Last week E-Trade Group Inc. made headlines with a splashy deal to buy a major network of automated teller machines. But there is a small catch: The company E-Trade plans to buy, Card Capture Services Inc., owns fewer than 5% of the 8,500 ATMs in its network.
The merchants that do own the machines - which include Rite Aid Corp. drug stores, Safeway Inc. supermarkets, and Chevron Corp. gas stations - might well have some say about E-Trade's plans to put its brand prominently on the ATMs and convert many of them into "financial services kiosks."
Executives at E-Trade, which is based in Menlo Park, Calif., say the ownership issue is a technicality that is unlikely to stand in the way of its ambitious plans. The merchants that own the ATMs all have long-term contracts with Card Capture Services for processing and network services. The president and chief executive officer of Card Capture Services, David Grano, said his merchants are "excited" about converting to the E-Trade brand, which they view as "clearly more powerful."
But the ownership issue - which was murky at the time of last week's deal announcement, and which an E-Trade spokeswoman said came as a surprise to her - does seem to mean that E-Trade's hold over the ATMs is less forceful than those of companies that own their machines outright. E-Trade, which branched into banking in January when it bought Internet-based Telebank, is competing with companies such as Bank of America Corp. and American Express Co., the two largest owners of ATMs.
E-Trade says the distinction is insignificant. "There is no value in owning or not owning a machine," said Mitchell Caplan, chief banking officer of E-Trade. "We have long been in the business of creating affinity relationships. I view this as a continuation of that. I don't see that as a particular challenge."
Still, E-Trade, which has said it is looking to expand its ATM network, says its goal is to own 20% of the machines in its network. The business model is "evolving," Mr. Caplan said.
Mr. Grano of Card Capture, which is based in Portland, Ore., said his company is helping E-Trade "lock up some very large retail accounts." He said E-Trade wants to have "a total physical presence" in "some very attractive national retail venues." Ownership, he added, "gives them the maximum amount of power in a couple or three very strategic relationships where they want to own the whole relationship."
Right now, more than 80% of Card Capture machines are branded with the CCSExpress ATM name. Mr. Grano said his company has spent months working on a "whole suite of services" that would make merchants want to convert to the E-Trade brand.
Mr. Grano - who will remain in a "key" role at Card Capture, according to E-Trade - said E-Trade does not want or need to get 100% of retailers to agree to every change. The strategy is to be selective about modifications, depending upon geography, demographics, and competition, he said.
For instance, Card Capture, which would be a wholly owned subsidiary, has "no intention" of trying to get all its merchant customers to consent to machines that take deposits, he said. Currently, none of the 8,500 machines have that capability.
Industry experts say E-Trade will not have the same independence to automatically make upgrades or brand decisions as companies such as American Express that own the ATMs outright. There is also the possibility - though it is some seven to 10 years off in most cases - that these retailers could join another network when the contracts expire.
American Express "certainly has more direct influence over the machines," said Ken Paull, vice president of sales and marketing at Triton Systems Inc. of Long Beach, Miss., which manufactures many ATMs distributed through Card Capture. Mr. Paull called the difference "subtle" and said retailers often have some kind of approval rights even when they do not own the machines.
Mr. Grano said E-Trade's negotiations with merchants would be more extensive because it does not own the ATMs. He said that most merchants have agreements allowing Card Capture to modify the brand on the ATM, and that in "some relationships" Card Capture is free to make upgrades without the merchant's permission.
"In the majority of cases, it will require actually gaining approval [for upgrades] from the merchant," he said. "In all cases, we'll work closely with the merchant to make sure it's a good fit."
Proprietors would be offered cross-promotional opportunities and would be eligible for bonuses for helping E-Trade acquire new customers. Retailers could also look forward to instant Internet promotion: the E-Trade Web site would include an ATM locator prompted by zip codes.
A Rite Aid spokeswoman said her company was "still evaluating" the situation and would "need to sit down and talk about the changes with CCS and E-Trade."
Deborah Newman, a spokeswoman for Telebank, said that at the very least, E-Trade has the right to brand all the ATMs in the Card Capture network with an E-Trade network logo, just as shared networks like NYCE Corp. or Star Systems Inc. do. "In many cases, we also have the agreement to brand the machine itself," she said.
Ms. Newman said not owning the machines is an advantage. "You don't want the investment in hardware or real estate necessarily. You want to focus on the electronic delivery aspect," she said.
After the acquisition, E-Trade customers who use machines outside the E-Trade network would still get reimbursed up to four times a month for surcharges (up to $1.50) imposed by other banks or ATM owners, according to the company.
E-Trade customers would be permitted to use machines within the network free of charge as much as they want. Because merchants that own ATMs are used to receiving some of the surcharge revenue, E-Trade has said it will continue to pay those fees to these merchants.
