The consolidation of the 30 or so automated teller machine networks in the Midwest is proceeding exactly as industry experts had anticipated.

With 15 of the region's most influential financial institutions talking about merging their electronic banking capabilities, a mega-network as big as Delaware-based Electronic Payment Systems Inc. seems to be taking shape.

And in the shadow of these discussions, dozens of small networks are hatching smaller-scale alliances in attempts to weather the increased competition from larger networks. The latest to be announced is the planned merger of EFT Illinois Inc. and Access 24, the nation's 26th-largest and 51st-largest networks, respectively.

But though the Midwest developments to date were widely expected, experts are split on what will happen next.

And what ultimately emerges is likely to be a blueprint for the rest of the country, experts say.

Alternative Futures

Some believe smaller networks will be gradually squeezed out by larger companies, such as Wilmington-based EPS, that can provide a wide array of processing services in addition to the basic ATM transaction switching to which most smaller networks are limited.

A more prevalent opinion is that a handful of smaller networks will be able to coexist with the mega-networks by holding onto financial institutions that want to have a say in the strategic direction of their networks without having to buy equity positions.

Many networks with 1,000 ATMs or fewer are not-for-profit enterprises that allow all members to vote on network-related issues.

Larger electronic banking companies -- with the exceptions of the Pulse network in Texas and Star in California -- are typically for-profit ventures owned by a handful of banks that make all strategic decisions.

Investment Seen as Crucial

"There, are elements of the not-for-profit structure that will always appeal to some financial institutions," says Richard Westelman, a senior consultant at Dove & Associates in Boston.

"The key to surviving [for a not-for-profit] lies in investing in new products and services for the next generation, and not just passing everything back to members in the form of lower pricing."

Most observers believe that when the dust from the nationwide consolidation settles, close to half of the 20 networks that are expected to remain will be relatively small-time not-for-profits with 2,000 or fewer ATMs.

Various reasons are given for this high survival rate.

First, much of the ATM transaction processing currently done in the United States is handled by third-party processors such as Deluxe Data System Inc. of Glendale, Wisc., and General Motors' Electronic Data Systems Corp. of Plano, Tex.

While the fact that the mega-networks typically run transaction-processing businesses of their own will probably hurt these businesses, many also believe that this competition will benefit smaller networks by forcing companies like Deluxe and EDS to lower their prices.

At a not-for-profit network, a reduction in cost to the network usually translates directly into lower costs for the members, which could well help the smaller organizations to attract and keep new members.

Fight Brewing

If the mega-networks are to be successful, "they are going to have to first displace a lot of traditional third-party-operated switches," says Mark Horwedel, executive director of EFT Illinois, a 1,000 ATM network based in Rockford.

"Those guys aren't going down without a fight," Mr. Horwedel says.

Mr. Horwedel pointed out that the third-party processors that have been in the business for years have probably already paid for their computer equipment, putting them in a position to cut prices aggressively.

By contrast, most of the larger networks in the United States, including NYCE in New York and EPS-owned MAC in Delaware, have just begun to finance their computer systems.

National Brands

A second reason that some smaller networks are expected to survive is the existence of national ATM networks, such as MasterCard's Cirrus and Visa'a Plus, to which most small networks can give access.

Since over 80% of the nation's ATMs participate in one national network or the other, many institutions do not make a priority of having a membership in the dominant regional network in their areas.

True, institutions in the East and Midwest that want to give their customers access to the most debit point-of-sale terminals need to belong to regional networks, which currently dominate the POS business in these regions.

But many believe that national POS brands, such as MasterCards's Maestro and Visa's Interlink, will gain widespread acceptance in these areas within a few years.

Rapid Attrition Foreseen

Yet even if small networks have some things working in their favor, popular wisdom says that most of the existing not-for-profit networks will disappear in the next five years.

Upward of 50 networks are expected to be merged or forced out of business in that time frame. Many of them are likely to be not-for-profits.

And if you wonder what characteristics the survivors will possess, the experts say, keep an eye on the Midwest.

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