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
More Information:
On October 12, 1999 Santa Monica, California became the first city in
the nation to ban ATM surcharges. The City Council voted 4-3 to pass
the measure after more than three hours of debate. The city of San
Francisco adopted its own surcharge ban on November 2, 1999, when a
ballot initiative passed by a 2-to-1 margin.
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On November 2, 1999, San Francisco voters by a 2 to 1 margin enacted a
measure banning ATM surcharges within the city. Wells Fargo and Bank of
America, which own 75 percent of the ATMs in San Francisco, along with
the California Bankers Association, filed a lawsuit against the city on
November 3, 1999. They argued that federal law preempts the local
ordinance and that national banks do not have to comply with state and
local ATM regulations.
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Credit unions, community banks, and consumer groups have worked to
enact ATM surcharge bans in several states and cities. Until the
late-1990s, two states,
Iowa and
Connecticut,
prohibited surcharges based on long-standing administrative orders. But
no state has yet barred surcharges through legislation. Proponents came
closest in Massachusetts -- where FleetBoston owns nearly two-thirds of
the ATMs.
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ATM networks in most regions are owned or controlled by a handful of
large banks, which, not surprisingly, tend to adopt network rules and
rate structures that boost their own profits and undermine smaller
competitors.
This has not been the case in Iowa. In
the 1970s, Iowa lawmakers had the foresight to enact a set of rules to
ensure that the ATM infrastructure would be equitably shared among the
state's financial institutions. Iowa established its ATM network as a
common carrier--similar to telephone wires and railroads.
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Connecticut was one of two states that prohibited ATM surcharges. The
state's ban was the result of an administrative order issued by Banking
Commissioner John Burke in 1995. He concluded that the state's 1975
electronic funds transfer (EFT) law implicitly prohibits surcharges,
although it does not mention the fees directly. His interpretation was
challenged in 1997 by two national banks, First Union and FleetBoston
Financial (FleetBoston is the result of a 1999 merger between Fleet
bank and BankBoston).
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Several bills to ban ATM surcharges have been introduced in Congress
since surcharging began in 1996, but none have proceeded beyond
committee. HR 3503, introduced by Representative Maxine Waters, was
before the House Committee on Banking and Financial Services. In
addition to eliminating surcharges, the bill would provide for certain
low-cost, lifetime bank accounts and authorize the continuation of the
Federal Reserve's annual study of bank fees. In 2001 and 2003
Representative Robert Andrews of New Jersey introduced a short
amendment to the Electronic Fund Transfer Act that would ban ATM
surcharges.
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