STRATEGIC PARTNERS
The interchange fee is small potatoes -- except in Nebraska, the cornhusker state. Nebraska's unusually high interchange prompted a recent decision to introduce surcharging. No one seems sure how the new fee structure will affect the ATM market. by Ann All, editor
August 26, 1999
While ATM surcharges remain an object of controversy across the nation, the good old-fashioned interchange is garnering its share of attention in Nebraska. The Nebraska Electronic Transfer System, also known as Nets or Networks, voted to lift its longstanding prohibition on ATM surcharging last May, in an attempt to bring the state's unusually high interchange rate more in line with what is paid elsewhere in the U.S. According to the Congressional Budget Office, interchange fees typically range from 20 cents to 60 cents, with a national average of about 50 cents. In Nebraska the fee was consistently $1.50 or more and had been as much as $3, according to Phil Jossi, senior vice president of Nets. Members of Nets, which was founded by the Nebraska Bankers Association and is jointly owned by the state's 360 financial institutions, were allowed to set their own interchange -- until the Nets board capped the fee at $1.50 and opted to allow surcharging. "The fees people were charging were getting out of hand," said John Miller, Nets president. Nets settled on a cap of $1.50 because "that's about what most banks are netting now with a service charge," he added. With the advent of surcharging, more independent deployers may be eying Nebraska. One caveat: a Nebraska Banking law requires independents to be sponsored by a state financial institution. Enough to go around? Even with the possibility of surcharging, Jossi doesn't see Nebraska as a land of wide-open opportunity. Some 1,800 ATMs are already installed in the state, which has a population of about 1,600,000. Other than Omaha and Lincoln, the state is largely rural. "If there's no people, there's no opportunity," Jossi said. "This isn't like L.A. or San Francisco. How much business are you going to do in a town of 1,200?" Russell Oatman, senior vice president of First National Bank of Omaha and a Nets board member, agreed with Jossi. Noting that banks have many of the high-volume locations locked up, Oatman said, "I think third- party deployers will try out some of the lower traffic areas, but to make any money they're going to have to surcharge." Testing the waters Therein lies the rub. The big question seems to be whether Nebraskans will actively avoid machines with a surcharge. If they don't want to pay, they may stick with bank ATMs at the expense of those owned by independents. No Nebraska bank has announced plans to surcharge Nets cardholders. "They feel surcharging at some of the non-financial institution owned ATMs is just going to drive transactions back to their machines," Miller said. A few banks, including First National, are experimenting with surcharges on non Nets transactions. Those transactions are relatively rare. According to Jossi, about 30 percent of Nets members have begun surcharging non-Nets cardholders since the rule change in May. "I think we'll continue to see that number continue to rise -- but slowly," he said. First National, which has about 130 machines, is levying a $1 fee on non-Nets cardholders. Introducing the surcharge on such a limited basis is a good way to gauge ATM users' response to the fee, Oatman said. "We're testing the waters a little bit. We'll see what it does in terms of consumer reaction. If our interchange structure was the same as every other network, there would probably be less hesitation." Since they generate less interchange, imposing a surcharge on non-Nets transactions gives banks a better chance of recouping their costs, Oatman added. New players Independent deployers already doing business in the state think the introduction of the surcharge could open up the market. Mark Emsbach, an independent sales representative for Golden, Colo.-based CashLink International, said, "It's going to be more economically feasible to go after new accounts. I'd be very interested in pursuing sales along the I-80 corridor." Emsbach plans to charge a $1 fee at his three Nebraska ATMs, each of which does only about 300 transactions a month. Emsbach, who is sponsored by Union Bank, did not actively seek the Nebraska sites; they were part of a deal that also included Kansas and Colorado locations. Owners of small convenience stores and similar businesses, once they realize they can own the machines, may be more inclined to go with an independent, Emsbach said. "I think some of the smaller locations out there would like to kick the banks out. They'll switch over, purchase the equipment and operate it themselves because they'll see how profitable it can be." One independent who has had trouble breaking into the state is Karl Erickson, a Nebraska native and owner of Western Reserve ATM in Marina del Rey, Calif. Erickson has an antagonistic relationship with Nets that dates back several years, when he was forced to pull some machines from the state because he did not have the required financial institution sponsorship. In fact, he said, "If you go into the Nets office in Lincoln, there's probably a picture of me with a bullseye and darts thrown at it." About a week after Nets' new surcharge rule took effect, Erickson announced he had lined up sponsorship with Union Bank and would place about 40 machines. Union Bank denied it had an agreement with Erickson. In a story in the Omaha World Herald, Alan Fosler, the bank's senior vice president, said that Erickson had given him a "sales pitch." Since then, Erickson said he has released his sites to another independent. "I found that the path of least resistance was to let someone else deal with the bureaucratic red tape being thrown up by Nets." Nets is "trying to limit outside ATMs from operating in the state," Erickson said. "They've been given no sovereign authority by the state of Nebraska, by the legislature or by the public, yet they've become one of the most powerful little independent networks in the country." Hide and seek Emsbach, of CashLink International, isn't sure how Nebraskans will respond to surcharges. The interchange is "more of a hidden fee," he said. "They may end up canceling a transaction when they see the charge upfront." Unlike surcharges, interchange fees are not disclosed at the ATM. A bank may opt to pass some or all of the charge along to its customer; the fee only appears on a bank statement. The new Nets policy is "a positive move for financial institutions and for consumers," said Bob Hallstrom, general counsel for the Nebraska Bankers Association. "Even with the potential advent of surcharging, consumers are being given a clear choice at this point." Oatman believes Nets will continue to examine its policies on fees, particularly the interchange. "I think Nets will have some very active discussions at the board level in terms of changing the interchange structure," he said. "There's some desire to keep it where it is for a period of time just to see what the market reaction will be." The possibility of further tweaking of fees has some Nebraska bankers concerned. One employee of a small, Omaha-based bank, who asked not to be identified, said, "If they do mess around with the interchange, most banks will have no choice but to surcharge." The employee said he's been contacted by ISOs in California, Colorado, New York and Mississippi since the Nets rule change. Many of them "hadn't done their homework," he said. "A lot of them had their own switch and just seemed to miss the point that most of the money is made off the interchange through Nets. It just didn't seem like they'd thought the whole process through."
