Wells Fargo & Co. agreed to sell its automated teller machine processing unit, which handles just a small subset of the operations now commonly offered by other debit providers, to First Data Corp., which dominates many of those operations.
The deal is yet another sign that consolidation has made it difficult, if not impossible, for small players to compete against the giants of the debit industry.
The San Francisco banking company announced the deal to sell its Instant Cash Services unit on Friday. A Wells Fargo executive acknowledged that the unit's offerings were no longer competitive with the vast array of products available to banks from larger debit outfits, such as First Data's Star Network.
"If you're a community institution, you want somebody who can provide ATM services, debit card, credit card, merchant, whatever new payment services that are coming down the road," said Ed Kadletz, the executive vice president of Wells Fargo's debit business. First Data is "positioned to offer all those services, and we were not."
Tim Sloane, the director for debit advisory services for Mercator Advisory Group Inc. of Waltham, Mass., said the deal is "a sign of how difficult it's becoming for the smaller networks to be able to expand and survive in what is a pretty consolidated market."
For example, though Instant Cash operates an ATM network, it does not have a debit network. It can carry ATM transactions but not transactions initiated with the same cards at merchants. For almost all of the top debit networks, including Star, these two functions go hand-in-hand.
Instant Cash was the country's 13th-largest electronic funds transfer network last year, according to Card Industry Directory, a sister publication of American Banker, with transaction volume well below its rivals. Instant Cash carried about 2.6 million ATM transactions in March 2006, while Star, the No. 2 provider, carried about 66.2 million ATM transactions and 310.2 million PIN debit transactions. Visa U.S.A.'s Interlink, the top provider, carried 58.9 million ATM transactions and 389.7 million PIN debit transactions.
First Data did not say how much it would pay. Todd Strubbe, the president of its debit services unit, said that buying Instant Cash makes sense for his company, because it is "right over the strike zone of what we do, from a processing perspective, and the client base they have."
The vast majority of Instant Cash's bank customers have $1 billion to $2 billion of assets, a market where Star also does a lot of business, and the networks have some shared customers, he said.
First Data and Wells also have a merchant acquiring joint venture, Wells Fargo Merchant Services.
Mr. Kadletz said that his company was looking for both a buyer and a partner for Instant Cash - a company that would be able to offer a variety of debit services to the unit's current customers and would continue to collaborate with Wells.
He also said that Wells, which has a global correspondent banking business, will "refer our customers to First Data for those processing services." Selling Instant Cash to First Data was "a logical choice."
Instant Cash is one of the oldest ATM networks in the country. It was created in 1977 by Northwestern National Bank of Minneapolis, a forerunner to Norwest Corp., which bought the old Wells in 1998. In addition to providing ATM network services for 500 community banks, credit unions, thrifts, and other companies in 20 states, Instant Cash offers ATM driving, debit payment processing, surcharge-free access to Wells ATMs, and deposit-sharing services at ATMs.
Instant Cash customers are permitted to use Wells Fargo's ATMs without paying a fee and can make deposits at those machines. This arrangement would continue after Instant Cash trades hands, and First Data would continue to promote the Instant Cash brand to the unit's current customers.
"We're going to have an ongoing relationship with Wells Fargo and its correspondent banking group," Mr. Strubbe said. "It's a well-known brand for these community banks and credit unions. Let's not mess that up."
Mr. Sloane said that for First Data, the deal is "really just Star strengthening it's position."For a small player, like Instant Cash, trying to compete against industry giants, "Wells Fargo had to consistently increases the value of Instant Cash to their financial institutions," he said. "It made sense to sell the unit to one of the big guys while there's still value in it."
The deal is expected to close at the end of the month.
