Order Approving Notices to Conduct Certain Data Processing Activities and Other Nonbanking Activities.

BankAmerica Corporation, BancWest Corporation, BB&T Corporation, First Union Corporation, SunTrust Banks, Inc., Wachovia Corporation, and Zions Bancorporation (collectively, "Notificants"), bank holding companies within the meaning of the Bank Holding Company Act ("BHC Act"), have requested the Board's approval under section 4(c)(8) of the BHC Act (12 U.S.C. 1843(c)(8)) and section 225.24 of the Board's Regulation Y (12 C.F.R. 225.24) to acquire and merge Honor Technologies, Inc., Maitland, Florida, and Star Systems, Inc., San Diego, California, and to engage in providing data processing services, pursuant to section 225.28(b)(14) of Regulation Y (12 C.F.R. 225.28(b)(14)).(1) In addition, Notificants, through H&S, would engage in providing check verification services, in accordance with section 225.28(b)(2) of Regulation Y (12 C.F.R. 225.28(b)(2)), and management consulting services related to the activities of H&S, in accordance with section 225.28(b)(9) of Regulation Y (12 C.F.R. 225.28(b)(9)).

Currently, Honor Technologies, Inc. operates two electronic funds transfer ("EFT") networks under the service names HONOR and HONOR West (collectively, "HONOR"), and Star Systems, Inc. operates the Star EFT network ("Star"). These EFT networks provide data processing and transmission services to financial institutions and merchants that are members of their respective branded automated teller machine ("ATM") and point of sale ("POS") networks.(2) H&S would engage through HONOR and Star in certain nonbanking activities related to the operation of ATM and POS networks, including various data processing and transmission services, in accordance with section 225.28(b)(14) of Regulation Y (12C.ER. 225.28(b)(14)).

Notice of the proposal, affording interested persons an opportunity to submit comments, has been published (63 Federal Register 67,693 and 70,131 (1998)). The time for filing comments has expired, and the Board has considered the notice and all comments received in light of the factors set forth in section 4(c)(8) of the BHC Act. As in similar cases, the Board also sought comments from the Department of Justice on the competitive effects of the proposal. The Department of Justice indicated that it had no objection to consummation of the proposed transaction.

Notificants are large commercial banking organizations with headquarters in Georgia, Hawaii, North Carolina, and Utah. Notificants each engage directly and through subsidiaries in a broad range of banking and permissible nonbanking activities in the United States.(3)

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 and controlling banks as to be a proper incident thereto." The Board previously has determined that all the activities proposed in the notice are closely related to banking within the meaning of section 4(c)(8) of the BHC Act.(4) Notificants would conduct the proposed activities in accordance with Regulation Y and previous Board decisions?

The Board also must consider whether the performance of the proposed activities by Notificants through H&S "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 review under section 4(c)(8) of the BHC Act, the Board considers the financial and managerial resources of Notificants, 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, including reports of examination and other supervisory information, the Board concludes that financial and managerial considerations are consistent with approval of the proposal. In addition, there is no evidence in the record that the proposal would result in conflicts of interests or unsound banking practices.

Competitive Considerations

The proposal would result in the combination of two EFT networks, one operating primarily in the mid-Atlantic and southeastern states and the other operating primarily in the western states.(8) A number of other large regional networks and national networks that link financial institutions and local and regional networks nationwide would continue to operate in these areas.

To determine whether a particular transaction is likely to decrease competition, the Board traditionally has considered the area of effective competition between parties. The area of effective competition has been defined by reference to the line of commerce or product market involved and a geographic market. In this case, the Board has carefully considered the relevant product and geographic markets in which to analyze the competitive effects of the proposal in light of all the facts of record, including information provided by Notificants and the geographic scope of and services provided by existing EFT networks and other providers of EFT services.

The Board previously has identified three distinct products that are typically offered by EFT networks:

(1) Network access (access to an EFT network identified by a common trademark or logo displayed on ATMs, POS terminals, and access cards);

(2) Network services (operation of a "network switch" to receive and route electronic messages between ATMs, POS terminals, and data processing facilities used by depository institutions to authorize EFT transactions and the provision of "gateway" access to other networks); and

(3) ATM/POS processing (data processing and transmission used to drive ATMs and POS terminals, monitor their activity, authorize ATM and POS transactions, and reconcile accounts.(9)

HONOR provides all three services to its network members. Star directly provides only network access; a third party provides network services and ATM/POS processing. Under the proposal, H&S would not acquire the facilities to provide network services or ATM/POS processing services to the Star network or any other network or the right to provide these services. Accordingly, the relevant product market in which to examine the competitive effects of the proposal is the market for network access.

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 EFT network to consist of regions comprising several states.(10) Based on all the facts of record, the Board believes that HONOR has a significant competitive presence in the mid-Atlantic and southeastern states (Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Tennessee, Virginia, and the District of Columbia) and, to a lesser extent, in Kansas and Missouri. Star's primary service area is located in the western United States (Arizona, California, Colorado, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington). Thus, the primary service areas for HONOR and Star do not overlap.

There are a number of areas outside these primary service areas in which HONOR and Star somewhat overlap in providing network access. Changes in market concentration in these other areas would not be significant, however, and in each area a number of other networks, including other large regional networks, and third party processors will continue to operate and to provide both direct and potential competition for HONOR and Star.(11) National networks also offer an alternative to regional networks for some financial institutions, particularly in the southeast region served by HONOR, where relatively fewer financial institutions are members of any regional EFT network and national networks appear to be increasing their competitive presence.(12)

The Board also has considered the proposed operating rules for HONOR and Star.(13) The rules appear to facilitate competition and to ensure access to the network for all depository institutions. For example, all depository institutions would be able to participate in HONOR and Star on a nondiscriminatory basis, to join other regional networks, and to co-brand their cards and ATM terminals. Each member of the network would be able to set for itself the fees it charges its retail customers for ATM or POS transactions.(14) The operating rules also would permit the use of third-party processors and unbranded subswitching of transactions.(15) The Board notes that transactions initiated at an ATM in the HONOR or Star network and routed through a national network to another network would not be required to pass through the HONOR or Star gateway. In addition, H&S's proposed corporate structure ensures that its board of directors would represent a wide range of interests and that H&S's policymaking would not be dominated by the organizations with the largest shareholdings.(16)

The proposal, therefore, would provide services to Notificants' subsidiary banks, other shareholders of H&S, and other financial institutions that participate in HONOR or Star under operating rules that would promote open access to the network.(17) Smaller financial institutions would have the opportunity to provide their customers with greater access to their deposit accounts and thereby could compete with larger, multistate organizations for retail deposit funds without substantial investments in their own proprietary ATM networks. In addition, the operating rules of HONOR and Star would promote competition between the HONOR and Star networks 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, and thereby encourage price and other competition for the services provided by HONOR and Star.

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. For these reasons, and based on all the facts of record, the Board concludes that consummation of the proposal is not likely to have a significantly adverse effect on competition in any relevant market.

Public Benefits

Section 4(c)(8) of the BHC Act requires that, in order to approve a proposal, the Board must determine that the public benefits that could reasonably be expected from the proposal would outweigh potential adverse effects. This is a balancing process that takes into account the extent of the potential for adverse effects, which, for the reasons indicated above, the Board does not believe to be significant in this case.

Consumers would benefit from the added account availability and convenience resulting from consummation of the proposal. In particular, an ATM network with a large number of financial institution members and that provides network access at more locations over a broad geographical area would have greater value to network cardholders because they would have broader and more convenient access to their deposit accounts. In this case, the geographic markets served by H&S would include all the southern United States and the Pacific northwest states and, accordingly, the proposal would enhance benefits to consumers in these areas, particularly as consumer travel increases and business activity continues to grow.(18)

In addition, H&S 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. As noted, membership in the H&S networks would enable smaller financial institutions to compete with larger, multistate organizations to retain deposit funds without having to make substantial investments in branch systems or their own proprietary ATM networks.

Consummation of the proposal also would result in other public benefits. The proposal is expected to produce economies of scale, for example, and to reduce average costs for the combined networks.(19) Members of each network also would benefit from the technical expertise and the expanded research and development programs of the other network. Star network members would have access to a broader array of products and services, including card production and website design and maintenance. HONOR network members would benefit from the introduction of a service provided by Star that permits bill payments by telephone without the use of a personal identification number.

For the foregoing reasons, and after careful consideration of all the facts of record, the Board has determined that consummation of the proposal can reasonably be expected to produce public benefits that would outweigh any possible adverse effects under the proper incident to banking standard of section 4(c)(8) of the BHC Act.

Conclusion

Based on all the facts of record, the Board has determined that the notices should be, and hereby are, approved. The Board's approval is specifically conditioned on Notificants' compliance with the commitments made in connection with these notices and the conditions referred to in this order. The Board's determination also is subject to all the terms and conditions set forth in Regulation Y, including those in sections 225.7 and 225.25(c) (12 C.F.R. 225.7 and 225.25(c)), and to the Board's authority to require modification or termination of the activities of a bank holding company or any of its subsidiaries that the Board finds necessary to ensure compliance with, or to prevent evasion of, the provisions and purposes of the BHC Act and the Board's regulations and orders issued thereunder. For purposes of this action, the commitments and conditions shall be deemed to be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be enforced in proceedings under applicable law.

This proposal 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 the Federal Reserve Banks of Atlanta, Richmond or San Francisco, acting pursuant to delegated authority.

By order of the Board of Governors, effective February 1, 1999.

(1.) Notificants would form a de novo company, H&S Holding Company, Maitland, Florida ("H&S"), that would indirectly acquire all the voting shares of the two companies to be acquired. Notificants are shareholders or members of the companies to be acquired and, under the proposal, each would receive, directly or indirectly, more than 5 percent of the voting shares of H&S.

(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 depository institutions. POS terminals are generally located in merchant establishments. POS terminals accept ATM or similar cards from retail customers and, using an ATM network or a parallel POS-only network, provide access to a retail customer's account to transfer funds to a merchant's account.

(3.) Asset and deposit data for each Notificant are set forth in the Appendix.

(4.) See 12C.ER. 225.28(b)(2), (9), and (14); 12C.ER. 225.131 (permissible consulting services); Barnett Banks of Florida, Inc., 65 Federal Reserve Bulletin 263 (1979) (check verification services); Compagnie Financiere de Paribas, 82 Federal Reserve Bulletin 348 (1996) (fraud detection services); Bank of New York Company, Inc., 80 Federal Reserve Bulletin 1107 (1994) ("InfiNet Order") (ATM network services); Banc One Corporation, 81 Federal Reserve Bulletin 492 (1995) ("EPS Order") (ATM network services).

(5.) The Board notes that ATM activities must be conducted in accordance with applicable federal and state laws, including applicable branching laws.

(6.) See 12 U.S.C. 1843(c)(8).

(7.) See 12 C.F.R. 225.26.

(8.) HONOR and Star are among the largest EFT regional networks in the United States. Star has the largest number of ATMs, POS terminals, and EFT transactions per month, and HONOR has the second largest number of ATMs and EFT transactions per month and the third largest number of POS terminals. HONOR has the largest number and Star has the seventh largest number of financial institutions participating in a network. Sources: EFT Network Data Book (1999); Bank Network News (September 25, 1998).

(9.) See EPS Order at 493-94.

(10.) See EPS Order at 494.

(11.) The Board also notes the rapid growth in recent years in the volume of POS transactions, which serve as an alternative for certain ATM transactions, and the presence of a number of competitors that provide POS network services across regional boundaries.

(12.) See Barnett Banks, Inc., 83 Federal Reserve Bulletin 131, 133 n.20 (1997) ("HONOR/Most Order"). In October 1998, Visa began operations of its Visa Check II card, a debit card offering issuers higher fees for POS transactions but prohibiting co-branding with other networks.

(13.) 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 InfiNet Order; EPS Order.

(14.) See HONOR/Most Order at 132.

(15.) "Subswitching" refers to the routing of transactions between members of the same regional network without accessing that network, and, therefore, without paying the network's switch fee. Typically, this is accomplished by routing the transaction through a third-party processor that provides ATM processing services for both network members.

(16.) The proposed bylaws of H&S provide that the board of directors would consist of 30 members, and this number may not be changed except by the affirmative vote of two-thirds of the directors or shareholders. No more than one director may be an affiliate of or have any material business relationship with any one shareholder, and voting for directors is cumulative. No shareholder may hold more than 19 percent of H&S voting shares. See also HONOR/Most Order at 133 n.21.

(17.) See HONOR/Most Order at 132-33.

(18.) See HONOR/Most Order at 134.

(19.) Notificants expect that any network services and ATM processing that are consolidated in the future would result in economies of scale for computer facilities, operations personnel, programming staff, and other support services and would likely reduce the cost of operation of the HONOR and Star networks.

Voting for this action: Chairman Greenspan, Vice Chair Rivlin, and Governors Kelley, Meyer, Ferguson, and Gramlich.

ROBERT DEV. FRIERSON Associate Secretary of the Board

Appendix

Asset and Deposit Data for Notificants(1)

BankAmerica Corporation, with approximately $594.7 billion in total consolidated assets, is the second largest commercial banking organization in the United States, controlling $287.6 billion in deposits. BankAmerica Corporation operates subsidiary banks in 23 states and the District of Columbia. BancWest Corporation, with approximately $8.2 billion in total consolidated assets, is the 63rd largest commercial banking organization in the United States, controlling $5.9 billion in deposits. BancWest Corporation operates subsidiary banks in five states.

BB&T Corporation, with approximately $33.9 billion in total consolidated assets, is the 27th largest commercial banking organization in the United States, controlling $20.6 billion in deposits. BB&T Corporation operates subsidiary banks in four states and the District of Columbia.

First Union Corporation, with approximately $234.6 billion in total consolidated assets, is the sixth largest commercial banking organization in the United States, controlling $134 billion in deposits. First Union Corporation operates subsidiary banks in 12 states and the District of Columbia.

SunTrust Banks, Inc., with approximately $86.6 billion in total consolidated assets, is the 11th largest commercial banking organization in the United States, controlling $53.3 billion in deposits. SunTrust Banks, Inc., operates subsidiary banks in six states and the District of Columbia.

Wachovia Corporation, with approximately $65.6 billion in total consolidated assets, is the 17th largest commercial banking organization in the United States, controlling $37 billion in deposits. Wachovia Corporation operates subsidiary banks in six states.

Zions Bancorporation, with approximately $12.4 billion in total consolidated assets, is the 53rd largest commercial banking organization in the United States, controlling $8.1 billion in deposits. Zions Bancorporation operates subsidiary banks in eight states.

(1.) Asset data are as of September 30, 1998, and deposit data are as of June 30, 1998, and are adjusted to reflect acquisitions consummated after that date.

Istituto Bancario San Paolo di Torino-Istituto Mobiliare Italiano S.p.A. Turin, Italy