

In its fourth-quarter earnings report, issued Jan. 30, eFunds had hinted at an upcoming deal that would contribute revenues of about $22 million a year. That would turn out to be the Hanco deal. Mr. Peckham said last week, “I think it’s reasonable to expect this acquisition to be additive to earnings per share as we leave 2002.”

Alanna Kellogg, the president of the Kellogg Group consulting firm in St. Louis, called the Hanco deal “really big” for eFunds.

“They’ve built a really big [system] of ATMs that they’re providing processing for, which gives them recurring revenue and gives them a wider base on which to spread a technology investment,” she said.