Future of Electronic Networks: Regional Networks' Bet: Diversify for

Diversification has become the order of the day for regional electronic banking networks intent on surviving their industry's consolidation.

Bank-owned organizations such as Electronic Payment Services Inc., Honor Technologies Inc., NYCE Corp., and Star System Inc. rose to prominence in the 1980s largely on their ability to process automated teller machine transactions.

But as the ATM service proliferated and matured, and as network owners grew larger and more influential, the role of the regional networks changed, as have the economic and competitive forces affecting their strategies and futures.

These are the subjects of this American Banker special report.

Regional networks have grown handsomely while shrinking in number. Seeking to reduce their network affiliations, superregional banks have encouraged the mergers and consolidations of dozens of networks. According to Bank Network News, a Chicago newsletter, the total of regionals has fallen in the last 10 years from 175 to just over 40 today.

With more consolidation sure to come, the best of the networks will have to prove their worth to owners, often by getting involved in home banking, check verification, smart cards, credit card processing, or other support services.

"The networks will have to provide other services to stay afloat," said Ronald V. Congemi, president of Star System.

Star, which by some measures is the largest regional network, covers most of the western United States. It boasts the greatest point of sale transaction volume of any network, regional or otherwise.

Mr. Congemi said San Diego-based Star invests heavily in its core services. It spends about $5 million a year on advertising and promotion of its ATM and POS networks.

But it also is branching out. It founded Primary Payment Systems Inc., a check-fraud prevention company now co-owned by several networks and the New York Check Cashing Association.

Star also plans to invest $1.5 million in Star Station, an intranet communications system that member institutions can use to download brochures and to send complaints or requests.

Advanced ATM services also are on Star's menu. Member banks can rig their machines to dispense stamps, tickets, and coupons or to print statements and cash third-party checks.

Foreign exchange services and prepaid telephone cards also are available through cash machines.

Though such services make the networks more valuable to some institutions, some of the largest banks said it makes little sense for them to make use of the services regionally.

"The value of the regional networks is their brand in the marketplace," said Bard Estabrook, national ATM manager at Banc One Corp. "We're not very interested in pursuing new types of products at the regional level."

Banc One belongs to at least 10 networks, including Star, Pulse EFT Association in the Southwest, Tyme in Wisconsin, and Electronic Payment Services' MAC system in the East.

"Having different networks with different rules and products creates challenges for us," Mr. Estabrook said.

For example, "if we want to introduce a new card product nationwide," such as an off-line debit card, "it takes three days to review and make sure we have all the correct network information on disclosures, the plastic, the card carriers, and the brochures."

He also noted that for services such as home banking, an alliance with a national provider makes more sense.

Mr. Estabrook said Banc One is "very interested in continued consolidation," pointing out that the national Cirrus and Plus networks, owned by MasterCard International and Visa International respectively, provide sufficient coverage.

Still, he did not advocate entirely dismantling the regionals.

"In certain markets there's very powerful brand identity with consumers," he said. "It's hard to predict if that will change over time."

Pulse, the fifth-largest regional network, has introduced home banking and is piloting an Internet banking application. But the president of the Houston-based network, Stan Paur, warned that until new payment options become ingrained in consumer behavior, "one could spend a lot of time chasing rainbows."

He advocates "proceeding cautiously" on spending for ancillary services.

Along more traditional lines, many regionals are doing off-line debit processing for Visa Check and Master Money programs.

Also, some are participating in electronic benefits transfer programs, which use ATMs and POS terminals to distribute government benefits such as welfare payments.

Though networks may be trying to anticipate the types of service their largest members might want to use, Dennis Lynch, chairman and chief executive officer of Woodcliff Lake, N.J.-based NYCE, said the networks would be expanding their horizons "whether financial institutions were consolidating or not."

Like participants in most maturing industries, the networks are under pressure to increase cash flow as well as their relevance.

Diversifying is a logical step for organizations that already have links established to member banks, said Alan Pohlman, a former NYCE chief executive officer who now is executive vice president of Carmody & Bloom, a Ridgewood, N.J., consulting firm.

"They want to look forward and say what's going to carry the business out past the turn of century," he said, "defending against the threat of the nationals."

Mr. Estabrook acknowledged that the regionals' "one-stop shop" approach would likely be attractive to smaller institutions.

Dale Dooley, president of the Shazam network in Johnston, Iowa, said community banks give him "a good market niche." He said he believes that as long as community-based financial institutions survive, Shazam, the 13th- largest U.S. network, will be serving them.

"We provide a lot of value in the marketplace besides physical switching," said Mr. Dooley.

"We're not a regional ATM network any more. We're a company involved with electronic funds transactions."

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