I Need Help with Thesis: Why Don't BancNet, Megalink, and ExpressNet Merge into One?

[cHaSeR]

I'm a Junior at the De La Salle University majoring in Applied Economics and Management of Financial Institutions.

As part of our thesis, we plan to make a study on why the three largest ATM consortia in the country, namely BancNet, Megalink, and ExpressNet, refuse to merge under one umbrella organization.

The closest the three have gone into merging with each other is making bilateral agreements with one another, which paved way for the interconnection of their ATM networks, making basic ATM transactions like withdrawals, balance inquiries, and the like, available to ATM cardholders of other consortia.

If they agreed to interconnect in the first place, why don't they just agree to consolidate all their resources and ATMs under one organization? It seems as if they want to make their ATMs more accessible to as many people as possible anyway. If they all merged into one, that would mean more people would have more access to more ATMs. And that would benefit society in general, wouldn't it?

In addition, it would cost banks more if they continued interconnecting with other consortia as compared to having one organization serving all banks.

My thesismates and I are all wondering why the three consortia don't merge into one organization given the positive effects such a consolidation would bring about to society.

Calling all Economics and Finance majors or professors out there! Or anyone out there who would be knowledgeable on the topic. Could you please help us out?

[victory]

cHaSeR, a few questions that might help you:

1. Are firms in business "to bring about positive benefits to society?" What is the objective function of a firm, after all?
2. Is this objective function maximized by ATM networks by merging into one entity, or are individual firms "better served" by preserving their separate identities?
3. What are the costs and benefits of mergers and alliances? Do the benefits outweigh the costs? You've hinted at something important and so you may want to consider the difference between private returns (for firms) and social returns (for society as a whole): Is there a mismatch? If so, do firms have an incentive to correct this mismatch, or should government or some regulatory agency step and introduce mechanisms that will maximize social surplus? Also note your assumption of government as "benevolent social planner" -- will this assumption apply in the Philippine context?

You may have already gone through this text in your applied economics subjects but reading through Jean Tirole's "The Theory of Industrial Organization" might help you find some of the insights you need. Browse through his sections on the theory of mergers and tacit collusion, etc.

Good luck and hope this helps!

[lupuS]

If you went to a potluck picnic bringing enough adobo to feed 20 people and found out everyone else each brought only one pandesal, would you feel the whole arrangement was worth it for you?

[cHaSeR]

Originally posted by victory
cHaSeR, a few questions that might help you:

1. Are firms in business "to bring about positive benefits to society?" What is the objective function of a firm, after all?
2. Is this objective function maximized by ATM networks by merging into one entity, or are individual firms "better served" by preserving their separate identities?
3. What are the costs and benefits of mergers and alliances? Do the benefits outweigh the costs? You've hinted at something important and so you may want to consider the difference between private returns (for firms) and social returns (for society as a whole): Is there a mismatch? If so, do firms have an incentive to correct this mismatch, or should government or some regulatory agency step and introduce mechanisms that will maximize social surplus? Also note your assumption of government as "benevolent social planner" -- will this assumption apply in the Philippine context?

You may have already gone through this text in your applied economics subjects but reading through Jean Tirole's "The Theory of Industrial Organization" might help you find some of the insights you need. Browse through his sections on the theory of mergers and tacit collusion, etc.

Good luck and hope this helps!

I think I know where you're driving at.

Here are my answers:

1) Theory of the Firm: Profit Maximization. Firms, in general, "bring about positive effects to society" when they are successful in maximizing the utility of their customers. In other words, the more ATMs there are available to more people, the more beneficial it is to society because the need for fast, easy, and convenient cash is satisfied.

2) If the ATM industry in the Philippines were characterized by a Monopolistic market structure, I guess that would give them the ability to set prices for ATM usage (much higher than the present rates if they wanted to). So I guess this would bring about a negative effect on customers because they would be paying more. But then, this would definitely be advantageous for the banks because this would maximize their ATM profits. On the other hand, if they continue acting in a Monopolistically Competitive market structure, just like what can be seen in the Philippine ATM industry today, there would be incentive to further improve their products and services as compared to a Monopoly. And it is these differentiated products, like the many Value-Added Services (VAS) that banks offer, which make some banks a cut above the rest. The more innovative your services are, the larger your customer base should be; therefore, the larger market share you hold.

3) Regarding the matter of mergers and alliances, I still have to take a look at the title you recommended. But I am sure there is a lot I can get from that book. When you mentioned government intervention, I immediately thought of the possibility of merging the three ATM consortia, but with regulation from the government so that ATM usage prices wouldn't be jacked up too high.

Do you have any more suggestions or possible questions you think may be relevant to our study?

Thank you by the way for the reply. You sure have been great help.

May I also ask where you graduated from and why you seem quite knowledgeable in Economics?

[Lek-Lek]

Chaser, I suggest you take victory's suggestions seriously. victory graduated from the Ateneo de Manila University with a degree in BS Management-Honors Program. He also finished his MBA from the Wharton School, and is currently pursuing his Ph.D. in Applied Economics from the same institution.

Hey Sir Biboy, sorry if I answred chaser's question about you. And sorry too if I haven't been able to e-mail you lately--quite busy with my Strategy Implementation project e.

[cHaSeR]

Originally posted by lupuS
If you went to a potluck picnic bringing enough adobo to feed 20 people and found out everyone else each brought only one pandesal, would you feel the whole arrangement was worth it for you?

Oh.....I get it! :D

So what you're trying to say is that the reason why these three consortia don't merge with each other is because some member banks are afraid that other member banks from other consortia would benefit MORE from the merger. I see. It's like a small rural bank finally getting the chance to have its depositors make ATM transactions on any ExpressNet ATM right after the merger. But huge banks like BPI wouldn't seem to get anything from merging its ATM network with that of a small rural bank's, right?

Good point.

[cHaSeR]

Originally posted by Lek-Lek
Chaser, I suggest you take victory's suggestions seriously. victory graduated from the Ateneo de Manila University with a degree in BS Management-Honors Program. He also finished his MBA from the Wharton School, and is currently pursuing his Ph.D. in Applied Economics from the same institution.

Hey Sir Biboy, sorry if I answred chaser's question about you. And sorry too if I haven't been able to e-mail you lately--quite busy with my Strategy Implementation project e.

Thank you for the info. I will indeed take his suggestions seriously. Wow! MBA at Wharton?! This guy must be really smart! I hope he considers teaching as a full time or at least a part time professor at the Economics Department of the De La Salle University. He would definitely be an asset to whatever institution he chooses to teach in, especially when it comes to research. But I am guessing his heart belongs to the Ateneo. :( Still, the Philippines needs more economists like him who would do research on possible ways to alleviate many economic problems our country is facing today and finally bring us out of economic turmoil. :)

You're a BS Management-Honors student at the Ateneo right? Would you have any idea why the 3 ATM consortia don't merge? You were Ateneo's representative to the FINEX right? Would it be possible for you to ask the opinion of one of your professors regarding the matter? I don't need a real detailed answer. Just common sense or a brief explanation would be fine. :p

[lupuS]

Originally posted by cHaSeR
So what you're trying to say is that the reason why these three consortia don't merge with each other is because some member banks are afraid that other member banks from other consortia would benefit MORE from the merger. I see. It's like a small rural bank finally getting the chance to have its depositors make ATM transactions on any ExpressNet ATM right after the merger. But huge banks like BPI wouldn't seem to get anything from merging its ATM network with that of a small rural bank's, right?


Very good, cHaSeR. Assembling an ATM network costs money, not just for the ATMs but also for the software, the telecom network, and the system administrators back at the head office. Any bank whow decides to invest money in the system wants to make sure it gets something back - usually, more business from its customers.

When the member banks in your consortium are not of equal size, some freeloading occurs. The smaller banks love it. They can expand their business using other banks' money. The larger banks hate it and tend to want to go it alone. They end up paying most of the bills.

[lupuS]

Oh, and if you have time and a little more initiative you might want to see if you can access the ATM networks' operating data.

You might want to hypothesize that during paydays and the days following them (traditionally the heaviest withdrawal days), most ATMs refuse withdrawals made by clients of other banks. Let's see if the data will support your hypothesis.

You might want to check how many bank ATMs accept deposits from clients of other banks. Very few.

It's the fear of freeloading that is operating here.

[Lek-Lek]

Chaser, I'm not a BS Management-Honors major. I'm a Legal Management major. Yes, it is indeed such a great honor to know someone like victory--he's probably one of the best teachers I had, even if it was only for a short time. He was one of our coaches--and learning so many things from him was such a rewarding experience for me.

Anyway, let's get back to your thesis. Basically, victory has given you the basic pointers for your thesis. Both victory and lupus have a common point: will a particular player in the industry be able to sustain its profit maximization objective? This is a strategic issue, so, it could also help if you perform some basic analytical techniques in strategic management. First, find out the opportunities and threats in the industry as a whole. Are there new pressures (Five Forces Model) being exerted on the entire industry that should make firms think about protective actions to take? Do opportunities exist out there that firms can take advantage of? Most importantly, a carefully done cost-benefit analysis must be performed. Just remember that since this proposal includes a lot of investments in technology, the revenues must at all times exceed expenses. So, do you think that the concerned banks will gain positive NPVs?? Maybe, to some of the firms, the action can be very beneficial--maybe some of the smaller firms may want to take advantage of economies of scale. However, the bigger firms may think that the costs outweigh the benefits--for the simple reason that the smaller players can turn out to be social loafers in the new arrangement. In an issue such as this, is a win-win situation possible? If not, then, maybe this is the reason why such a merger has not yet occurred. Therefore, an analysis of strengths and weaknesses is also necessary. Just think within that framework so that you can pursue with your analysis of the situation.


Good luck in your thesis.

[cHaSeR]

Originally posted by lupuS
You might want to check how many bank ATMs accept deposits from clients of other banks. Very few.

I noticed this too. But would you know the reason why ATMs refuse to accept deposits from depositors of other banks? Aren't deposit liabilities sort of like "assets" to banks because more money is being invested in the banking system? I don't see the rationale behind rejecting these deposits.

Or could this be like an indirect way of INCONVENIENCING customers so that they would consider moving their deposits to other banks?

[cHaSeR]

Originally posted by lupuS


Very good, cHaSeR. Assembling an ATM network costs money, not just for the ATMs but also for the software, the telecom network, and the system administrators back at the head office. Any bank whow decides to invest money in the system wants to make sure it gets something back - usually, more business from its customers.

When the member banks in your consortium are not of equal size, some freeloading occurs. The smaller banks love it. They can expand their business using other banks' money. The larger banks hate it and tend to want to go it alone. They end up paying most of the bills.

I concur. This must be the reason why BPI was always hesitant to interconnect its ExpressNet with other ATM consortia. It took them so many years before they finally agreed to interconnect with MegaLink. Maybe it felt that it would lose a lot, especially to the smaller banks from other consortia, if it agreed to interconnect. BPI in itself, if I'm not mistaken, has so many ATMs in operation, it could compete directly with other ATM consortia.

[mac_bolan00]

hmmm, this is a micro-econ problem more than anything.

so-called "improved scale of operations" simply means minimizing your long-term average total costs viz-a-viz output. however, in the near-term, you have to derive an accurate marginal cost function. this is more critical in the short-term since the proposal is to create a new production function whose output is equal to the three original functions. at this stage, one can only conjecture how the increase in transactions processed will result in cost per transaction (reason is simple, there was never an operation as big as the proposed merger).

[lupuS]

Originally posted by cHaSeR


I concur. This must be the reason why BPI was always hesitant to interconnect its ExpressNet with other ATM consortia. It took them so many years before they finally agreed to interconnect with MegaLink.

Maybe you should check with BPI itself. One reason for agreeing to interconnect could be because BPI bought Far East Bank, which was already connected to MegaLink.

[lupuS]

Originally posted by cHaSeR
I noticed this too. But would you know the reason why ATMs refuse to accept deposits from depositors of other banks? Aren't deposit liabilities sort of like "assets" to banks because more money is being invested in the banking system? I don't see the rationale behind rejecting these deposits.


Accepting deposits for another bank costs money - to process the transaction the accepting bank must provide:

1) tellers
2) bookkeepers
3) some computer facilities
4) clearing facilities
5) safekeeping and delivery of the checks
6) reporting

At the end of the day after funding these services the deposit ends up on a competitor's balance sheet. Not a good business move.

This could be alleviated if the deposit bank would be willing to pay the accepting bank a transaction fee. The deposit bank would either absorb the fee or pass it on to the depositor. If you were the depositor would you be willing to pay that fee?

[Lek-Lek]

So, cHaSeR, how's your thesis going? Have you browsed through those books which victory suggested? I hope things are going well for you.

[cHaSeR]

Originally posted by Lek-Lek
So, cHaSeR, how's your thesis going? Have you browsed through those books which victory suggested? I hope things are going well for you.

I still haven't gotten the chance to check out the title he recommended. I tried looking for it at the DLSU library, but unfortunately, they didn't have it. I am now kind of basing my research around the guide questions he gave. And when you mentioned Michael Porter's Five Forces Model and the possibility of strategic management by the heads of these consortia as the reasons for not merging their ATM networks, I realized that you might be right. The best thing my thesismates and I could do at this moment is visit some BancNet, MegaLink, and ExpressNet officials and get some information directly from them.

Thank you for your concern.

[Lek-Lek]

Don't mention it. I'll try my very best to help someone who has nothing but honest intentions to further the level of management education in the country. To help you in doing the Porter framework of the analysis, you may want to check out his books, Competitive Advantage and Competitive Strategy.