Over the past decade consolidation in banking has created something of a two-tier industry, with enormous institutions at one end and a robust segment of smaller ones at the other. As consolidation now sweeps the world of electronic funds transfer networks, the question is whether a similar topography will emerge in that arena.

Can small ATM networks find a place in a field where the benefits of being small are harder to define? The issue was brought to the fore when Shazam, a small and defiant network in Johnston, Iowa, began sounding alarms about the evolving situation. Executives of Shazam say the growing dominance of large networks - Star Systems Inc., MAC, and NYCE Corp. - may lock small banks out of the point of sale debit card business and other new payment methods such as digital certificates, check conversion, and Internet debit transactions.

"The small financial institutions feel disenfranchised by the regional networks, because they're losing their voice and control," said Christopher J. Thomas, Shazam's senior vice president of marketing and sales.

Shazam is one of only a handful of small networks left. Its owners, more than 1,000 community banks and credit unions, average $70 million of deposits each.

The larger networks, which are controlled by big banks but include many community bank members, insist that the technology infrastructures their strength lets them build are good for all banks - especially small ones. The economies of scale brought about by network consolidation are obvious benefits, the large networks point out.

Moreover, they say, if the small networks' business models were successful they would not get bought out so steadily by the larger ones.

NYCE, for instance, is the first network to develop a product that will let consumers use their ATM cards to buy goods on the Internet, and says that the resources for this project would not be available without the deep pockets of large bank owners. "Nobody else is doing SafeDebit," said James S. Judd, a senior vice president who manages NYCE's network business. "That doesn't materialize on the back of a napkin with a couple hundred dollars."

Mr. Judd had strong words for the small networks and their gripes: "If they don't have a business model that will support commercial pricing, that we can't fix. These products and services are going to be priced on a commercial level."

Mr. Judd, whose network is owned chiefly by Chase Manhattan Corp., Citigroup Inc., and the six other large banks on its 12-member board, called Shazam's assertions an "easy scare tactic."

"There's no way that any smaller organizations are going to be left out," he said. As the number of networks dwindles, there is far more scrutiny of anticompetitive activities, he said. The remaining networks would be foolish not to discharge their "fiduciary duties properly," he said.

Moreover, Mr. Judd pointed to NYCE's management of the SUM program, an alliance in which financial institutions in 13 states and Puerto Rico can offer surcharge-free ATM access to one another's customers. This program, populated largely by smaller institutions with fewer ATMs, "doesn't do anything for big banks," Mr. Judd said.

Shazam is one of the last remaining pocket networks - those serving institutions in a small geographic area. (The Tyme network of Brown Deer, Wis., is another.) Shazam is a not-for-profit, member-owned cooperative, and most of its ATMs are in eight Midwest states.

Because economies of scale are seen as such a major advantage in electronic funds transfer, several other pocket networks have been sold recently to larger ones. In April, Memphis-based Concord EFS Inc. - owner of the prominent MAC network - announced plans to buy Cash Station Inc. of Chicago. And last week, NYCE, of Woodcliff Lake, N.J., said it had bought X-Press 24, a New England network that FleetBoston Financial Corp. had owned. NYCE had previously bought Magic Line, of Dearborn, Mich. And the Star Systems network - once made up of a number of smaller networks including Star of San Diego, Honor of Maitland, Fla., and the Most network of Reston, Va. - has grown over the years.

Much of the early consolidation was driven by smaller networks that had found they needed more transactions to operate profitably. More recently, the regional nature of ATM and point of sale networks has grown less and less relevant as the largest financial institutions they serve have become bigger and more geographically spread out. After inheriting multiple network affiliations through mergers, superregional banking companies have pushed for consolidation.

Despite these developments, Mr. Thomas was adamant. "Shazam is not for sale," he said "We exist for the sole purpose of ensuring community financial institutions access to the payments system."

Shazam has been exclusively endorsed by community banking organizations in six states. Last month the Community Bankers Association of Illinois became the 11th such organization to give its sole backing to Shazam.

"This is a step toward community banks taking control of their own destiny when it comes to the delivery of EFT and debit-related services," said Michael Kelley, executive manager of Community BancService Corp., the for-profit services subsidiary of the Illinois trade group.

Robert J. Wingert, executive director of the 550-member association, said Shazam won the endorsement for its low prices and commitment to broad access to services.

Cash Station, which has historically dominated the Chicago area, has big-bank ownership despite its relatively small geographic presence. Cash Station president Stephen S. Cole said that if models like Shazam's worked, there would have been fewer buyouts of small networks. Larger members of Cash Station, which will become part of MAC in the second quarter, typically receive discounts because their switch volume is greater, but big banks also help to keep overall costs down, he said.

While large banks "pay less on a unit cost, they bring in the majority of the revenue to the network," Mr. Cole said. "If Bank One were to quit our network, I'd have to raise prices."

Mr. Thomas of Shazam said there is something more disturbing than economics afoot: big banks' "agenda." He said organizations including the Banking Industry Technology Secretariat (BITS), Identrus, and Small Value Payments Co. are big-bank clubs that exclude smaller banks. Meanwhile, community banks lack research and development funds of their own.

"It's been very clear, looking at what BITS is doing, looking at what SVPCo. or other large entities are doing, that the large financial institutions are looking to build their own payments infrastructure," Mr. Thomas asserted. "Our position is there needs to be a 'clearer' of last resort - just like the Federal Reserve handles checks. There needs to be a neutral third party that handles point of sale [debit] as well as any emerging transaction types that may be out there."

He added, "There has to be somebody making sure that consumers have a choice of where they do business and [are] not just forced to do business with larger financial institutions."

As evidence of a growing lack of cooperation between networks, Shazam points to recent cancellations in reciprocal ATM and point of sale sharing agreements. Shazam has been cut out of reciprocal agreements several times in the last two years, executives said. Pulse cancelled its ATM sharing agreement, and the former Honor network cancelled both debit and ATM sharing deals. Most recently, Star Systems, which has merged with Honor, notified Shazam that it would be ending its ATM sharing contract. Star and Shazam never had a point of sale agreement.

Star, which has also cancelled certain reciprocals with MAC and Pulse, says the cancellations are simply a result of its integration with Honor. "We chose to move forward with those reciprocals that were the same for both organizations," said Nikki Waters, chief marketing officer and executive vice president at Star.

In the 1980s, regional networks entered into ATM sharing agreements so that banks could skirt the higher interchange fees associated with Cirrus and Plus, the national networks owned by MasterCard International and Visa U.S.A. that serve as the default switch when a card is used outside of the regional network from which it belongs. More recently, some networks formed similar agreements for the switching of debit card transactions at the point of sale.

"What's happening is interchange agreements are being cancelled. Point of sale agreements, if they even existed, are being cancelled," Mr. Thomas said. "Now things are becoming much more proprietary and competitive."

Richard S. Jenkins, corporate counsel for Shazam, offered another reason: "Under the ATM sharing agreement, it would be possible to link the no-surcharge groups of each network," he said. The networks' divorces help bigger banks "avoid that opportunity," he said.

Such cancellations have even bigger ramifications in the point of sale industry,, Mr. Jenkins said. Cirrus and Plus can always step in to switch an ATM transaction, though for a higher fee. But Maestro and Interlink, the point of sale counterparts to Cirrus and Plus, do not have as broad a reach as those networks. Therefore, many merchants only accept regional debit cards.

The recent cancellations are "another signal of the erosion of interoperability for PIN-initiated transactions," Mr. Jenkins said. "It does not appear that the private sector is going to be capable of assuring continued open access to the electronic payments system."

Shazam executives say network shakeups in Illinois illustrate how small banks can get swept up in larger networks. In the last few years, EFT-Illinois was swallowed up by Magic Line, which in turn was bought by NYCE.

"There was a lot of talk [before] the Magic Line sale that MAC was going to be the acquirer of Magic Line, and then there was even talk of Magic Line going with Cash Station, again because the big banks wanted to consolidate those brands," Mr. Thomas said.

Bank One Corp. - whose 34% stake is the largest in Cash Station - stands to gain from the MAC purchase as well as brand consolidation, Mr. Thomas said. "The big banks, since they have the most ownership interest, have the most to gain by any proceeds from a sale," he said.

Additionally, Bank One is a major customer of MAC, which became the first entirely public network last year when Concord EFS purchased it from five superregional banks - including Bank One.

Mr. Thomas of Shazam said: "Bank One had tried to break into the Chicago market using the MAC brand before, but basically was completely unable to do that because Cash Station was such a powerful brand name and brand presence for consumers in Chicago." Bank One was forced to join Cash Station and cobrand its ATMs with both network logos, he said.

Mr. Cole of Cash Station pointed to endorsements from credit unions - "America's bastion of small financial institutions" - as a hole in the Shazam theory. His network, which has eight large banks and five small banks represented on its board of directors, has been endorsed by the Illinois Credit Union League. Similar leagues in Michigan and Ohio have endorsed MAC.

Mr. Wingert of the Community Bankers Association of Illinois said the changes at Cash Station may open a door for Shazam.

Shazam could "make some inroads in the Chicago market," he said, if Cash Station's new ownership "stubs its toe with … high pricing or inferior services."

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