With two deals in four months to acquire networks that process automated teller machine and point of sale transactions, NetBank Inc., which is primarily an Internet retail institution, is demonstrating serious aspirations in the processing business.
In December the Atlanta company bought Financial Technologies Inc., which services about 4,300 ATMs in retail locations and owns about 10% of them. On Wednesday, NetBank simultaneously announced a deal to buy some ATM and merchant processing assets from Electronic Cash Systems Inc. and to rebrand both these businesses under the name NetBank Payment Systems Inc.
Already, the fledgling division has begun trying to cross-sell ATM processing services to the 500 community banks for which NetBank handles mortgage processing.
"We intend to grow this company," NetBank chairman and chief executive officer Douglas K. Freeman said in a telephone interview Wednesday. "The acquisition of ECS is an indication of what we think is the best way to acquire this business."
In processing NetBank will focus on serving small merchants and community banks. Mr. Freeman said his goal is for his company to become the best processor in the business. "Best doesn't always mean the biggest, but you have to have critical mass to be the best," he said.
In October, when NetBank announced the deal for Financial Technologies, Mr. Freeman said that buying the Jackson, Miss., company would mean more revenue sources for NetBank but would not necessarily add to the number of ATMs his deposit customers could use without incurring fees.
But on Wednesday, in describing the deal with Electronic Cash Systems, of Rancho Santa Margarita, Calif., and the move to corral the payments business under the NetBank name, Mr. Freeman said that the 5,000 ATMs soon to be under his management as a result of both deals will gradually be offered to the bank's retail customers at no charge, adding to the 10,000 or so that NetBank customers can already use free.
After the new deal closes, NetBank Payment Systems division will also handle transactions for about 300 point of sale terminals and $72 million of transactions a month. It will have a much larger processing presence on the West Coast, where Electronic Cash Systems' business is concentrated. NetBank Payment Systems president Tommy Glenn said in a press release, "The deal with ECS enhances our focus on merchant processing."
ECS president Fadi Cheikha is to join NetBank Payment Systems as vice president of national sales distribution and oversee the company's distributor and point of sale program.
NetBank, established in 1996, also has a sizable mortgage subsidiary, which it acquired in 2002 with its deal for Resource Bancshares Mortgage Group Inc. That business both originates loans and provides mortgage processing for nearly 500 community banks. Since acquiring the first ATM processing business in December, NetBank has been cross-selling its ATM processing to these banks, Mr. Freeman said.
He added that two recent megadeals - Bank of America Corp.'s to buy FleetBoston Financial Corp. and J.P. Morgan Chase & Co.'s agreement to buy Bank One Corp. - could open opportunities for NetBank to pick up processing business from smaller banks.
Mr. Freeman said NetBank usually sets up private-label relationships with community bank customers, "which is extremely important," he said. "We allow these small banks to private-label everything they do in their name, so they retain their customers as their customers, not somebody else's."
Chris Musto, a vice president of research at Gomez Inc. of Waltham, Mass., said that by getting into the processing business, "You have committed yourself to a pattern of acquisitions, because, ultimately, processing involves economies of scale and networking effects. The more people you can connect to your own network, the more valuable it becomes for anyone to join it."
NetBank's deals were something of a coup, Mr. Musto said, because companies like First Data Corp. "have teams of people that just scour the country looking for deals like this. Every opportunity to economically increase your scale is an opportunity to become more competitive."
Paul Jamieson, the president of FiSite Research in Lakewood, Colo., said that though NetBank was one of the first Internet-only banks to turn a profit, it still is "very challenging" to grow as a Web-only operation. "So they decided to diversify and put a business plan together to diversify their revenues sources."
These additional ATMs will give NetBank a chance to distribute "additional financial services through those touchpoints, whether they're NetBank-labeled or private-labeled," Mr. Jamieson said.
