In the scramble to cover the landscape with automatic teller machines, banks in the Washington region may have become too preoccupied with technology and customer convenience. They may be putting too much of a premium on ATMs and their effect on competition.

David A. O'Connor, a senior vice president at Virginia National Bank, has been trying to make that point for nearly a year. But he has had little success thus far because competitors either didn't understand his rationale or suspected his motives.

After all, VNB owns Cash Flow Inc., a regional electronic funds transfer system that will also have its own ATM network, starting early next year. In addition to VNB, Cash Flow members include Washington's Riggs National Bank and Mercantile Bank of Baltimore.

Not only have banks in this area formed three regional ATM networks, but some are contemplating links with national networks.

O'Connor, who is also president of Cash Flow, thinks banks in this region may be vulnerable to competition from national financial services giants. His remarks at a banking seminar in Leesburg on Wednesday carried a clear warning that shared ATMs by themselves won't ensure customer loyalty or the survival of some institutions.

He warned Northern Virginia bankers that major national financial institutions using the new ATM technology might one day mount raids on the deposits of community banks.

Regional and community banks are deluding themselves if they hope to solve their competitive problems by joining an ATM network, particularly a national network, O'Connor said.

"All the ATMs in the world won't hold on to your high-value depositors if Chase Manhattan and Citicorp are offering more attractive rates and terms," O'Connor warned.

In a humorous but pointed reference to Plus (a national ATM network backed by Chase Manhattan Bank and Bank of America), O'Connor said joining it is "like dancing with a big friendly bear, which is fine as long as you both are listening to the same music."

Having access to an ATM network or to a point-of-sale system in two years won't add to a bank's competitive position, O'Connor believes.

"A regional bank that decides to share ATMs with Citicorp is literally turning its high-value customers over to Citicorp for all their banking services," he told the 120 bankers at the seminar on ATMs. "That bank can say good-bye to its high-value customers, its deposit base and its survival.

"Your ability to protect your deposit base and your high-value customers will depend on the nature of the services that you are offering, not on the means through which your customers access these services," O'Connor said.

His remarks should have special significance for Northern Virginia bankers. If it isn't apparent to bankers in that area already, the decision by Sears, Roebuck & Co. to open a one-stop financial services office in the Fair Oaks shopping mall is a preview of what's to come.

"Fairfax County is one of the most attractive communities in the United States for financial institutions and others that are offering financial services," O'Connor noted later. "Clearly, [Northern Virginia] is going to be a target area for those institutions."

"The pressure of economic conditions and the pressure to control costs are coming together and those are coming together with technological changes and the trend toward deregulation. And that's going to change the nature of competition."

The key to competitive survival, O'Connor contends, doesn't lie in ATM sharing, but in the development of products and services that will enable regional banks to compete effectively against the financial services giants.

"Banks are going to have to be backed up by research analysis, software development, better pricing systems and long-term planning," for market penetration, says O'Connor.

That's not an argument against ATMs, he emphasizes. In fact, Cash Flow banks may join another ATM network, he added, if they think it will enhance customer convenience.

"I would agree with the fact that what [O'Connor] has to offer the small institution is a good product," says Phillip Parker, president of Shared Electronic Systems, which operates Network Exchange, a rival ATM network. "I think the Cash Flow concept is very valid and if priced correctly can be a soup-to-nuts package for an institution that doesn't have the technology."

While O'Connor obviously is interested in selling Cash Flow's product development services to regional banks, his warnings about future competitive problems are worth considering.