A group of midwestern banks looking to form a large automated teller machine network lost a second potential member earlier this week.

Liberty National Bancorp, an early participant in the Midwest group, has instead decided to join the MAC network. The Louisville, Ky.-based company will maintain its membership in the regional Quest ATM system, displaying both MAC and Quest logos on its automated teller machines.

Liberty National is the second defection in the last month from the Midwest group, which now consists of 13 banks, including First Chicago Corp. and Norwest Corp.

In late July, Provident Bank broke from the circle to join the Jeannie network, which is owned and operated by another Cincinnati company, Fifth Third Bancorp.

Autonomy Seen as Factor

Experts are split on what effect, if any, the defections will have on the Midwest study group's talks. However, most agree that Liberty National and Provident were at least partially motivated by a desire to be able to operate their own ATMs.

The still-forming Midwest network, which has tentatively taken the name Electronic Transactions Inc., will likely require that the ATMs of its equity holders be "driven" by the network.

ATM driving is a processing function that determines such things as the look of an ATM's display screen and the range of tasks that the terminals will perform.

|A Huge Hurdle'

"For some banks that have made an investment in computer equipment to drive their ATMs, handing over [the function] to a network is a huge hurdle to get over," said Richard Westelman, a senior consultant at Dove and Associates in Boston.

Its approach to ATM driving is one of the fundamental ways that Electronic Transactions differs from MAC, which experts say would be its primary competition in a number of states, including, Ohio, Kentucky, and Indiana.

MAC became a model for the electronic funds transfer industry when it became part of Electronic Payment Services Inc., a Wilmington, Del.-based joint venture formed last summer by CoreStates Financial Corp., Banc One Corp., PNC Bank Corp., and Society Corp.

MAC rules do not require its owning institutions to process with the network, although observers believe that the four bank owners will eventually let the network drive their ATMs.

Condition of Ownership

Electronic Transactions, on the other hand, is making network ATM driving a condition of ownership.

The driving business is a huge part of the network's planned revenue stream - and one of the ways the network will measure each bank's equity share.

"The way that you will get equity in ETI is to sign a long-term processing contract, and you will allow ETI to drive your ATMs at a market rate," said Phillip A. Parker, a Star Banc Corp. executive vice president and a spokesman for the Midwest group.

A report on the results of three months of meetings between the 13 remaining Midwest banks is expected by the end of this month.

Mr. Parker also noted that early versions of the report, which is being written by Speer & Associates Inc., an Atlanta-based consulting firm, indicated that Electronic Transactions should allot a significant sum of money for the research and development of new electronic banking products.

If all of the remaining 13 institutions in the study group buy into the network, Electronic Transactions would have almost 10,000 ATMs in 20 states.

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