Shazam Fight: Still Room for a Small EFT Network?
Stock, Helen, American Banker
Over the past decade consolidation in banking has created something of a two-tier industry, with enormous institutions at one end and a robust segment of smaller ones at the other. As consolidation now sweeps the world of electronic funds transfer networks, the question is whether a similar topography will emerge in that arena.
Can small ATM networks find a place in a field where the benefits of being small are harder to define? The issue was brought to the fore when Shazam, a small and defiant network in Johnston, Iowa, began sounding alarms about the evolving situation.
Executives of Shazam say the growing dominance of large networks -- Star Systems Inc., MAC, and NYCE Corp. -- may lock small banks out of the point of sale debit card business and other new payment methods such as digital certificates, check conversion, and Internet debit transactions.
"The small financial institutions feel disenfranchised by the regional networks, because they're losing their voice and control," said Christopher J. Thomas, Shazam's senior vice president of marketing and sales.
Shazam is one of only a handful of small networks left. Its owners, more than 1,000 community banks and credit unions, average $70 million of deposits each.
The larger networks, which are controlled by big banks but include many community bank members, insist that the technology infrastructures their strength lets them build are good for all banks -- especially small ones. The economies of scale brought about by network consolidation are obvious benefits, the large networks point out.
Moreover, they say, if the small networks' business models were successful they would not get bought out so steadily by the larger ones.
NYCE, for instance, is the first network to develop a product that will let consumers use their ATM cards to buy goods on the Internet, and says that the resources for this project would not be available without the deep pockets of large bank owners. "Nobody else is doing SafeDebit," said James S. Judd, a senior vice president who manages NYCE's network business. "That doesn't materialize on the back of a napkin with a couple hundred dollars."
Mr. Judd had strong words for the small networks and their gripes: "If they don't have a business model that will support commercial pricing, that we can't fix. These products and services are going to be priced on a commercial level."
Mr. Judd, whose network is owned chiefly by Chase Manhattan Corp., Citigroup Inc., and the six other large banks on its 12-member board, called Shazam's assertions an "easy scare tactic."
"There's no way that any smaller organizations are going to be left out," he said. As the number of networks dwindles, there is far more scrutiny of anticompetitive activities, he said. The remaining networks would be foolish not to discharge their "fiduciary duties properly," he said.
Moreover, Mr. Judd pointed to NYCE's management of the SUM program, an alliance in which financial institutions in 13 states and Puerto Rico can offer surcharge-free ATM access to one another's customers. This program, populated largely by smaller institutions with fewer ATMs, "doesn't do anything for big banks," Mr. Judd said.
Shazam is one of the last remaining pocket networks -- those serving institutions in a small geographic area. (The Tyme network of Brown Deer, Wis., is another.) Shazam is a not-for-profit, member-owned cooperative, and most of its ATMs are in eight Midwest states.
Because economies of scale are seen as such a major advantage in electronic funds transfer, several other pocket networks have been sold recently to larger ones. In April, Memphis-based Concord EFS Inc. -- owner of the prominent MAC network -- announced plans to buy Cash Station Inc. of Chicago. And last week, NYCE, of Woodcliff Lake, N.J., said it had bought X-Press 24, a New England network that FleetBoston Financial Corp. …