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The ATM Surcharge Bulletin -January 2001I. INTERNATIONAL UK CONSUMERS DEFEAT ATTEMPTED SURCHARGE Consumer anger over an attempt by several British banks to introduce ATM surcharges was so strong that the banks have not only dropped their surcharge plans but eliminated existing ATM "disloyalty" fees as well. The beginning of the end came in 1999, when first Barclays and then several other large banks announced plans to impose surcharges on non-customers for use of their ATMs. At the time, surcharges were virtually non-existent in the UK. The announcement brought sharp criticism from building societies (membership-based financial institutions similar to credit unions). The largest, Nationwide, contended that surcharges violated the rules of Link, Britain's ATM network, and threatened to take Barclays to court. Within weeks, a full-scale consumer revolt had erupted. The Consumers' Association declared surcharges anti-competitive and published a detailed Q&A on the fees. Newspapers ran headlines such as "Stop the Great Bank Robbery." Public officials warned that an investigation of the impact of surcharges on small financial institutions and consumers would be forthcoming. The supermarket chain Tesco said it would not allow surcharging ATMs on its premises. Surveys showed 91 percent of the public and 83 percent of the British Parliament felt the fees were unfair. >From the banks' perspective, the timing of the surcharge move could not have been worse. Barclays made its surcharge plans public shortly after it announced the elimination of 200 branch offices and hefty pay raises for top executives. The surcharge debate also coincided with the release of a sharply critical 16-month study of the banking industry. The government-sponsored report accused big banks of "profiteering" to the tune of pounds 5 billion ($7.5 billion) in excessive fees and charges. The report concluded that greater government oversight and regulation is needed to prevent large banks from manipulating the ATM network and other electronic payments systems to undermine smaller rivals. The nation's four largest banks account for 68 per cent of all deposits, despite charging higher fees and interest rates than small banks and building societies. By June, Britain's big banks were in full retreat. Not only did they drop their surcharge plans, but they announced that an existing ATM fee, the "disloyalty" fee, would be eliminated as well. Disloyalty fees, known in the US as "off-us" or "foreign" fees, are levied by a customer's bank each time s/he uses another bank's ATM. These fees are nearly universal in the US. They typically appear on the customer's monthly statement and average about $1.50. US consumers often pay both a disloyalty fee and a surcharge for a single ATM transaction. (For an explanation and breakdown of the four different fees involved in an ATM transaction, see "Explanation of ATM Fees" below.) With the demise of the disloyalty fee, UK consumers can now access almost all of the nation's 34,000 ATMs for free. The change is expected to save consumers pounds 270 million ($400 million) in 2001. In December, the British government created a new department within the Office of Fair Trading that will monitor ATM, credit and debit card, check cashing, and other electronic payments systems. The department has been charged with issuing new rules to ensure a fair playing field. For more information:
II. NEWS FROM THE LEGISLATIVE FRONT NEW YORK CITY CONSIDERS SURCHARGE BAN In December, the Committees on Finance and Consumers Affairs of the New York City Council held a hearing on a measure to prohibit ATM surcharges within the city. The proposed ordinance, Int. 680, is sponsored by City Council Speaker Peter Vallone. When the measure was originally introduced last Spring, it had the support of 35 of 51 Council members. That level of support would be strong enough to override a veto from Mayor Rudolph Giuliani, who opposes banning the fees. A coalition of more than a dozen consumer, low-income, senior citizen, labor, and student groups has formed to support passage of the ordinance. An annual bank fee survey conducted by the New York Public Interest Research Group (NYPIRG) found that 93 percent of the cash machines in the state surcharge non-customers, up from 33 percent in 1997. The average fee has risen from $1.05 to $1.33. When consumers use an ATM owned by a bank other than their own, they are typically charged twice, once at the machine (the surcharge) and once on their monthly statement (the foreign fee). "Not only is ATM surcharging unfair to consumers, since it is charging them twice for one transaction," says Tracy Shelton of NYPIRG, "it is also anti-competitive." By imposing surcharges on non-customers, the banks that own a dominant share of the ATMs in a given market can induce customers of smaller banks and credit unions to move their accounts to one of the dominant banks in order to avoid the fees. Surcharges create an inverted form of price competition. The higher the surcharge, the more likely consumers are to move their accounts to the dominant bank. Large banks contend the surcharge is a necessary fee for service, without which non-customers would be getting a free ride. But, in fact, banks are already compensated for non-customer ATM use. The bank that operates the ATM collects an interchange fee from the customer's own financial institution. This fee covers the cost of the transaction and often provides a profit to the ATM owner. Surcharges are a second and unnecessary fee for the same transaction. (For an explanation and breakdown of the four different fees involved in an ATM transaction, see "Explanation of ATM Fees" below.) For more information:
ILLINOIS CONSUMER COALITION CALLS FOR SURCHARGE BAN; LEGISLATION INTRODUCED IN SEVERAL OTHER STATES An Illinois consumer organization, the Coalition for Consumer Rights, called on the state to ban ATM surcharges at a news conference held this month. The group was joined by Representative John Fritchey, chairman of the House Consumer Protection Committee, who plans to introduce a surcharge bill in the coming weeks. "It's going to take a certain amount of rage on the part of the public if we are going to get this done," said Fritchey. "This is a problem that is not going to go away, but it's going to worsen unless the Legislature does something." The Coalition's new report, "Rage Against the Cash Machine," found that Illinois consumers are spending as much as $4.50 per transaction in a combination of surcharges and foreign fees. The report also found a correlation between higher fees and larger banking networks. Legislation outlawing ATM surcharges has been introduced in several other states, including Connecticut (SB10), Massachusetts (SB12), New Jersey (AB742), and New York (AB24). The Connecticut measure would not only bar surcharges within the state, but prohibit state-chartered financial institutions from surcharging state residents at out-of-state ATMs. A bill (HB2649) introduced in Oregon would require that state banks either eliminate surcharges or impose them on all users, including their own depositors. The bill would not apply to national banks. III. COURT BATTLES CONSUMER GROUPS FILE BRIEF IN SUPPORT OF CALIFORNIA CITIES In November, several consumer organizations filed a friend-of-the-court brief urging the 9th Circuit Court of Appeals to uphold the right of cities to ban ATM surcharges. Two California cities, San Francisco and Santa Monica, have appealed to the 9th Circuit to reinstate their laws prohibiting surcharges. The laws were enacted in late 1999 and overturned by a federal district court in June. The case stems from a lawsuit filed against both cities by the California Bankers Association and two national banks, Wells Fargo and Bank of America. The banks own 86 percent of the ATMs in San Francisco and 72 percent in Santa Monica. They contend that the National Bank Act (NBA) preempts local authority over ATMs owned by national banks. The district court agreed and overturned the local bans. San Francisco and Santa Monica appealed. The consumer groups represented by the brief include the California Public Interest Research Group, California Reinvestment Committee, Consumer Action, Consumer Federation of America, Consumers Union, Foundation for Taxpayer and Consumer Rights, and the US Public Interest Research Group (PIRG). In their brief, the consumer organizations argue that the lower court erred in its interpretation of federal law and inappropriately based its ruling on the political views, rather than the legal authority, of the nation's chief bank regulator, the Office of the Comptroller of Currency (OCC). "The authority of states to regulate national as well as state banks is long-standing and clear," the brief argues, noting that federal law has consistently granted states broad authority to regulate national banks and protect consumers. "The NBA contains no provisions at all with regard to ATMs or the ability of national banks to charge ATM fees," the brief notes. "An intent to preempt by Congress cannot be gleaned from . . . a silent NBA that merely states an obvious general authority of banks to charge customers fees. . " Moreover, the federal Electronic Funds Transfer Act (EFTA), enacted in the 1970s to provide a basic framework for regulating ATMs, expressly authorizes states and cities to enact laws that provide greater consumer protection than is afforded by federal law. The brief contends that the court should not give deference to the opinion of the OCC, which has formally sided with the banks. The OCC has no legal authority over the matter, the brief argues. Congress instead charged the Federal Reserve Board with determining whether state laws conflict with the EFTA. Furthermore, the brief argues, the OCC has a long history of overly aggressive attempts to preempt state authority. The agency was formally reprimanded by Congress for such behavior in 1994. The brief concludes that more is at stake in this case than local surcharge bans. "Virtually all state consumer banking laws would be at risk if the District Court's interpretation of bank powers. . . is upheld, contrary to the Congressional intent expressed in. . . most, if not all, Federal consumer banking laws." For more information:
IV. OTHER DEVELOPMENTS CALIFORNIA'S THIRD LARGEST BANK DROPS SURCHARGE Washington Mutual announced in October that it would no longer surcharge users of its ATMs in California. The bank is the third largest in the state, with 548 branches and more than 1,000 cash machines. "We know that people don't want to be nickel and dimed with fees," said a spokesperson. "By eliminating our surcharge, we have a great opportunity to show potential customers. . . how we operate differently from other financial institutions. We expect to add new accounts." Washington Mutual's competitors, Wells Fargo and Bank of America, sued San Francisco and Santa Monica in 1999 in an effort to overturn local ordinances banning surcharges. (See story above.) The move by Washington Mutual demonstrates that surcharges are not as necessary as some banks have claimed. Wells Fargo and Bank of America insist that non-customers should not be allowed to use their ATMs for free, but in fact the two banks are already compensated for these transactions through an interchange fee paid by the customer's own bank. The interchange fee, typically 50 cents for a withdrawal, covers the ATM owner's costs and often provides a profit. Surcharges are a second fee for the same transaction. SURCHARGES MAY SPREAD TO DEPOSITS An industry publication, ATM & Debit News, reported in December that some ATM networks may eliminate long-standing network rules that bar surcharges on deposits. Currently, member banks must allow non-customers to make deposits at their ATMs without paying a surcharge. They do, however, collect an interchange fee from the customer's own bank. Interchange fees are typically much higher for deposits than they are for withdrawals. Pressure from some members have forced a number of networks to reconsider their rules. Some banks, such as Milwaukee-based Firststar, contend that the growth of internet-only banks has forced them to shoulder a greater volume of deposits. Because these virtual banks do not establish their own ATMs, there's no growth in the network of ATMs available to Firststar customers. Other banks, including Wells Fargo, oppose lifting the surcharge ban on deposits as it might inspire internet banks to build competing ATM fleets. V. RESOURCES BIGGER BANKS CHARGE BIGGER FEES The Federal Reserve has once again documented substantial differences in the level of fees charged by large and small banks. "Large banks (assets of more than $1 billion) charged significantly more than small banks (assets of less than $100 million)," the Fed concluded in a report released this month. The report, "Retail Fees of Depository Institutions, 1994 - 99," highlights findings from the Fed's annual survey of bank fees. The surveys have been required by Congress since 1989. Beginning in 1995 and 1996, the Federal Reserve separated its data according to the size of the bank and whether it was a single- or multi-state institution. The new report finds that, for seven of the most common fees associated with basic consumer banking services, large banks charge significantly more than small banks. In 1999, the average monthly fee for a non-interest checking account with a minimum balance was $5.62 at small banks, compared to $8.20 at large banks. Stop-payment orders averaged $13.92 at small banks and $21.50 at large banks. The required minimum balance to maintain a checking account was substantially higher at large banks compared to small ones. Large banks were also more likely to impose ATM surcharges, and to surcharge at a higher rate, compared to their smaller rivals. Why then do large banks continue to gain market share? Part of the answer lies in their control of ATMs. In many areas, a handful of large banks control most of the ATMs. For consumers, the easiest way to avoid surcharges is to open an account with one of the dominant banks. This creates an inverted form of price competition whereby large banks gain market share by raising the prices they charge for ATM access. Unfortunately, 2001 may be the last year of the Federal Reserve's annual report. A sunset provision was to bring the survey to an end last year, but Congress enacted a one-year extension. The Federal Reserve favors dropping the study entirely. The US Public Interest Research Group has urged Congress to make the survey permanent as it is the only source of data on the consumer impact of banking consolidation and deregulation. For more information:
EXPLANATION OF ATM FEES There are a total of four fees involved in ATM transactions: the surcharge, foreign (or disloyalty) fee, interchange fee, and switch fee. If a customer with an account at Bank A uses an ATM owned by Bank B, here's how it would work: The customer would pay a surcharge ($1.50) to the owner of the ATM, Bank B. She would also pay her own bank, Bank A, a foreign fee ($1.50). Her total cost would be $3.00. Bank A, the customer's bank, would collect the foreign fee ($1.50) from the customer. Part of this revenue would be used to pay Bank B an interchange fee (50 cents) and pay the network that switched the transaction a switch fee (10 cents). This would leave 90 cents for Bank A. Bank B, the owner of the ATM, would collect the surcharge ($1.50) from the customer and the interchange (50 cents) fee from the customer's bank, Bank A. Bank B would collect a total of $2.00 for the transaction. Published by the New Rules Project (http://www.newrules.org) of the Institute for Local Self-Reliance (1313 5th St SE, Minneapolis, MN 55414), a public policy organization. Copyright 2001 by the Institute for Local Self-Reliance. Click Here to check out the other New Rules Project e-Bulletins No portion of this bulletin (except for brief quotations with attribution) may be reproduced or utilized in any form without permission from the Institute for Local Self-Reliance (1313 5th Street SE, Minneapolis MN 55414 - Phone: 612-379-3815 - Fax: 612-379-3920) http://www.ilsr.org/ The New Rules Project - http://www.newrules.org/ |
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