Small Banks Snag Ride on Rising STAR : System Fills Need, Grows by Offering an ATM Network

Debby Kyle’s worries began early in the 1980s, when financial giant Bank of America began an aggressive campaign to set up automated teller machines across the state, creating an electronic banking system that today boasts more than 1,500 ATMs.

Kyle was then ATM director for La Jolla Bank & Trust, a mid-size bank with fewer than 10 ATMs. As Bank of America wooed more and more customers with the wonders and conveniences of its expansive electronic banking network, Kyle feared that her bank would get muscled out of the market.

Like other small-bank managers, Kyle sought a strategy that would enable La Jolla Bank to compete with the banking giants in the Age of ATMs. That’s when Kyle realized she had to catch a rising STAR.

La Jolla Bank & Trust signed up with STAR System, the San Diego-based electronic banking system that has become the West’s premier ATM network in less than five years. Since its incorporation in 1984, STAR has been able to wrest electronic banking, once monopolized by industry giants, and offer it to small and mid-sized banks.

Expanded Network

Today, La Jolla Bank has 15 ATMs--hardly enough to compete with Bank of America, Kyle concedes. But, with its STAR affiliation, La Jolla Bank customers can get cash at thousands of ATM sites in six Western states and Illinois, said Kyle, who is now vice president/director of training at La Jolla Bank.

STAR has become the second-largest regional ATM network in the country by providing an accurate, reliable data-processing system to conduct electronic banking transactions. The STAR network now operates in California, Arizona, Hawaii, Illinois, Nevada, Oregon and Utah.

STAR, a not-for-profit network founded by 11 banks and savings and loans in 1984, had recruited 143 banks and S&Ls; by the end of its first year of operation in 1985. Now, STAR has 416 members.

The number of ATMs in its system totals more than 7,600, more than triple the 2,431 ATMs in the system four years ago. ATM cardholders in the STAR system now approach 19 million, up from 6.7 million in 1985.

The rapid growth of STAR has astonished many, but bankers and industry analysts say there’s no secret behind the network’s success: STAR has gained market dominance by recognizing and seizing a niche in the marketplace, offering quality service and paying attention to client needs.

“STAR has one of the highest up-times in the country,” said David Robertson, vice president of the Nilson Report, a leading newsletter for the credit card and ATM industries, based in Santa Monica. Up-time refers to the time an ATM system is operating and not broken down. “There’s nothing that upsets a customer more than, when he walks up to a machine and it’s shut down,” Robertson said.

“You have a very competitive market,” Robertson said. “All the banks are staying open later, opening on weekends. They’re looking for a competitive edge. And that’s exactly what STAR offers.”

Which is why First Interstate Bank of Nevada announced last month that it is joining STAR.

‘Expanded Access to Cash’

“The idea behind it was to give our customers expanded access to their cash,” said Graham McKenney, a First Interstate spokesman. “STAR has had phenomenal growth, and we’d like to take advantage of that.” The Las Vegas-based bank is expected to add 132 ATMs and 250,000 cardholders to the network.

Bankers disagree on whether electronic banking is profitable. Purchasing and installing one ATM costs nearly $40,000, and maintenance and operating costs can range from $2,000 to $5,000 per month per machine. Still, banks and savings and loans say it is an essential service for customers.

“Whether you lose money on the machines isn’t a factor,” said Lynne Duke, manager of bank card services at La Mesa-based Grossmont Bank, another STAR affiliate. “It’s something you have to offer to be competitive,” she said, describing ATM service as a cost of doing business.

According to Rita Champ, STAR vice president of marketing and communications, for each transaction conducted at a STAR ATM, the network charges the ATM card-issuing bank a set fee of 50 cents per withdrawal and 30 cents per balance inquiry. STAR also charges client banks an initial membership fee of $1,500 to $2,500 and annual dues of $1,000 to $2,250.

Those charges, however, are not necessarily passed along directly to cardholders. Some banks and S&Ls; charge ATM transaction fees, and others have chosen not to.

All fees paid by STAR clients go back into updating the system or for marketing and research, Champ said. Because STAR is not-for-profit, revenue surpluses result in the lowering of transaction fees, Champ added. Within the last 18 months, STAR has reduced its transaction fees three times.

Although STAR achieved its success in part by offering competitive prices, the network’s rapid growth is primarily because it was the first network to seriously offer electronic banking to small financial institutions. While national networks, such as Cirrus and Plus, sought only to recruit big-name banks, STAR rushed to fulfill the smaller bank’s desire to grow.

Luring Customers

The major financial institutions were the first to realize that ATMs could lure more customers by offering 24-hour banking and the ability to get cash at many locations.

With their considerable financial muscle, major institutions such as Bank of America and Security Pacific National Bank launched ATM expansion campaigns in the early 1980s, installing electronic tellers throughout the state. In the midst of the banks’ ATM buildup, national networks were also gaining prominence and seeking a foothold in the West Coast.

In some cases, the national networks, eager to gain credibility and net as many customers as quickly as possible, offered electronic banking only to the biggest-name bank in a particular market, Champ said. For example, when Bank of America agreed to join Plus, the national network in return promised not to recruit a competitor in the same market. At the time, such exclusive agreements appeared to have given the banking powers a monopoly on electronic banking and threatened the smaller banks’ future.

“The big banks and the networks thought they were going to lock up the market,” said Bill Haynor, first vice president of marketing at Great American First Savings, which was an original member of STAR. “But what they didn’t realize was that they created an opportunity for the small banks to get together and say, ‘Hey, they

locked us out. Why don’t we form our own network?’ ”

Four banks--California First Bank (now Union Bank), Lloyds Bank (now Sanwa Bank), Bank of the West and American National Bank--did exactly that by conceiving the STAR concept in 1984. Then, the group recruited seven other well-recognized banks and savings institutions to join the original network.

The fledgling network quickly bolstered itself as small and mid-sized banks that were shunned by the national networks flocked to join STAR.

Offered a Service

“We were lucky because we were offering a service that was needed in the marketplace . . . a service that no one else was really offering,” Champ said. “Smaller banks were eagerly looking for a vehicle to expand their system without having to spend money on brick and mortar for new branches. We were that vehicle.”

Without having to ward off competitors’ challenges, STAR was able to focus on providing quality service in its early years. Backed by its founding members’ reputations and by paying attention to its members’ needs, STAR had little difficulty recruiting clients. Today, the network has more than 67% of the state’s ATM base.

“It’s tough being the small guy,” said Kyle of La Jolla Bank & Trust. “The big banks always see their names in the headlines. We always get overlooked. But STAR has never made us feel like a small bank. They ask us for our opinions and pay as much attention to our needs as they do to the needs of their founding members.”

The STAR System also offered small bank managers a deal they couldn’t refuse. By joining the network, small banks could expand their operations, yet simultaneously reduce their need for more branch offices.

“Before ATMs, the only way you could expand was with brick and mortar,” said Bob Plunkett, first vice president of the ATM department at San Diego Trust & Savings. “But land in Southern California is so expensive. By joining STAR we’ve been able to reduce the number of proposed branches because we can augment our current branches with off-site ATMS.”

A decade ago, San Diego Trust & Savings was building five new branches annually, according to Plunkett. Today, the bank constructs one or two new outlets each year. “The slowdown is directly linked to our ATM growth,” Plunkett said. “It’s a lot cheaper this way.”

Name Recognition

As STAR continued to lure members, the national networks recognized the flaws in its strategy to seek only the big-name banks, industry members say. But, by the time the national networks dropped their exclusive offers and opened electronic banking service to other institutions, STAR had gained dominance of the Western market. According to a consumer awareness study, STAR is the most-recognized electronic banking network in the state.

Even the big banks are beginning to recognize the advantages of joining STAR. According to Robertson, vice president of the Nilson Report, STAR ensured its future over the last two years by recruiting Wells Fargo Bank and Bank of America.

“Getting those two was a major coup,” Robertson said. “The fact that STAR was able to crack that group, to persuade the big banks to join, shows just how strong it has become.”

Loraine Boland, vice president and manager of Wells Fargo’s ATM department, denied that her institution joined STAR because it felt threatened by the network’s growth.

“Since we had such a large ATM network of our own, we didn’t feel a need to join early on,” Boland said. San Francisco-based Wells Fargo is the third-largest financial institution in the state according to assets and has more than 1,200 ATMs. Although Wells Fargo has 455 branches in the state, it only has 18 offices in San Diego County.

“We joined recently because we knew STAR had a lot of ATMs in Southern California,” Boland said. “Most of our ATMs are in Northern California. We just wanted to give our customers in the southern part of the state the convenience of more ATMs.”

Besides offering their customers greater convenience by joining STAR, major banks that operate large numbers of ATMs can generate revenue by offering its machines to the network, said Champ of STAR. For example, any time a cardholder of Bank A uses an ATM at Bank B, the network pays Bank B a fee of $.40 per withdrawal and $.20 per balance inquiry.

“By opening our many ATM machines to other STAR members, we can generate revenue,” said Brenda Yost, vice president of Bank of America’s electronic banking department. The San Francisco-based bank is the state’s largest financial institution according to assets and operates more than 1,500 ATMs.

Although STAR brings money into the institutions, bankers say more money goes out to pay the network’s transaction fees.

For example, in order to offset the network’s transaction fees and pay for the cost of ATM operations, some banks charge its customers a fee each time they use their ATM card at Bank B. Not all banks assess such fees, but those that do typically charge 50 cents to $1.

‘Doesn’t Make Any Sense’

“Here we are trying to persuade more people to use their ATM cards,” said Kyle of La Jolla Bank, which does not charge its customers fees when they conduct transactions at other STAR machines. “We pour money into ATM advertising campaigns. Then, we do a complete about face and charge them when they use their ATMs. That doesn’t make any sense.”

Kyle says she understands banks’ desire to offset operational costs, but criticizes them for not understanding the savings that electronic banking offers.

“Sure, if you just look at transaction fees we’re losing money,” Kyle said. “But consider how much more it would cost us to handle all the ATM transactions annually. The cost of more staffing, the cost of statement processing. And, if you took away our ATMs, consider the impact it would have on our customer service. If you want to talk about losing money, let’s start with how many accounts we would lose if we lost our ATMs.”

STAR would prefer to see banks drop such charges to foster greater ATM usage, but the network has no control over that decision.

“Those charges are not imposed by STAR,” Champ said. “They’re set by the individual banks. We can’t try to regulate what they do. That’s against antitrust laws.”

Although STAR officials were concerned that bank charges might deter customers from using ATMs, they said steady growth has assuaged such fears.

“I can’t tell you how many people are not using ATMs because of the charges,” Champ said. “If there were no charges, maybe our volume would be higher. But we don’t think it would be that much more. We’re happy with our growth.”

Although STAR will welcome banks that want to join the network, Champ said seeking new members is not first on STAR’s agenda. Nor does STAR plan to become a national network.

“We’ve been so successful because we can focus on a local market,” Champ said. “We know who our customers are, what they need. We could never do that if we had to pay attention to 50 different markets across the country.”

Instead, STAR wants to make bank customers aware of electronic banking’s benefits and increase ATM usage. STAR, like other ATM networks, is exploring how to get more out of its system: using ATM cards to buy groceries, movie tickets, gasoline.

“When the ATM was first introduced, we marketed the card to be used for one purpose only: to get emergency cash quick,” Champ said. “Card transactions have increased tremendously because now we’re taking the approach that the customer can use the card anytime. The best way we can grow is if we can convince the cardholder to use the card more often, for various purposes.”