ATM Surcharge Bans

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.

RULES:

• Federal ATM Rules
  Several bills to ban ATM surcharges have been introduced in Congress since surcharging began in 1996. H.R. 3503, introduced in 1999, would have prohibited the fees. In addition, 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. More...
• Connecticut
  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. In December 1999, the Connecticut Supreme Court overturned Burke's order as an invalid interpretation of existing state law. More...
• Iowa
  When ATMs first appeared in the 1970s, Iowa had the forethought to establish a set of rules to ensure that the infrastructure of electronic banking would be equitably shared among the state's financial institutions. Iowa set up their ATM network as a common carrier--similar to telephone wires or railroads--where all institutions are given access to the network at equal rates. More...
• Massachusetts
  Legislation to ban ATM surcharges in Massachusetts - where BankBoston and Fleet Bank own 65 percent of the ATMs - was passed unanimously by the Senate in July 1996 and again in September 1997. By the spring of 1998, the surcharge ban enjoyed the support of the attorney general, the governor, and a majority of House members. House Speaker Thomas Finneran, however, refused to allow the bill to come to the floor for a vote. Finneran has received substantial campaign contributions from the banking industry. More...
• San Francisco
  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, contending that federal law preempts the local ordinance and that national banks do not have to comply with state and local ATM regulations. More...
• Santa Monica
  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. On November 3, 1999, the cities of Santa Monica and San Francisco were sued by Wells Fargo, Bank of America, and the California Bankers Association. More...

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.

Related Online Resources

• 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.