Strategies: Where Small Is Beautiful—And Risky

Lauri Giesen

The ranks of regional EFT networks have dwindled from more than 100 in the 1980s to about 20 today. What are the smaller ones doing to stay alive—and thrive?

In the mid-1980s, the United States had about 150 electronic funds transfer networks. Apart from their often colorful names—bygone marks include Cash Station, Magic Line, Cactus Switch, Yankee 24, and TYME, for Take Your Money Everywhere—what distinguished them from each other most often was geography. Networks typically confined themselves to a few states, one state, or even just part of a state.

Today, fewer than 20 EFT networks survive. Despite this great winnowing, some observers question whether the U.S. needs even a dozen. The survivors include a handful of regional networks that have morphed into national entities, but small regional ones remain.

“I expect even more consolidation, and I question the viability of many small networks,” says industry veteran and consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures. “They only exist now because of their bank shareholders, and eventually many of the owners are going to ask, ‘why do I continue to fund this network?’”

But others believe smaller independent networks serve an important purpose by filling special niches. They argue current owners want to keep their networks viable so that they can control network pricing and regulation—something they don’t get with networks owned by large corporations.

The savvy smaller players not only will survive, but also expand services as new technologies emerge, their proponents say.

In addition to their original core services—switching transactions so that consumers can use ATMs other than those of their own financial institutions and debit card acceptance at the point of sale if the customer types in a PIN—many EFT networks already offer newer services such as person-to-person, bill, and mobile payments.

“There is definitely a positive future for the smaller EFT networks,” says Paul Tomasofsky, president of Montvale, N.J.-based Two Sparrows Consulting and also president of the Secure Remote Payment Council (SRPc), a trade group working to adapt PIN-debit cards to online and mobile commerce as well as chip technology.

“Many of these financial institutions have relationships with these networks that go back 30 or 40 years. They’ve developed a lot of trust over the years and that trust is very powerful,” Tomasofsky adds.

Still, some observers wonder if small, independent EFT networks really can provide anything beyond what the big networks offer, noting that their owners could get the same services without supporting multiple networks.

Grover says most financial institutions and merchants that accept debit cards can get everything they need from the Visa Inc. and MasterCard Inc. national networks. Even beyond that, he notes, there is a handful of what used to be large regional networks that have been purchased by big payments companies. They also offer a full range of services.

Grover points to the Star network, now owned by leading payment processor First Data Corp.; Pulse, owned by Discover Financial Services; NYCE, owned by processor Fidelity National Information Services Inc. (FIS), and Accel (recently rebranded from its long-time name, Accel-Exchange), owned by bank processor Fiserv Inc.

“Those networks have staying power and are robust national networks now. But beyond that threshold, I don’t see much future for the remaining networks,” Grover says. “Five years from now, I think there will be fewer than a dozen. Which ones will make it, I can’t say.”

Even some executives with the smaller networks expect there will be fewer of them in the future.

“We’re coming to a fork in the road,” says Rob Rankin, senior vice president of Symmes Township, Ohio-based Vantiv Inc., a big merchant and card-issuer processor that owns the Jeanie network. “With the requirement to support EMV [Europay-MasterCard-Visa chip cards] and other core technologies, I think we may have another weeding out of networks.”

Rankin, however, believes Jeanie will be a survivor, saying its parent company has the technological know-how to help it adapt.

‘Streamlined Services’

While Grover thinks many smaller players will merge or simply shut down when owners decide not to continue funding them, he thinks a few might be purchased by large companies currently on the periphery of the payments industry.

“There could be some non-traditional players that want to be in the payments business that would find buying an EFT network to be a way into the market,” he says. “If somebody like Apple, for example, wanted to get into the physical point-of-sale business in a big way, they could buy a network.”

There is precedent for such a move. Discover, for example, had been a successful credit card company that wanted to make a bigger play in the ATM and POS debit markets. By buying Houston-based Pulse in 2005, it gained an immediate strong position, particularly in the Southwest. Since then, Discover has expanded Pulse’s presence throughout the U.S.

But the remaining independent networks’ current owners might not want to relinquish control over such important matters as pricing and rules. As a result, supporters like Tomasofsky think most of the remaining networks not only will stick around, but also will grow in size and diversity of products with Internet payments, mobile payments, and PINless debit for small purchases (“No PIN, No Problem”).

“Many networks are very aggressive in new-product development and there is a great opportunity now for developing services that allow consumers to replace checks and cash using mobile devices,” he says.

Also, with EMV coming to the U.S., Tomasofsky sees a strong opportunity for EFT networks to work with banks and retailers to develop migration plans.

“EMV is going to create a need for streamlined services that are cheaper, faster, and better than what we have today,” he says.

And with the Durbin Amendment in 2010’s Dodd-Frank Act requiring that debit card issuers provide at least two alternatives for merchants to route transactions, there is a real opportunity for small networks to develop interchange tables that are appealing to retailers, Tomasofsky says.

New Technology

One network that believes it will not only survive but become stronger and more diverse is Johnston, Iowa-based Shazam.

“We’re one of the last remaining not-for-profit networks,” says Dan Kramer, Shazam senior vice president. “We provide a low-cost service to our members that are striving to compete with the large financial institutions.”

Starting out as a network that primarily served banks based in Iowa and a few neighboring states, Shazam today has 1,400 members in 32 states, only 400 of which are within Iowa.

Shazam concentrates on community banks that need electronic-banking services to compete with the big banks. Its members range in size from $25 million in assets to more than $10 billion, but Kramer estimates about two-thirds have $100 million to $250 million in assets.

In addition to switching ATM transactions, Shazam drives 9,000 terminals for its members and provides merchant card processing services for 400 financial institutions. Shazam also is the automated clearing house association for the state of Iowa. As part of that service, it provides ACH payroll services for 800 merchants.

Kramer believes Shazam can provide better pricing and services to smaller institutions than the large EFT networks, which he claims are focused on the big financial institutions.

“We’re the only network that gives automatic price reductions across the board. In the last five years, we’ve given our members $15 million in price reductions,” Kramer says.

And because it is not-for-profit, Kramer says the network invests much of its income in new technology. Shazam rolled out a mobile-banking service several months ago and had 270 financial institutions enroll in the first two months. It has announced plans for a PINless debit offering for transactions under $25 and is participating in EMV development through the SRPc.

Niche Player

An example of a small network serving a niche is St. Petersburg, Fla.-based Armed Forces Financial Network (AFFN), which provides EFT services to military-oriented financial institutions. The Association of Military Banks of America and the Defense Credit Union Council co-own AFFN.

David Weber, AFFN president, says AFFN’s owner institutions often face unique challenges serving customers who move frequently. While other networks also provide international access to funds, AFFN has more experience in dealing with those issues, Weber says.

“The DoD [U.S. Department of Defense] rotates people a lot and that means remote access to funds is even more important to our members,” he says.

Weber says his network is competitive with the larger networks through pricing that includes no branding or card fees. AFFN is looking to roll out mobile-phone-based financial services and PINless debit, he says.

Additionally, while other U.S. networks are just starting to look at EMV, AFFN has been piloting a program with MasterCard. Many AFFN users, Weber notes, are assigned overseas and have an immediate need for chip cards, which have replaced magnetic-stripe cards in nearly all major industrial nations except the U.S.

‘An Upward Direction’

Meanwhile, serving the specific needs of small-to-mid-sized credit unions is a role filled by Tallahassee, Fla.-based CU24.

“We are focused intently on the unique qualities of credit unions so that they can compete with the larger financial institutions in the country,” says Mansel Guerry, chief executive of CU24. “We have a different philosophy from the for-profit networks. They are driven by profit and maximizing their bottom line. We are more interested in the value-added services we give our customers. Our competitors are not willing to go as far as we are in giving personal services.”

Guerry also believes educating credit unions about the new directions in electronic payments is essential.

“Even when I go into a half-billion-dollar credit union and talk to the management in charge of payments services, I find a real need for education,” he says. “They don’t always have the time or ability to understand what is going on with payments and they need assistance to help them interpret their own payments data to make them more competitive.”

Guerry, a former credit-union executive himself, took the helm at CU24 at the beginning of this year. He has been assigned the task of aggressively pursuing new members and new services.

CU24 currently has 500 members, 375 of which own a share of the network. Guerry says that number has been stable for the past few years but he expects bigger gains in the next several.

“We have not seen appreciable growth but when I was brought in, my mission was to get it going in an upward direction,” he says.

To that end, Guerry has been traveling around the country visiting credit unions. The network is national, though its primary footprint is in the Southeast and Midwest. Most members have assets under $500 million; a significant number have assets of less than $50 million.

To generate more volume from merchants now that the Durbin Amendment has given merchants more transaction-routing power, CU24 recently released an interchange-fee schedule that Guerry believes will make it more competitive against Visa and other large networks.

In terms of new offerings, CU24 just announced an ATM terminal-driving service and a new prepaid card for the unbanked. The network also is developing a number of mobile-banking applications that it expects to announce before year’s end. Guerry declined to give details.

‘Nimble Network’

Although its owned by the big processor Vantiv, Jeanie is another network focused mostly on smaller financial institutions—some 1,200 nationally. While the network has been expanding in the Western U.S., its core market is still east of the Mississippi. It represents a mix of credit unions and banks, the majority of which are under $2 billion in assets, Rankin says.

Like many other networks, Jeanie is a member of SRPc working on EMV migration and also on developing new  tech-based services. It recently began offering mobile check deposit to its members, for example. Rankin also says Jeanie plans to offer PINless debit and a person-to-person payment service.

“Vantiv provides Jeanie with a single system to connect issuers and acquirers, and it is a nimble network in terms of being able to develop new technologies and get it out to members of Jeanie,” he says.

Still, despite his optimism for his own network, even Rankin admits it is unlikely all EFT networks in the business today will make it.

“The survivors will be those that are fair in attracting both issuers and acquirers,” he says. “They will provide value to both in terms of the economics, education, and offering new technologies that will help them compete.”