News

NetBank acquires FTI

This isn't the first time an Internet bank has acquired an ATM management company. But NetBank and FTI say their deal differs in several key respects from E*Trade's 2000 purchase of Card Capture Services.

October 6, 2003

"This is a very neat deal, a non-bank ATM operator marrying a non-bank bank," said Douglas K. Freeman, chairman and chief executive of NetBank, Inc.

NetBank just agreed to pay $16 million in cash and $1 million worth of restricted stock for FTI(Financial Technologies), the Jackson, Miss.-based ISO headed by Tommy Glenn. The two companies expect the deal to close this quarter.

This is not the first match of its type. E*Trade Financial Group in 2000 purchased Card Capture Services (CCS), then the country's most dominant ISO, arguably one of the most seminal events in the young retail ATM industry's history.

E*Trade's stated intent was to take on traditional banks. Supplementing its Internet-only presence with ATMs that would allow E*Trade customers to deposit and withdraw funds -- and perhaps eventually trade stocks and perform other financial transactions -- was a key part of E*Trade's strategy.

Shortly afterward, however, the heated Internet economy cooled -- and E*Trade's ambitious ATM plans along with it.

E*Trade Access, the company's ATM arm, has added some 5,000 machines to its network, making it the country's second-largest ATM operator. Yet E*Trade in July closed 43 "Target Zones," 400-square-foot banking outlets at Target stores complete with ATMs and other self-service terminals for its customers.

Both Freeman and Glenn characterize the FTI acquisition as different from E*Trade/CCS.

"E*Trade is a good company and they run a good ATM business," said Glenn, "but they have a very different business model that was developed in a different place and time. Our plan is a lot more specific, with a harder and faster business case."

Thinking small (business accounts)

Although the deal may ultimately benefit NetBank's 165,000 customers by making some 4,300 surcharge-free ATMs in 48 states available to them, that access is not the primary reason for the deal.

The two companies believe FTI's ATM management business -- which includes transaction processing, card issuance and functionality such as check cashing and prepaid phone top-ups at ATMs -- will help NetBank win small business bank accounts. NetBank in June introduced a small business banking program.

"Tommy can provide one of the most attractive components for a small business owner, an ATM. Along with that, they can get credit and debit card acceptance, pre-paid cards and any number of other neat things," Freeman said. "We'll be able to offer them anything they can get through their local bank or anything they can dream up, within reason."

Freeman added, "If it's electronic and a merchant wants to do it, we intend to support it."

FTI and NetBank share similar corporate cultures, including a strong entrepreneurial bent, Freeman said.

Both companies also put an emphasis on profitability. FTI has turned a profit in all seven years of its existence. Privately-held FTI said it had net income of $727,000 on revenues of $25.8 million in 2002. For the first eight months of 2003, FTI said it had net income of $633,000 on revenues of $20.5 million.

NetBank reported net income of $14.2 million on revenues of $130.8 million in 2003's second quarter. Its stock price has ranged from $8.35 to $15.55 in the past 52 weeks; it was $13.31 in early trading on Oct. 7. In addition to its retail banking business, NetBank is active in mortgage banking.

Glenn said FTI brought in a group of investment bankers to help raise capital, perhaps by finding a company willing to take a minority stake in the business. While Glenn wasn't initially interested in selling FTI, he called the NetBank acquisition a "great fit" because of the obvious synergies of the businesses and NetBank's hands-off management style.

What's ahead

FTI will operate as a subsidiary of NetBank, and Glenn and the other 50 FTI employees -- most of whom are based in Mississippi and Texas -- will remain with the company. "We wouldn't have bought the business if Tommy and his staff weren't interested in running it," Freeman said.

Tony Hayes, director of Dove Consulting's Financial Services Group, called the sale "a logical exit strategy" for FTI, which he said lacks the scale of the largest ISOs such as eFunds/Access Cash, E*Trade and Cardtronics, or a specialty such as Innovus'emphasis on turnkey ATM placements at hotels.

As with E*Trade, ATMs may play a key role in NetBank's branding strategy, Hayes said.  "In acquiring these ATM contracts, NetBank buys a way of branding 4,300 touchpoints for its customers -- and potential customers.  Relative to alternative branding strategies such as billboards or print advertising, (the ATMs) represent a low-cost, high-value customer interaction channel."

Both Freeman and Glenn said that some -- though not all -- of FTI's 4,300 ATMs will likely receive a NetBank brand.

The NetBank/FTI deal differs from E*Trade/CCS in two key ways, Hayes said.

On a per-ATM basis, NetBank will pay some 60 percent less than what E*Trade paid. The recent economic downturn, combined with more realistic valuations of ATM portfolios, contributed to a lower sales price.

Second, the imminent passage of Check 21 legislation will make it more feasible to offer deposit taking at FTI's ATMs, which Hayes said is "a huge plus for an Internet bank." (See related story Passage of Check 21 advances idea of check imaging at ATM)