Automated teller machines have become an unlikely bone of contention in a Minnesota bank merger controversy.
Community bankers, who have tried - mostly in vain - to derail the acquisition strategies of arch-enemies Norwest Corp. and First Bank System, believe they have found a weakness in the big banks' ATM access policies.
Arguing that the big companies' networks discriminate against smaller competitors, the Independent Community Bankers of Minnesota is trying to prevent Norwest's proposed acquisition of $167 million-asset Amerigroup Inc., Bloomington.
And to the potential horror of electronic banking providers around the country, the community bankers are making some headway on the regulatory front.
Pam Nardolilli, a senior attorney at the Federal Reserve Board, said the challenge "raises issues that ... merit consideration."
While most ATM industry observers consider the Minnesota case unique and isolated, a ruling in the community bankers' favor could force other big banks to revise or rethink their ATM linkages, said Linda Echard of IBAA Bancard Inc., an affiliate of the Independent Bankers Association of America.
The Minnesota group's objections, outlined in a letter to the Federal Reserve Bank of Minneapolis, mark the first time that regulators have been asked to explicitly consider the competitive aspects of electronic banking in connection with an acquisition.
The Fed's board of governors requested more information from both sides and is expected to consider the application this month.
Ms. Echard, who is president of a national MasterCard and Visa program for IBAA members, said acquisitive banks that operate proprietary ATM systems run the risk of having "to divest their interests in electronic networks," or at least will have to be wary of their networks' becoming sticking points in future acquisitions.
But blocking acquisitions was not the primary motive of the Independent Community Bankers of Minnesota, said its president, Allen Olson. Rather, he said, the group wants to raise regulators' awareness of what many members see as a crucial competitive issue between large and small banks.
"We're offering the Fed a very timely opportunity to become concerned about the trend toward domination of the electronic banking system by a handful of powerful banks," Mr. Olson said.
"We believe deep down in our community banking souls that this is the most important issue facing us today," he added. "If we can't have equal access to these electronic payment systems, then ultimately we'll fail to exist."
In its strongly worded protest letter, the bankers charged that Norwest and First Bank System - which along with TCF Financial Corp. are said to control 98% of ATMs in Minnesota - have "colluded" in preventing other electronic banking providers to interchange transactions with their systems.
The net effect in antitrust terms is an alleged "bottleneck monopoly," which allows big banks to control access and pricing policies. They have the leverage to "prevent smaller banks from taking aggressive competitive positions," the letter stated.
"By its actions in the electronic banking market ... Norwest has demonstrated a clear corporate predilection toward predatory behavior and restraint of trade," it added.
First Bank spokeswoman Wendy Raway denied the collusion charge, saying that the bank sets its prices independently.
TCF has an agreement with Shazam, a shared network based in Des Moines that has hundreds of bank, thrift, and credit union members in the upper Midwest. But even that agreement is priced higher than national averages, the Minnesota independent bankers claimed.
Brian O'Hare, president of Norwest Card Services, called his smaller competitors' accusations "blackmail." He said the protest boils down to "a pricing issue. They're trying to negotiate a better price with us than we've offered them for ATM services."
He said community banks that are members of Shazam currently have access to Norwest machines via the Cirrus and Plus networks, which are owned by MasterCard and Visa, respectively.
Direct access to Norwest or First Bank would presumably give cardholders more service options at ATMs, such as making deposits.
"If they pay a certain price we'll be willing to negotiate with them," said Mr. O'Hare.
In his official written response, Norwest assistant general counsel Bruce Moland told the Fed that the collusion charge was unsubstantiated. He also said questions about the structure of the Minneapolis-St. Paul electronic banking market "are not relevant" to the acquisition process.
Mr. Moland pointed out that the four-branch Amerigroup has just two ATMs and thus the deal "will have no impact whatsoever on the electronic banking market."
Mr. Olson said in an interview that his group's challenge "is about something way beyond the specifics of a small acquisition in Minnesota." He said "it would be a hollow victory" if the Amerigroup transaction were rejected without the Fed's taking a position on ATM competitiveness.
As electronic banking grows in popularity, the lack of interchange agreements encourages small bank customers to move their accounts to larger banks that control networks, Mr. Olson said.
The independent banking group, he added, has been waiting more than a year for the opportunity to raise this objection. Bank market share in the Twin Cities is highly concentrated among its two leaders - First Bank at 36% and Norwest at 29% - making it ideal for trying to bring a competition issue to national attention, Mr. Olson said.
In 1992, the Federal Reserve Board was one vote shy of denying a proposed Norwest acquisition in the Twin Cities market.
Noting that two of Amerigroup's branches are within two blocks of Norwest locations, the community bank group said in its letter that "the acquisition will not provide Norwest access to a new customer base. Neither will it provide needed managerial resources or desirable branch locations. What Norwest will gain by acquisition of Ameribank is increased market power and reduced competition."
Community bankers nationwide are uneasy about the growth of big proprietary ATM networks, Mr. Olson said. They fear the big owners will gain a stranglehold on emerging opportunities such as electronic benefits transfer - the delivery of welfare, food stamps, and other entitlements through ATMs and point of sale terminals.
According to the Chicago-based newsletter Bank Network News, eight of the 32 largest ATM networks - including Norwest's Instant Cash, TCF's Express Teller, and First Bank's FastBank and Peak - are owned by single banks. Their proprietary ownership contrasts with multibank cooperatives like Star in the West and NYCE in the Northeast.
Mr. Olson's group charged that proprietary owners like Norwest are building a "toll road" that will ultimately disadvantage smaller banks unless regulators step in to ensure equal and fair access.
Ms. Echard at the IBAA said forcing small banks to pay duplicate fees and to join a network owned and run by a competitor who can control pricing would be a violation of antitrust laws.
In his letter to the Fed, Mr. Moland said Norwest's Instant Cash network is open to all financial institutions, which in turn are free also to belong to Shazam.
Evelyn Murphy, a former Fed regulator who is advising the community bank group, called that argument "disingenuous. They're saying to small banks, 'You don't need to have an interchange agreement because your customers can just come to us.' That's not acceptable."
Mr. Olson noted that while the industry waits to hear the Fed's verdict, the Justice Department's antitrust division has already confronted an ATM- related issue. Last year, in response to complaints about overpriced ATM processing, the department forced an agreement with Electronic Payment Services, owner of the MAC network, to charge independent data processors the same usage fees as larger networks.
Mr. Engen is a freelance writer based in Minneapolis.
Valerie Block contributed to this article.