Until now, small financial institutions have been left out of the planning and development of the numerous shared automatic teller machine networks that have been proposed for operation in the Middle Atlantic region.

The smaller institutions either don't have on-line computers that would enable them to tie into a shared ATM system, or the up-front cost of participation has been regarded as too prohibitive for most.

In the meantime, the proliferation of ATM sharing programs has caused concern among officials of some small banks and savings and loans. Their primary concern is that their market share will diminish rapidly as larger institutions gain access to more customers through shared regional ATMs.

However, a new strategy developed by three of the region's biggest banks competing in the ATM wars may make it easier for smaller institutions to enter the mainstream of electronic banking.

At the same time, developers of the new strategy envision a regional network that will extend as far north as New York and south to South Carolina.

Smaller institutions would be licensed much like franchises to participate in an ATM system called Cash Flow Inc. developed in Virginia and shared by Riggs National Bank of the District, Virginia National Bank of Norfolk and Mercantile Bankshares Corp. of Baltimore.

Each of the three banks will issue licenses that will enable smaller institutions to offer customers access to remote automated teller machines in the system throughout the District, Maryland and Virginia.

A customer of a small District bank licensed by Cash Flow, for example, could use his plastic card to withdraw cash from a terminal in Williamsburg, Va., or transfer funds from one account to another by using a terminal at Ocean City, Md.

Transactions by that customer would be switched electronically through a regional interchange to his bank and would be reflected in his regular monthly statement.

Cash Flow is the product of what once was a consortium of eight major financial institutions in the District, Maryland and Virginia. Those banks and S&Ls announced last November that they were developing a regional ATM network.

However, a fragmentation of the consortium resulted in only three of the original members--Riggs, Virginia National and Mercantile--agreeing to participate in Cash Flow, which was established as a subsidiary of Virginia National.

On the surface, Cash Flow would appear to be similar to other ATM networks planned for this region. However, Cash Flow provides participating institutions with support services not yet envisioned by competing networks, according to David A. O'Connor, president of Cash Flow Inc.

O'Connor says the essential difference is research and development. Widely anticipated competition from large money-center banks and nonbank competitors such as Sears, Roebuck & Co. practically dictates a need to develop a research and product development capability, he added.

"Cash Flow Inc. will be providing research and coordinating development of regional products to be able to compete with other regional banks coming in," O'Connor explained.

"We're saying to prospective licensees , 'You're getting into the mainstream for future development,' " he added. "That includes point-of-sale, in-home systems, and research and development for other kinds of systems."

That is a key part of the pitch O'Connor will be making Thursday in Arlington at a seminar to which several small Northern Virginia-based financial institutions have been invited.

A similar seminar was held recently in Williamsburg, and others will be conducted in the District and Maryland.

A competitor such as Sears can penetrate a market with new products "beyond the scope of any three banks," O'Connor maintains. The cost of research, product design, product definition and writing new computer programs would be almost prohibitive for one or two banks competing against financial giants.

But with a large group of licensees sharing the costs of research and development, Cash Flow participants can meet the competition on more favorable terms, O'Connor believes.

What's more, "We think now with the commitment of these three banks we can extend into Pennsylvania, New York, North Carolina and South Carolina," he said.

Discussions have been held with officials of major banks in those states about extending the reach of Cash Flow. If all goes well, large regional banks in those states will be signed within 60 days.

Conceivably, Riggs, Virginia National and Mercantile customers will be able conduct limited banking transactions at ATMs in New York or North Carolina when Cash Flow becomes operational in January.