News

The shared network business: Under new management

With all of the changes that have hit the ATM industry over the past few years, Speer & Associates Chairman George Albright opines that the consolidation of EFT networks, along with a shift to non-bank ownership, may ultimately make the biggest impact.

May 14, 2002

Over the past few years, the ATM industry has undergone some dramatic changes. Among them: the widespread imposition of cardholder fees by both issuers (foreign and on-us fees) and acquirers (surcharges); technology and functional improvements; accelerated locational deployment; the emergence of ISOs; and the consolidation of both financial institutions and third party ATM programs as their owners merged and were themselves acquired.

George Albright

Of these trends, none may be more significant over the long term than the surprisingly rapid changes that have occurred within the shared EFT network business sector. The consolidation of this business has been relentless over the past five years, resulting in the reduction of networks from more than 100 to fewer than 30. This consolidation was not unforeseen, with many experts accurately predicting the extent of the trend, guided by the parallel consolidation of the financial services industry as a whole.

What is surprising, and not completely understood by even close observers, is the extent to which the banking industry has largely turned its back on the very business that it built up, state-by-state and region-by-region, during the 1980s and early '90s.

Five years ago, the network business was dominated by bank-owned and bank-managed entities, with only EDS and Publixrepresenting non-banks among the top tier of networks. Today, that situation is reversed, with Concord EFS, First Data Corporation, EDS, GenPassand Publix owning all or part of five of the largest 10 networks.

It is easy to blame (or credit) Concord EFS for this dramatic shift in ownership. Certainly, Concord's aggressiveness in acquiring the largest two regional networks, MAC and STAR, in short succession far surpassed the methodical, relatively limited-scale merger process that had been underway for some years.

Concord's chutzpah caught many by surprise in an industry that was heretofore directed and influenced -- if not controlled -- by risk-averse boards comprised of financial institutions with often differing, and sometimes conflicting, private agendas.

So, just as the banking industry effectively abandoned the credit card merchant acquiring business a few years ago, it has apparently allowed the ATM network business to devolve to third party processors: in this case, a few large integrated transaction processors with very deep pockets. Today we find that with few exceptions, these publicly funded, well-capitalized corporations have essentially replaced banks as the movers and shakers of the network business.

What are the long-term implications of a change of ownership of this magnitude? What will these new owners do differently from the previous generation of network owners, and how will these changes impact industry participants at each level?

Some possible answers to these questions:

• Branding - The largest players (Concord, FDC and EDS) may not be content to merely process transactions, unconcerned as to whether they are branded with their captive identities. They will make money on all transactions processed, but there may be a renewed emphasis on establishing strong, national brands in the debit business that can be carried over to innovative new transaction services. Such a branding strategy could have implications on the established identity hierarchy carved out by Visa, MasterCard and the regional networks.
  
• Cost Effectiveness - In the transaction processing business, bigger may not be necessarily better -- but bigger is usually more cost effective. Scale economics are not accounting exercises; they are tangible and translatable into lower processing costs and higher margins. Processors with billion-plus annual volumes reap the benefits of improved technology, highly efficient processing platforms and more productive operations.
  
• Products and Services - Once established, the new owners will invest heavily in research and development, something which the financial institution ownership was often reluctant to fund. Concord, FDC and EDS will not allow their acquisitions to become dated or redundant, and will impart their customer service perspectives to the network business.
  
• International Expansion - As the international market for EFT services becomes more homogenous and cross-border transactions continue to increase in volume, the potential for the new network players to look outside the United States for expansion opportunities will be evident. With an uneven track record of international credit card forays, they will tread lightly, but will not ignore opportunities when presented.

With these and other possibilities resulting from the new ownership model, it is apparent that the EFT network industry has largely "grown up," with fewer competitors, many national in scope, and the largest players able to evaluate their new businesses as they would any other major investment venture. This represents a different business model than the regional shared network executive trying to manage the diverse interests of multiple financial institutions, as well as merchants, processors, acquirers, ISOs and everyone in between.

There will always be room for selected regional networks to operate, whether driven by unique market conditions (Shazam) or single bank-owned service businesses (Instant Cash, Jeanie), but the shared network industry has been forever changed in its fundamental structure.

Since 1980, Speer & Associates, Inc. (S&A) has been preparing financial institutions worldwide for the challenges of a rapidly changing and increasingly electronic financial services world. Headquartered in Atlanta, S&A is a recognized consulting leader possessing competencies in all vital aspects of the financial services environment.