Iowa Transfer System Inc. president Dale A. Dooley swears he did not intend the site that the company chose for its headquarters in 1991 to carry any symbolism. But, in some ways, that is hard to believe.

Bordering a seed company on one side and a flood plain on another, the building sits squarely between an area of growth and one of destruction.

It is a situation that also describes the figurative ground that ITS occupies in the electronic funds transfer industry.

As the operator of Shazam, the 16th-largest automated teller machine and point of sale network in the country, ITS is handling growing numbers of transactions.

Merger Territory

At the same time, Des Moines-based ITS resides in the region that is expected to be a hotbed of network merger activity in coming years. It would thus come as little surprise if it were gobbled up by one of the larger networks that plan to expand in the Midwest.

ITS is not alone in this predicament, nor is it the only network merger candidate in the region that wants to survive the coming consolidation.

The difference between ITS and some other networks its size is that the company has taken steps to brace itself for the coming onslaught of mergers and increased competition by diversifying its business beyond standard ATM and POS transaction switching services.

Small-Bank Strategy

And while experts are split on ITS' chances for survival, they agree that the 17-year-old company's commitment to small-bank services such as credit card processing and Federal Reserve gateways is an intelligent reaction to the industry climate.

"We have tried to occupy the high ground in both a literal and figurative sense," Mr. Dooley said as he looked out from ITS headquarters to an adjacent field that only last spring was filled with floodwater.

"We made it through the floods, and I believe we'll make it through the consolidation as well."

Most Use Third Parties

One of the main reasons for Mr. Dooley's confidence is the fact that ITS operates its own computer systems.

While it would seem a foregone conclusion that a business based on processing electronic financial transactions would own its systems, a quick look at the EFT industry shows that relatively few networks handle their own processing.

Most smaller networks use a third party, such as Deluxe Data Systems Inc. or Midwest Payment Systems Inc., to process transactions from their member financial institutions.

There is a simple explanation for this phenomenon. A network with less than 1,500 ATMs, which describes all but the top dozen networks in the country, does not enough ATM and POS traffic to justify the cost of buying, operating, and maintaining processing systems.

Though ITS's Shazam network is hardly a monolith in the industry -- it consists of about 1,500 ATMs and 3,000 POS terminals -- the fact that the company has diversified its product offerings has given it the leverage to afford its own systems.

A Key to Survival

Experts believe systems ownership will be the most prominent characteristic of networks that will remain standing when the dust from the EFT industry consolidation has settled.

"With a few notable exceptions, the survivors of the EFT industry shakeout will be those with processing capabilities," said Richard Speer, chairman of Speer & Associates, a consulting firm based in Atlanta.

In addition to acting as an intermediary through which a transaction can flow from one member bank to another, Shazam drives 80% of its members' ATMs and acts as a gateway to the national ATM and POS networks run by MasterCard International and Visa U.S.A.

But, despite the fact that the network was originally built around the ATM-related services, debit and credit transactions at the point of sale are perhaps the most important future line of business within ITS.

Easing Card Issuance

ITS handles the processing for credit and national debit card services through its Card Services Member Association unit.

One of the unit's primary functions is to enable community financial institutions, which make up the lion's share of ITS's membership, to issue credit cards cheaply.

As a principal member in both MasterCard and Visa, ITS can sell credit and debit card issuance to its members.

Large banks that are principal members of the card associations also sell such services, and this fact enables ITS to use its position as a "neutral" processor rather than a competitor in the banking industry as a selling point to smaller institutions.

'A Niche Player'

The national credit and debit card services "are what differentiate us from other networks in the area," said Mr. Dooley. "We are a niche player that is trying to bring big bank card services to smaller institutions."

Since ITS entered the credit card processing arena in 1990, it has enabled almost 200 financial institutions to issue cards. CSMA also provides processing services to more than 6,000 merchants.

Beyond credit and national debit card services, ITS also offers ATM-based bill payment and is looking to other mediums to deliver this service.

While business diversification is a major issue for ITS, Mr. Dooley and his staff recognize that the company must not bite off more than it an chew.

He said ITS has no plans to get into the processing of medical payments.

Potential Partners

Mr. Dooley also realizes that ITS is still unlikely to survive the consolidation without merging with another network in the next few years.

As such, the company has kept its eye on potential partners. A recent attempt to merge with EFT Illinois, a 247-member network based in Rockford, Ill., fell through, but ITS continues to explore other possibilities.

The network is also making some organizational changes that it believes will help in its search for merger partners.

The most significant of these is the consolidation of its subsidiaries into a single unit to be known as Shazam Inc. When this action is completed this summer, the network will extend ownership privileges for the first time to out-of-state members.

In addition, the network plans to market its services more aggressively to small financial institutions in the future. It is currently without a marketing executive, but Mr. Dooley has made filling that position a priority.

Core Customers

ITS hopes that a strong marketing effort will help it expand its customer base, but it has no plans to leave the niche it has carved for itself. Financial institutions with $1 billion in assets and less account for most of the network's membership and will continue to do so.

But as larger networks, such as Cash Station in Chicago and MAC in Delaware, extend their reach deeper into the Midwest, ITS may soon find itself battling for the very members that have been at the core of its success to date.

"I think [ITS] could survive forever, as long as it keeps costs low and as long as there aren't widespread acquisitions of its members by banks that belong to other networks," said Liam Carmody, president of Carmody & Bloom, a consulting firm based in Woodcliff Lake, N.J.

When competition for membership comes to Iowa, ITS can assess the value of the diverse services it has created. Until then, Mr. Dooley holds firm to the belief that the seed company next door is not the only building on the block with growth potential.

"Many of our services are geared toward smaller institutions, and I think that breeds some loyalty," said Mr. Dooley.

As he stood outside ITS headquarters, Mr. Dooley wondered aloud about its future, "What does a survivor look like? We're betting that [it's] going to look like us."

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