Electronic Payment Services Inc., a tarnished Cinderella story of electronic banking, is in search of a happy ending.

Its MAC automated teller machine network grew from modest beginnings at CoreStates Bank in Philadelphia to become an industry powerhouse, a status it still enjoys as processor of more transactions than any other system of its kind.

And MAC is just the "mature" part of EPS, a Wilmington, Del., joint venture of CoreStates and four other superregional banking companies that has hit some bumps on the road to diversification, notably in smart card technology.

Many industry observers still view EPS as a leader in applying new ATM technologies and point of sale debit and credit systems. Its MAC brand reaches 45 states through 24,000 machines. EPS also connects to 300,000 point of sale terminals.

But outsiders detect disarray. In the most recent high-level shake-up, David Van Lear announced he would retire as chief executive at the end of February. His replacement, Richard N. Garman, will retain the title of president, but his role as chief operating officer will be assumed by Robert Golitz, senior executive vice president.

Turmoil has been familiar to EPS, say outsiders. Layoffs shook the staff beginning in January 1996. A high-profile smart card trial failed to materialize last year. And Mellon Bank Corp. backed out of a 1995 plan to become a sixth equity partner. (CoreStates Financial Corp., PNC Bank Corp., KeyCorp, Banc One Corp., and National City Corp. each hold 20%.)

"They got caught up in aggressively trying to take the lead, and it was a very expensive mistake," said a source familiar with EPS who asked not to be identified. "They blew their brains out on the smart card deal."

EPS is not seen as vulnerable to the rising influence of national network providers-it plays in that league. The turmoil has been internal, a case of ambition run amok. But repairs are progressing.

"I don't think EPS has problems more than anyone else," said John B. Benton, president of Benton International, a Torrance, Calif., consulting firm.

Mr. Garman, EPS' president and chief executive, who was hired in August 1995 from Montgomery Securities in San Francisco, described 1996 as the "best year ever."

"We have had double-digit revenue growth," he said. "We grew in 1996 more than any other.

"Our operating margins are better, we have higher revenues, and we have more customers."

Because EPS is not publicly traded, it does not have to disclose financial specifics, and Mr. Garman declined to give details. A spokeswoman confirmed that EPS added 198 financial institutions to its MAC network and switched 1.1 billion transactions last year.

In one of its biggest niches-ATM terminal driving-the company also set a record, adding 5,500 terminal installations in 1996, up from 1995's 4,300.

The reorganization that caused the dismissal of 26 mid-level and business-line managers in January 1996 was followed by 100 hirings, and 200 more are anticipated this year, said Mr. Garman. "It's all driven by growth."

The abandoned smart card initiative has given way to other projects. Slated for this year is the rollout of a home banking product. Point of sale will also be a major focus, said Mr. Garman. And the company hopes to become the "driver of choice" for financial institutions "in all 50 states."

Many observers credit Mr. Garman, a former investment banker with experience in mergers and acquisitions, for the company's newfound focus.

"He turned the back-room organization around, delivered improvements, and changed the environment internally to be more customer-driven," said an industry source.

Others said the leadership team simply got better at managing the business.

"I think they have put their heads down and are focusing on what they do best," said Mr. Benton. "They have one hell of a core business."

The smart card incident, though perhaps not involving a core business, brought unwelcome publicity. Conceived in 1995 as a partnership among MasterCard International and several banks, including EPS' equity owners, the SmartCash program was to have begun, after several delays, with an extensive pilot in Wilmington last summer.

But last fall MasterCard agreed to buy 51% of Mondex International, which had already been operating a smart card pilot in England for more than a year.

The executive in charge of the EPS effort, Michael G. Love, joined First Union Corp. last October to run its Visa Cash program. Visa International, meanwhile, had been rumored to be interested in acquiring EPS' SmartCash platform.

Without at least one of the bank card associations in its camp, observers said, EPS could not make its smart card program work. "Smart cards are such a changing front that EPS simply got left behind," said one source.

Mr. Garman admitted that the smart card initiative was "a bit misguided."

"We have revised our strategy," he said. "Originally we expected to develop a proprietary product and push it through MAC. That is not executable. It really has to be a national product."

Instead, EPS is concentrating on the home banking system, Direct Bank. EPS would be the focal point for financial institutions to deal with system vendors such as Intuit Inc., Checkfree Corp., and Visa Interactive.

Mr. Garman said that, because EPS' existing network would link banks with other "content providers," banks could cut their communications expenses significantly.

"It could be the difference between $30,000 for our ATM lines versus $500,000 for a dedicated line the bank installs itself," he said.

A pilot is scheduled this fall, to include the participation of 17 banks.

EPS is also expecting to capitalize on the overall growth in debit and credit payments and nonbank ATM locations. A key vehicle will be Buypass, its Atlanta-based subsidiary that specializes in point of sale networks for petroleum and convenience stores, supermarkets, and restaurants.

"There continues to be a convergence of debit and credit at the point of sale," said Mr. Garman. "As consumers become even more plastic-centric, these trends will be alive and well."

EPS might even be in a position to make a public stock offering- something other transaction processors profited from while EPS was cleaning house.

Mr. Garman "has done a pretty good job there in terms of getting costs in line," said Richard Weingarten, analyst at Montgomery Securities. "I think they could do" an initial public offering this year.

Mr. Garman would not rule out the possibility: "An IPO would be part of that (growth) strategy, but it's no panacea. Our results are stronger than what is commonly thought. So in that respect, an IPO would be a good marketing advantage.

"It's an open alternative, not something that we're working on right now."

More capital could also come from additional equity partners, said Mr. Garman.

"The inclusion of additional financial institutions as equity partners would be centered on a business relationship, not as a passive investor," he added.

Mr. Garman questions the view that the regional networks' survival is at stake, especially when it comes to EPS and its MAC brand.

"We are an ingredient brand," he said, waving his ATM card embossed with the MAC logo. "We think we have the strongest brand and it adds value to our proprietary institutions. We are joined at the hip with our partners. The more transactions their customers do, the more money we make."

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