Mellon Bank Corp. has backed out of an agreement to become a co-owner of Electronic Payment Services Inc., operator of one of the country's most prominent automated teller machine networks.

Mellon had applied for regulatory approval to take an equity stake in the Delaware-based company, whose MAC system connects 16,500 ATMs and ranks first among regional networks in transactions processed through its central switch.

The Pittsburgh bank's pullout, for reasons said to be related to "financial terms and conditions," is a rare setback for EPS and MAC. Transactions had been growing and business expanding steadily since the network became a joint venture of CoreStates Financial Corp., Banc One Corp., PNC Bank Corp. and Society Corp. - now Keycorp - in late 1992.

Mellon, which remains a participating member of MAC, was to have joined National City Corp. in the second wave of equity partners.

When Mellon agreed in December 1993 to pay $29 million for its stake, the announcement was hailed as a coup for EPS and MAC.

Conversely, the deal's termination is seen as a tough blow at a time when EPS is also concerned about federal antitrust scrutiny and, according to some sources, its income flows, capital needs, and general financial health.

"This could present the perception that EPS' growth momentum has slowed down," said Art Clark, a partner with Business Dynamics Consulting Inc., Nyack, N.Y.

EPS and Mellon applied last June for Federal Reserve approval of their agreement. Money Station, a regional ATM network based in Columbus, Ohio, filed an objection on antitrust grounds, which delayed consummation.

The U.S. Department of Justice was also believed to be looking into the competitive implications of the MAC network's rapid expansion in Ohio through the affiliations of Banc One, PNC, Keycorp, National City, and non- equity participants like Huntington Bancshares.

A Mellon spokeswoman acknowledged there were regulatory and legal issues "not about our organization," but said the deal was called off "simply because we could not agree on financial terms and conditions." She declined to elaborate.

In addition to, or as part of, the cash payment for what was to be 16.67% of EPS, Mellon was to transfer control of its Network Services Division, which processes transactions for other banks and networks.

John Beahn, who headed the Mellon division, has already moved to EPS as head of network services, and he plans to stay there.

Industry insiders expect Mellon to seek a buyer for the profitable transaction processing unit.

"I can think of a lot of organizations that would be interested in that particular piece of the business," said Mr. Clark, who named First Data Corp., Electronic Data Systems Corp., Fiserv Inc., and other network players as possible buyers.

One industry source saw a connection between a $130 million charge to Mellon's fourth-quarter earnings related to securities lending at its Boston Co. subsidiary, and the possibility of recouping that amount by selling Network Services to someone other than EPS.

Mellon denies it is under any financial pressure to sell the division, which has annual revenue of $42 million and 200 employees, serving about 800 financial institutions and 60,000 retailers.

Mellon wants to hold onto the business as "an integral part of our organization," the spokeswoman said. "We expect to name a senior manager for this business very soon . . . Our announcement will show how committed we are to this business."

"What they're saying just doesn't make sense," said a former Mellon employee familiar with the unit. "Management was too ready to slough off this business. Management is gone, and the image in the marketplace is in dire straits."

Meanwhile, rumors are flying that EPS could require further capital infusions from the owners.

An EPS spokeswoman denied these reports.

In addition to the ATM network, which was launched by CoreStates' Philadelphia National Bank in the 1970s, EPS is a leading supplier of electronic transaction processing services to merchants through its Buypass subsidiary.

The company is also investing heavily in electronic purse, or stored- value, payment systems - seen as an automated alternative to cash - through its Smart Card Enterprise, currently in a research and development mode.

National City is still awaiting regulatory approval to become a shareholder, and Keycorp, currently a smaller shareholder, remains committed to pursuing Fed approval for a stake equal to the others'.

With Mellon out of the picture, each of the five remaining owners will eventually have 20%. EPS has indicated that it may add as many as four more partners in the next two years.

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