Surcharges are the fees banks charge noncustomers for use of their ATMs. Surcharges are deducted directly from the consumer's account at the time of the transaction. (When you withdraw $20 and your receipt says $21.50, you have paid a $1.50 surcharge to the bank that owns the ATM.) Surcharging first began in 1996. Today, 93 percent of all banks surcharge noncustomers an average of $1.37 for each ATM transaction. Americans paid an estimated $2.2 billion in surcharges in 2001.
Surcharges are anti-competitive and threaten the viability of small banks and credit unions. In most regions, a handful of large banks own the majority of ATMs. For example, just two banks own 60 percent of the ATMs in California and nearly 80 percent of those within San Francisco. By imposing surcharges, these banks create an incentive for customers of small banks and credit unions to move their account to one of the dominant banks in order to avoid the surcharge. Former Federal Trade Commission policy director David Balto argues that surcharges create a "perverse form of price competition where firms can actually gain customers by raising prices."
As a result, small financial institutions are losing market share, despite the fact that they offer consumers a better deal. For several years running, the Federal Reserve has concluded that small banks and credit unions offer better interest rates and lower fees than big banks. Average monthly fees on checking accounts, for instance, are 14 percent higher at multistate banks than at smaller, single-state banks. (See the Fed's latest annual report, Fees and Services of Depository Institutions.)
Consumer groups and community financial institutions in many cities and states have worked to enact laws that prohibit surcharges. But several of the nation's largest banks, together with the Office of the Comptroller of Currency (OCC), the federal agency that regulates national banks, have filed lawsuits challenging state and local surcharge bans on the grounds that they are preempted by federal law.
In March 2002, a federal judge struck down Iowa's long-standing surcharge ban. Courts found in favor of Bank of America and Wells Fargo against surcharge bans enacted by the California cities of San Francisco and Santa Monica, and the U.S. Supreme Court denied an appeal. The courts reasoned that state and local governments have no authority to regulate "national" banks overseen by federal agencies.
To learn more about the legal issues involved and the OCC's long history of aggressive attacks on state and local banking laws, see Preemption of State Banking Laws under the Governance sector.
ILSR Publications- ATM Surcharge Fact Sheet
- ATM Surcharge Testimony - submitted by ILSR Researcher Stacy Mitchell to the Committees on Finance and Consumer Affairs, New York City Council, December 2000.
- Minnesota Should Ban ATM Surcharges - commentary by ILSR Researcher Stacy Mitchell, November 1999.
- The National Bank Robbery - Within five years, industry analysts predict, just five networks will control 90 percent of ATM transactions. Fees to use these machines will go up, while community-based financial institutions will decline. Some states are fighting back--but can they win? Article from the Fall 1999 issue of The New Rules.
- Stop ATM Fees - web site maintained by the state Public Interest Research Groups (PIRG's).
- Fees and Services of Depository Institutions - The Federal Reserve's latest survey of bank fees, finding that bank fees continue to rise and big banks charge the biggest fees, July 2002.
- Double ATM Fees, Triple Trouble - US PIRG's most recent national bank fee survey, March 2001.
- Retail Fees of Depository Institutions, 1994-1999 - This Federal Reserve report highlights findings from the agency's annual reports on bank fees, including a comparison of fees at small, medium, and large banks, January 2001.
- Regulatory, Competitive, and Antitrust Challenges of ATM Surcharges - by David Balto of the Federal Trade Commission, July 1998.
- Competition in ATM Markets: Are ATMs Money Machines? - Congressional Budget Office report, July 1998.


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ATM Surcharges Are Not Evil
On the surface it may seem unfair and anti competitive to charge for transactions conducted on foreign ATM's, that is, ATM's belonging to institutions other than where your account resides. But when a bank such as Bank of America, Wells Fargo or Chase builds an extensive ATM system they do so for two reasons: provide convenient access points for their customers to transact business with them and generate a revenue stream from non-customers who find value in their locations.
There are extensive capital costs to build an ATM network (e.g., the cost of the machines, the systems supporting them, building out ATM vestibules, etc.) as well as considerable ongoing expenses to run the network (e.g., location rent, machine maintenance, cash replensihment, security, data communications and electric, just to name a few). If a bank could not recoup these costs and recieve a return on its investment, there would be no reason to open their machines to customers of other institutions.
I would suggest that small banks recieve considerable benefit from the network of machines available to their customers. If a community bank could only offer access to their own ATM's they would potentially lose business from their many customers who venture outside the limited geographic footprint they offer. In any event, there is no justification for small banks and their customers to be "free riders" on a system built by and maintained by others.
You are correct in stating that generally small banks provide better rates and lower fees than their large competitors. In many cases they are better managed. They also have a favorable cost structure by focusing on core product offerings and not facing the overhead of running enormous far flung operations. But in fact, smaller banks have a higher return on equity that their large regional and national peers.
As customers we face a set decisions every time we select the products and services we buy: What is the cost? What are the features offered? What is the quality? How convenient is it? Does it fit with my values? All purchase decisions involve finding the best solution for our needs and understanding the tradeoffs inherent in our decision.
Stripping away emotion and populist sentiment from the issue it should be clear that ATM fees, while not popular, are certainly justified. In any event, if fees are outlawed there will be unintended consequences that will be of greater detriment to the consumer. Banks with large ATM networks would be likely to close their system to external transactions and eliminate or rationalize their placement of machines in places like airports, hotels, transit facilities, stadiums, etc. where a large portion of usage is form non-customers. In that case everyone loses.
Re: ATM Surcharges Are Not Evil
We have never suggested that banks should not make a return on their investment in building networks of ATMs.
A bank that owns an ATM used by a customer of another bank collects two fees: one paid by the customer (the surcharge) and one paid by the customer's bank.
We have no problem with the latter. This fee is set by the network and since big banks both collect and pay these fees (when their customers use other banks' ATMs), the rate is likely to be a fair market price that provides a reasonable return for the bank that owns the ATM. The customer's bank, which paid the fee, can then elect to pass it on to the customer, perhaps with an additional markup to cover its costs. If the bank charges its customer too much for this service, the customer may opt to shop around and open an account elsewhere. That's how a market should work.
Surcharges distort the market. The bank that owns the ATM can attract new customers not by charging less, but by charging more. If a large bank with a lot of ATMs in a city raises its surcharge fees, consumers are likely to respond by moving their account to that bank. The bank is rewarded for raising prices. That is exactly the opposite of how a market should function. Hence the problem with surcharges. This perverse incentive to raise prices explains why surcharges have increased despite improvements in technology and why they are so much higher than any reasonable measure of actual cost.
Iowa is excellent case study. They prohibited surcharges up until 2002, when big banks managed to convince federal regulators to preempt the state's authority to ban these fees. Prior to 2002, Iowa had the same number of ATM machines per capita as the national average. Banks made a good return on these machines through the bank-to-bank fees and so installed them in the same numbers seen elsewhere.
The big difference was that Iowa's market was far less concentrated. The surcharge ban prevented big banks from being able to leverage their size to gain marketshare from smaller banks. They had to compete on price and service. Iowa had a much larger number of banks and more diverse and competitive market for banking services. Given the financial crisis of the last year, less concentration would seem a very worthwhile policy goal.
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