| For immediate release |
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The Federal Reserve Board today announced its approval of the notices by six Southeast banking organizations to acquire more than 5 percent of the voting shares of a new company that will result from the merger of the HONOR, MOST, and ALERT electronic funds transfer networks. Banking organizations making the request to acquire shares in the new company are Barnett Banks, Inc., Jacksonville, Florida; Crestar Financial Corporation, Richmond, Virginia; First Union Corporation, Charlotte, North Carolina; NationsBank Corporation, Charlotte, North Carolina; Southern National Corporation, Winston-Salem, North Carolina; and Wachovia Corporation, Winston-Salem, North Carolina. A copy of the Board's Order is attached. |
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Barnett Banks, Inc. |
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Barnett Banks, Inc., Jacksonville, Florida; Crestar Financial Corporation, Richmond, Virginia; First Union Corporation, Charlotte, North Carolina; NationsBank Corporation, Charlotte, North Carolina; Southern National Corporation, Winston-Salem, North Carolina; and Wachovia Corporation, Winston-Salem, North Carolina (collectively, "Applicants"), bank holding companies within the meaning of the Bank Holding Company Act ("BHC Act"), have given notice under section 4(c)(8) of the BHC Act (12 U.S.C. § 1843(c)(8)) and section 225.23 of the Board's Regulation Y (12 C.F.R. 225.23) to acquire or retain control of 5 percent or more of the voting shares of Southeast Switch, Inc., Maitland, Florida ("SES"), after its mergers with Internet, Inc., Reston, Virginia ("Internet"), and Alabama Network, Inc., Birmingham, Alabama ("Alabama Network").1 Currently, SES operates an electronic funds transfer ("EFT") network under the tradename HONOR, Internet operates an EFT network under the tradename MOST, and Alabama Network operates an EFT network under the tradename ALERT. These EFT networks provide data processing and data transmission services to banks and retail merchants who are members of their branded automated teller machine ("ATM") and point of sale ("POS") networks.2 The combined entity ("Company") would engage in certain nonbanking activities related to the operation of ATM and POS networks, including various data processing services, pursuant to section 225.25(b)(7) of Regulation Y (12 C.F.R. 225.25(b)(7)).3 Applicants propose to conduct these activities throughout the United States, Bermuda, Canada, Mexico, Central America, and the Caribbean. Notice of the proposals, affording interested persons an opportunity to submit comments, has been published (61 Federal Register 56,547, 58,882 (1996)). The time for filing comments has expired, and the Board has considered the notices and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act. As in other cases, the Board also sought comments from the Department of Justice on the competitive effects of these proposals. The Department of Justice conducted an investigation of the proposals and indicated that it had no objection to consummation of the proposed transactions. Applicants are large commercial banking organizations with headquarters in Florida, Virginia, and North Carolina, and they engage directly and through subsidiaries in a broad range of banking and permissible nonbanking activities in the United States.4 Section 4(c)(8) of the BHC Act provides that a bank holding company may, with Board approval, engage in any activity that the Board determines to be "so closely related to banking or managing or controlling banks as to be a proper incident thereto." The Board previously has determined that all the activities proposed in these notices are closely related to banking within the meaning of section 4(c)(8) of the BHC Act.5 Applicants would conduct these activities in accordance with Regulation Y and previous Board decisions. |
| The Board also must consider whether the performance of the
proposed activities by Applicants through Company "can reasonably be
expected to produce benefits to the public . . . that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking practices."6 As part of
this consideration under section 4(c)(8) of the BHC Act, the Board reviews the
financial and managerial resources of the Applicants and their subsidiaries, and
any company to be acquired, and the effect of the proposal on those
resources.7 Based on all the facts of record, the Board concludes that
financial and managerial considerations are consistent with approval of the
proposals. In addition, there is no evidence in the record that the proposals
would result in conflicts of interests or unsound banking practices.
Competitive Considerations
The Board previously has concluded that the economic and market structure characteristics of the EFT industry tend to favor establishing a dominant network to serve a multi-state region.8 For example, network externalities, such as the economies of ubiquity, appear to promote consolidation of regional ATM networks.9 As a result, dominant ATM networks have emerged in various geographic areas throughout the EFT industry.10 One recent study indicates that the ten largest regional networks now account for 80 percent of all regional ATM network transactions in the United States.11 The proposed joint venture would provide services to depository affiliates of the joint venture participants, including the Applicants, and to unaffiliated financial institutions under operating rules that promote open access to the network, which are discussed in detail below. Accordingly, smaller financial institutions would have the opportunity to provide their customers with greater access to their deposit accounts and thereby could compete with larger, multi-state organizations for retail deposit funds without the necessity of substantial investments in branch systems or their own proprietary ATM networks. The operating rules also promote competition between Company's network and alternative providers of EFT-related services, including national ATM and POS networks, other regional networks, and third-party providers of EFT switching and processing services, thereby encouraging price and other competition for the services provided by the proposed network. In addition, each of the Applicants would be free to continue to operate its own proprietary network and to participate in other national and regional networks while participating in Company's network. Moreover, there is no evidence in the record that this proposal would reduce competition among Applicants, the other owners of Company, and other banking organizations as providers of banking products and services. In particular, Company's operating rules do not set prices that a member institution must charge its retail customers for ATM or POS transactions. In this light, and based on all the facts of record, the Board concludes that the proposal would not result in adverse effects such as undue concentration of resources or unfair competition. The Board also has considered whether these proposals would result in decreased competition. The Board and the courts traditionally have considered the area of effective competition between the merging parties in order to determine whether a particular merger transaction is likely to decrease competition. This area of effective competition has been defined by reference both to a line of commerce, or product market, and to a geographic market. |
| The Board previously has identified three distinct products that
may be offered by ATM networks: (1) network access (access to an ATM network
identified by a common trademark or logo displayed on ATMs and ATM cards);
(2) network services (the switching and gateway functions for the network); and
(3) ATM processing (the data processing and telecommunications facilities used
to operate, monitor, and support a bank's ATMs).12 HONOR provides all three
services to its network members. In contrast, MOST and ALERT provide only
network access directly; network services and ATM processing are provided to
members of these networks through third parties.13 The relevant product
market in which to examine the competitive effects of this proposal, therefore,
is the network access market.14
The Board previously has determined that the geographic market for network access is an area significantly larger than local banking markets and has considered the market area of an ATM network to consist of regions comprising several states.15 In this case, the HONOR network operates primarily in the Southeast, in North Carolina, South Carolina, Georgia, and Florida ("HONOR core states"), and is the predominant regional EFT network in that area. MOST operates primarily in the Middle Atlantic, in Maryland, Virginia, the District of Columbia, and Tennessee ("MOST core states"), and is the predominant regional EFT network in that area. ALERT operates primarily in Alabama and is the predominant regional EFT network in that state. On consummation of these proposals, Company would provide network access in a region consisting of those states and adjacent states ("Southeast Region"). Although the three networks involved in this proposal operate primarily in areas adjacent to one another, the record also indicates that the MOST network has a notable presence in the HONOR core states and that the HONOR network maintains a notable presence both in the MOST core states and in Alabama.16 There are a number of considerations, however, that mitigate any decrease in existing or potential competition resulting from these proposals. For example, the extent of geographic overlap among HONOR, MOST, and ALERT results primarily from the geographic expansion of a few member institutions, and the record indicates that the EFT networks generally have not actively competed for new members in each other's core states.17 In addition, several other large regional networks, such as MAC and NYCE, currently operate in areas adjacent to Company's proposed network. The Board believes that these regional networks would provide competitive constraints to the proposed network, and that their existence may become increasingly significant as multi-state banking organizations continue to expand geographically.18 Moreover, smaller networks and third-party processors will continue to operate EFT networks within the Southeast Region, and to provide both direct and potential competition for Company.19 Finally, national networks offer an attractive alternative to regional networks for some financial institutions in the Southeast Region, and national networks appear to be increasing their competitive pressure on regional networks.20 The Board also believes that proposed operating rules for Company, when taken together, facilitate competition with national and other regional networks and with third-party service providers, and ensure access to the network for all depository institutions.21 Applicants anticipate that Company would continue the use of certain procompetitive rules currently implemented by one or more of the constituent networks. For example, all depository institutions would be permitted to participate in the network on a nondiscriminatory basis and would be permitted to join other regional networks and to co-brand their cards and ATM terminals. The Board also notes that national network transactions initiated at a terminal in Company's network would not be required to be routed through Company's switch. The combined entity, moreover, would allow the use of third-party processors and would permit unbranded subswitching22 of transactions subject only to a royalty fee established to compensate Company for the use of its brand.23 |
| For those reasons, and based on all the facts of record, the Board
concludes that consummation of the proposals would not have a significantly
adverse effect on competition in any relevant market.
Public Benefits
Consumers would benefit from the added account availability and convenience resulting from the consummation of these proposals. In particular, an ATM network with a larger number of financial institution members and available ATMs has greater value to network cardholders, because they would have broader and more convenient access to their deposit accounts. In this case, the geographic territory covered by a network in the Southeast Region would expand significantly, and, accordingly, the benefits to consumers in this area of the country would be enhanced, particularly as consumers travel increasingly and business activity continues to grow.24 Furthermore, as noted above, the proposed joint venture would offer services to all financial institutions, and smaller financial institutions would have the opportunity to provide their customers with greater access to their deposit accounts. Membership in Company's network would thereby enable smaller financial institutions to compete with larger, multi-state organizations for retail deposit funds without the necessity of making substantial investments in branch systems or their own proprietary ATM networks. Consummation of these proposals would result in other public benefits. For example, the proposal is expected to produce economies of scale and reduce average costs for the combined network.25 The Board expects that a portion of these cost savings would be passed on to member financial institutions, and to consumers, in the form of lower fees.26 The record also indicates that Company plans to increase research and development expenditures over the levels budgeted by the constituent networks in the past. The broader ownership base of Company should improve the probability of success for new products by increasing the number of financial institutions that would be willing to introduce these products to consumers in earlier stages of development. For the foregoing reasons, and after careful consideration of all the facts of record, the Board has concluded that the balance of the public interest factors it must consider under the proper incident to banking standard of section 4(c)(8) of the BHC Act is favorable and consistent with approval of these proposals. Conclusion
This transaction shall not be consummated later than three months after the effective date of this order, unless such period is extended for good cause by the Board or by the Federal Reserve Bank of Atlanta or the Federal Reserve Bank of Richmond, acting pursuant to delegated authority. |
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By order of the Board of Governors,27 effective December 9, 1996.
Deputy Secretary of the Board |
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Appendix A List of Activities
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Appendix B Asset and Deposit Data as of June 30, 1996 Barnett Banks, Inc., with approximately $41.8 billion in total consolidated assets, is the 13th largest commercial banking organization in the United States, controlling $34.6 billion in deposits. Barnett operates subsidiary banks in Florida and Georgia. Crestar Financial Corporation, with approximately $18.5 billion in total consolidated assets, is the 40th largest commercial banking organization in the United States, controlling $11.7 billion in deposits. Crestar operates subsidiary banks in Virginia, Maryland, and the District of Columbia. First Union Corporation, with approximately $139.9 billion in total consolidated assets, is the sixth largest commercial banking organization in the United States, controlling $90 billion in deposits. First Union operates subsidiary banks in Connecticut, Delaware, the District of Columbia, Florida, Georgia, Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee, and Virginia. NationsBank Corporation, with approximately $192.3 billion in total consolidated assets, is the fifth largest commercial banking organization in the United States, controlling $98.4 billion in deposits. NationsBank operates subsidiary banks in North Carolina, Delaware, the District of Columbia, Florida, Georgia, Kentucky, Maryland, New Mexico, South Carolina, Tennessee, Texas, and Virginia. Southern National Corporation, with approximately $20.6 billion in total consolidated assets, is the 32nd largest commercial banking organization in the United States, controlling $14.7 billion in deposits. Southern National operates subsidiary banks in North Carolina, South Carolina, and Virginia. Wachovia Corporation, with approximately $46 billion in total consolidated assets, is the 31st largest commercial banking organization in the United States, controlling $25.1 billion in deposits. Wachovia operates subsidiary banks in North Carolina, South Carolina, Georgia, and Delaware. |
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Footnotes 1 Applicants are the bank holding companies that would control more than 5 percent of any class of Company's voting shares. Other current shareholders of SES, Internet, and Alabama Network also would own shares of Company after consummation of this proposal. 2 In general, an ATM network is an arrangement whereby more than one ATM and more than one depository institution (or the depository records of such institutions) are connected by electronic or telecommunications means to one or more computers, processors, or switches for the purpose of providing ATM services to retail customers of the institutions. POS terminals are generally located in the establishments of merchants. They accept ATM or similar cards and, using the ATM network or a parallel POS-only network, provide access to the cardholder's account to transfer funds to the merchant's account. 3 A list of Company's proposed data processing and transmission activities is set forth in Appendix A. In connection with its EFT-related data processing and transmission activities, Company also would provide management consulting services to depository institutions for EFT-related activities pursuant to section 225.25(b)(11) of Regulation Y (12 C.F.R. 225.25(b)(11)) and check verification services to retailers pursuant to section 225.25(b)(22) of Regulation Y (12 C.F.R. 225.25(b)(22)), which permits a bank holding company to engage in authorizing a subscribing merchant to accept personal checks and purchasing from the merchant validly authorized checks that are subsequently dishonored. 4 Asset and deposit information for each of the Applicants is set forth in Appendix B. 5 See 12 C.F.R. 225.25(b)(7), (11), and (22); The Bank of New York Company, Inc., et al., 80 Federal Reserve Bulletin 1107 (1994) ("Bank of NY Order"). 6 See 12 U.S.C. § 1843(c)(8). 7 See 12 C.F.R. 225.24. See also The Fuji Bank, Limited, 75 Federal Reserve Bulletin 94 (1989); Bayerische Vereinsbank AG, 73 Federal Reserve Bulletin 155 (1987). 8 Early ATM networks typically were composed of banks that used their ATMs for dispensing cash, and were confined to branches in local banking markets. The smaller ATM networks have tended to consolidate in response to several factors, including increased consumer desire to obtain widespread access to their accounts, the rise of interstate banking, the competitive advantage produced by economies of scale, and the desire to undertake relevant and timely technology research and development and thereby enhance the products available from and through the network. |
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9 As an ATM network expands the number of its financial institution members and available ATMs, its value to network cardholders increases due to the greater accessibility of their deposit accounts. Similarly, as the number of cardholders increases, so does the number of transactions and hence the economic return on ATM terminals in the network. This increased economic return provides incentives for banks to establish additional ATMs, thereby further enhancing the network's value to cardholders. Accordingly, banks tend to place a greater value on membership in a network as its membership expands. 10 Although the network in the proposals would become the nation's largest regional EFT network in transaction volume, a number of other large networks would continue to operate both in Company's service area and elsewhere throughout the United States. 11 See McAndrews and Rob, "Shared Ownership and Pricing in a Network Switch," 14 International Journal of Industrial Organization 727 (October 1996). 12 See Banc One Corporation, et al., 81 Federal Reserve Bulletin 492 (1995) ("EPS Order"). 13 Several regional or national firms, such as Deluxe Data Systems and Electronic Data Systems, offer network services and ATM processing services to unaffiliated networks and their members. 14 In considering network access for POS transactions, the Board notes that there are a number of competitors in the market, including two large national networks that have grown substantially in recent years throughout the nation (VisaCheck and MasterMoney). Based on all the facts of record, the Board concludes that the proposals would not significantly affect competition in any market for POS-related services. 15 See EPS Order at p. 494-95. 16 For example, HONOR operates 484 ATMs in Virginia, and MOST operates 419 ATMs in North Carolina. 17 The record indicates that the overlap among these networks is attributable primarily to (1) the membership of two large interstate bank holding companies in both the HONOR and MOST networks, and (2) the membership of a few large Alabama-based organizations in both the ALERT and HONOR networks. 18 The record indicates that banking organizations tend to transport regional ATM marks as they expand into new geographic areas. 19 For example, Publix Supermarkets Inc., operates an ATM network under the tradename PRESTO in Florida and Georgia, and First Tennessee Bank operates an ATM network under the tradename Money Belt in Tennessee, Virginia, Georgia, and Florida. Electronic Data Systems, a large third-party processor, operates an ATM network under the tradename MPACT in 14 states, including Mississippi and Arkansas. 20 A number of smaller banks in the Southeast Region that are members of a national network are not members of HONOR, MOST, or ALERT. In addition, VISA operates a national EFT network under the tradename PLUS, and recently has announced that it plans to change the PLUS mark to VISA in order to generate greater brand recognition in all regions of the country. 21 The Board previously has determined that ATM network operating rules are an important consideration in assessing the competitive impact of a proposal under the section 4(c)(8) factors. See Bank of NY Order; EPS Order. In addition, Company's corporate structure ensures that its board of directors will represent a wide range of interests and that Company policy will not be dominated by the organizations with the largest shareholdings. Twenty-two members of the Company's 26-member board of directors will be appointed by the Company's Class A shareholders, which are all financial institutions. The Class A shareholders consist of both net issuers and net acquirers of network transactions, vary in asset size of the organization, and are geographically diverse. 22 "Subswitching" refers to the switching of transactions between members of the same regional network without accessing that network, and therefore without paying the network's switch fee. Generally, this is accomplished by routing the transaction through a third-party processor that provides ATM processing services for both network members. 23 Applicants have stated that Company's proposed operating rules would not be made final until the proposals are consummated. The Board believes that the benefits of the five operating rules summarized above are important considerations in its determination to approve these proposals. Accordingly, Company must notify the Board if Company does not adopt those operating rules substantially as proposed so the Board can determine whether the rules as adopted affect the Board's consideration of the factors in this case. 24 See generally Schiller, "The Travel Market in the United States and the Third District," Business Review of the Federal Reserve Bank of Philadelphia, pages 11-21 (September-October 1996) (demonstrating increases in aggregate travel during the period from 1984 to 1994). Moreover, available evidence indicates that the benefits of ubiquity have continued to grow over time as ATM networks have consolidated. In particular, the number and percentage of interchange transactions -- in which consumers access their accounts through terminals not deployed by their own financial institutions -- have increased markedly in recent years. See generally Bank Network News (1988-1995). 25 The MOST and ALERT networks do not provide switching and processing services directly to their members. HONOR provides switching and processing services directly to its members and currently maintains some excess capacity in its system. The record indicates that HONOR's marginal costs to provide switching services are substantially lower than the prices charged to MOST and ALERT by a third-party provider of these services. Hence, increased transaction volume for the HONOR switch and the elimination of costs attributable to the current outsourcing of services for MOST and ALERT network transactions would be likely to allow Company to realize economies of scale and to reduce average costs for the combined network. The transactional cost savings for Company could be substantial, even after taking into account the added capital, conversion, and operating costs that would be incurred in expanding Company's network processing capacity and utilization. The Board also notes that, due to the large market share of the third party performing switching services for MOST and ALERT network transactions, the conversion of transaction volume from the third-party switch to the HONOR switch could increase competition in this product market. 26 See McAndrews, "Retail Pricing of ATM Network Services," Working Paper No. 96-4, April 1996, Federal Reserve Bank of Philadelphia (indicating that network fees and consumer prices are lower in larger EFT networks). 27 Voting for this action: Chairman Greenspan and Governors Kelley, Lindsey, Phillips, Yellen, and Meyer. Absent and not voting: Vice Chair Rivlin. |
1996 Orders on banking applications