It seems we are on the eve of interstate branching, and for the first time since the 1930s, smaller institutions will have to compete with the national banks aggressively entering their markets. The cost of providing electronic funds transfer (EFT) services is at the very heart of their ability to do so. Until last summer's settlement between the Justice Department and the MAC network--an ATM interchange network operated by EPS, a company owned by several large banks--community banks were in a very untenable position. MAC reportedly required that members use EPS for their "on us" processing as well as switch processing.

Access to network ATMs has become so important that for all intents and purposes, smaller institutions were forced to comply. The Justice Department essentially held that this practice is monopolistic. While MAC agreed to stop the practice without admitting any wrongdoing, the settlement put all large ATM network operators on notice that the U.S. government will not allow such behavior to continue.

The direction of EFT processing today favors smaller organizations--those small enough to do their processing on a powerful personal computer rather than the mainframe computers large institutions must utilize. For example, using a PC-based processor/switch, a credit union or community bank can handle its own processing in-house, with complete control over authorizations, account relationships, card management and so forth. This can be done for as little as 50% of the annual cost of network processing, and with no incremental costs as the volume of processing increases.

Almost any off-the-shelf PC can make a community bank equal to a money center when it comes to providing access to thousands of ATM and debit card terminals. Moreover, the community bank using a PC will find it easier to upgrade, add services, link services and even add new technology than the institution that must make EFT decisions based on reprogramming a mainframe for a national audience.

Two economic forces will continue to favor the smaller institution in electronic services in the coming years. First, as technology progresses, the size of the assets required to justify in-house processing will shrink. The PC is a commodity today, and competition in the PC world will ensure that the price/performance ratio will continue to improve. New hardware, software and communications will always be only a small investment to the local financial institution. A myriad of ever-more sophisticated products offered on low-priced PC platforms will make it possible for even the brand new charter to open for business with the same highly advanced products and services as the nationwide institutions.

Second, as the largest banks grow even larger through interstate branching, their processing infrastructures will continue to grow--and grow progressively more unwieldy. Every escalation of service the bank undertakes will increase the investment in the existing infrastructure, making change and flexibility more difficult yet.

The MAC settlement delivered a message to third-party network operators that the control of access to ATM and debit card EFT interchange networks will continue to be closely monitored for access violations due to unfair restrictions or discrimination. A reasonable conclusion one might draw from this action is that any third party with the power to control access--and who discriminates through pricing or other monopolistic practices--will be open to action by government agencies.

Of course, COMTRAC is not a disinterested party in this evolution. Our own PC-based processor/switch has enjoyed a surge in sales since the MAC settlement and the steady progress of an interstate banking bill through Congress. But regardless of whether smaller institutions use our product, they're heading into a new era of technologically based financial services. They'll be up against some tough marketers, and they'll have to use every means at their disposal to hang on to their market. Fortunately, they now have a powerful weapon: the PC. Community banking has a better chance to survive as a result.

Robert Markovich is president of COMTRAC Corp. in Dallas.

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