battle of e-money: Evolution of electronic payment system threatens to leave community banks sitting on the sidelines, The

Northwestern Financial Review, May 1, 2001 by Bengtson, Tom

Evolution of electronic

payment system threatens to leave community banks sitting on the sidelines

TCF Financial Corp dealt a blow to community banks last month when it terminated its 11-year agreement with the Shazam ATM network. Thousands of customers who bank with one of the 1,500 Shazam financial institutions find themselves with fewer options for conducting electronic transactions, particularly in the Twin Cities of Minneapolis and St. Paul where the TCF network is prevalent.

Access to the payment system, which is becoming increasingly electronic, is crucial to the viability of the community banking industry, said Dale Dooley, president and CEO of Johnston, Iowa-based Shazam. The move by TCF Financial is the latest in what could be a string of developments ultimately designed to shut community banks out of the electronic payment system, Dooley contends. Agreements Shazam had held with other electronic fund transfer networks, such as Honor, Star, Pulse and Magic Line, also have been canceled in recent years.

"Access to the electronic payment system is essential to the survival of community banks," said Dooley. "Community bankers cannot take their access to that system for granted. They will have to work diligently to preserve it."

It is a message Dooley has been carrying to community bankers located throughout the Heartland of the United States. Community bankers in Minnesota understand the issue all too well. Since the 1970s, Minnesota's marketplace for automatic teller machines has been dominated by Instant Cash, which is part of Wells Fargo, Fast Bank, which is part of U.S. Bank and Express Teller, which is owned by TCF Financial of Minneapolis. Many community bankers shied away from signing agreements with "the big three" because they shunned the idea of working with a competitor. Shazam offered an alternative, although the number of machines it operates in Minnesota is limited. With the TCF agreement, however, Shazam provided at least one thing that many rural banks wanted to offer their customers: convenient deposit-taking service through ATMs in the Twin Cities. Now that opportunity has disappeared.

Dooley believes the issue will grow more incendiary as merchants migrate toward point-of-sale transactions that are based on personal identification numbers rather than signatures. In many parts of the country, customers already can pay for products with PIN-based debit cards in addition to ordinary signature-based credit cards. Although making up a relatively small percentage of retail purchases today, the same PIN-based technology that drives the ATM networks is finding favor with merchants. The personal identification number makes a PIN-based card more secure than a signature-based card. Perhaps more importantly to the merchant, the PIN-based transactions, which require only one processing step, cost less than signature-- based transactions, which require two steps.

Customers at risk

The fragmentation of the networks that facilitate electronic funds transactions is inconveniencing consumers and retailers, and ultimately may drive consumers to the biggest banks, Dooley notes. Retailers are likely to go with point-of-sale terminals that accommodate the largest number of cards. Consumers, logically, will migrate toward the banks that offer cards accepted by the greatest number of merchants. It is a scenario that ultimately finds smaller banks sitting on the sidelines, shut out of the payments system.

Others share Dooley's concern. "What I see happening is that as ATM systems consolidate, we are creating a proprietary payment system," observed Allen Olson, president of the Independent Community Bankers of Minnesota.

John Sorensen, president of the Iowa Bankers Association, led a delegation of bankers to Washington D.C., in March where they talked to lawmakers about access to the payment system, among other issues. As a follow-up, Sorensen sent a letter to Sen. Charles Grassley (R-Iowa) encouraging him to consider the issues surrounding the electronic payments system.

Dooley, Olson, Sorensen and others want Congress to require the Federal Reserve to mediate an open access agreement for the electronic payment system, which would ensure inter-operability between EFT networks.

"Just like the Federal Reserve was established in 1913 to provide open access to the paper-based system, it must get into the game to serve as the backbone of the electronic payment system," commented Camden Fine, president of the Missouri Independent Bank of Jefferson City, Mo. Fine makes his comment on a videotape produced by a coalition of 12 financial industry trade groups concerned about the issue.

"Our industry will migrate smoothly to a more efficient paperless system, but without the Federal Reserve's involvement there will certainly be winners and losers," added James Ghiglieri, Jr., president of the $122 million Alpha Community Bank in Toluca, Ill., on the same videotape.

The Federal Reserve, however, has demonstrated only lukewarm interest in the issue. As far back as 1996, the Fed established a committee on payment mechanisms, which was dubbed the Rivlin Committee after its chairman Alice Rivlin. The committee concluded that "the Federal Reserve should play a more active role in helping the public move to the next generation of payment instruments," but so far the Fed has kept its hands off the inter-operability issue.