New Rules Project - ATM Surcharge Bulletin

Table of Contents

I. COURT BATTLES

Court Lifts Iowa Surcharge Ban

II. PREEMPTION NEWS

Congressman Criticizes OCC's Preemption Actions

I. COURT BATTLES

COURT LIFTS IOWA SURCHARGE BAN

On March 6, U.S. District Judge Ronald Longstaff struck down Iowa's ban on ATM surcharges. Five national banks---Bank of America, Firstar, Metrobank, U.S. Bank, and Wells Fargo---challenged the ban in a lawsuit filed last year. The banks were supported in court by the Office of the Comptroller of the Currency (OCC), the federal agency that regulates national banks.

The OCC and the banks argued that the National Bank Act implicitly allows national banks to operate ATMs without regard to state law.

Iowa countered that nothing in the NBA preempts state authority with regard to ATMs. Furthermore, the major federal ATM law, the Electronic Funds Transfer Act, expressly grants states the right to enact their own regulations.

In his ruling, Judge Longstaff noted that he had upheld the authority of states to regulate ATMs operated by national banks in an earlier lawsuit. That case was brought by Bank One in 1998 and challenged two provision of Iowa's ATM law. One required out-of-state banks to open a branch office in Iowa before installing ATMs within the state. The other banned advertising on ATMs.

Judge Longstaff ruled that both provisions were valid, but his ruling was later overturned by the Eighth Circuit Court of Appeals. The appeals court sided with the OCC and concluded that states have little or no authority to regulate ATMs operated by national banks.

"While this Court previously found that the state of Iowa did have the power to prohibit ATM fees," Judge Longstaff wrote in the surcharge case, "[I]t is now clear that is not the law in the Eighth Circuit."

Iowa Attorney General Tom Miller, an ardent defender of the surcharge ban and states' rights to regulate ATMs, decided it would be fruitless to appeal Longstaff's decision based on the Eighth Circuit's previous ruling.

The court decision applies only to national banks, but, in order to prevent state banks from being at a competitive disadvantage, Iowa regulators have lifted the surcharge ban entirely.

The advent of surcharging is expected to cost Iowa consumers tens of millions of dollars annually. Residents of small communities with only one or two ATMs will be hurt the most, according to Murray Williams of the Iowa Credit Union League. Many may feel pressure to switch their accounts to a big bank with a larger fleet of ATMs in order to avoid the new fees.

Although Iowa law prohibited surcharges, it did not bar banks from earning a profit on their ATMs. As is true in every state, banks in Iowa compensate one another for providing ATM service to one another's customers through an interchange fee. (This is paid by the user's own bank to the bank that owns the ATM. Outside of Iowa, banks have long collected both the interchange fee and a second fee on each transaction, the surcharge, which is paid directly by the user.)

According to evidence presented by the state during the case, these interchange fees were set by Iowa's ATM network at a level that allows the bank that owns the ATM to earn a 9 percent rate of return. The five plaintiff banks received more than $3 million in such fees during the year prior to filing suit.

Together the surcharge ruling and the earlier ruling in the Bank One case substantially gut Iowa's unique and innovative ATM law.

In most regions of the country, ATM networks 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.

But in Iowa, lawmakers established the ATM network as a common carrier---similar to railroads or telephone wires. All banks and credit unions are guaranteed access under the same terms. The law requires that ATMs in the state be linked to a central network run by Shazam, Inc., a nonprofit corporation. Shazam's rules and pricing structures are determined by committees representing both small and large financial institutions.

The result has been one of the most competitive and lowest cost ATM networks in the country. In most states, two or three banks own most of the ATMs. In California, for example, Bank of America and Wells Fargo own 65 percent of the ATMs and nearly 80 percent of those within San Francisco. In contrast, the top four banks in Iowa own fewer than 20 percent of the ATMs.

Iowa's approach has proven so effective that it has even won the support of three groups that rarely agree on anything---the state's bank, credit union, and consumer associations. Iowa has a high number of ATMs per capita and among the highest rate of ATM usage in the country.

The two court rulings have left little of this structure intact. One provision that remains is the rule requiring all ATMs to be linked to Shazam. But that provision would probably not withstand a court challenge. "The courts have made it pretty clear that national banks can do what they want here," notes Iowa Solicitor General Dennis Johnson. According to some observers, large banks operating in the state are already considering de-linking from Shazam and using the same networks they use elsewhere.

Some contend this could threaten Shazam's viability. The network, however, has substantial reach outside the state. Less than one-third of its transaction volume occurs within Iowa. Moreover, Shazam has built its business strategy around meeting the needs of community banks and credit unions, not the needs of large, multistate banks.

Many of Iowa's smaller financial institutions will likely join Shazam's Privilege Status selective-surcharge alliance. Selective surcharge alliances are expanding in several states. Members of these alliances agree not to levy surcharges on one anotherÕs customers. They are free to collect surcharges from customers of banks that do not belong to the alliance. The idea is to replicate what big banks provide: a vast network of ATMs that depositors can access surcharge-free.

Privilege Status currently includes 500 banks and 1,400 ATMs in 29 states. If most of Iowa's smaller financial institutions join the alliance, that could significantly soften the impact of the court decision on community banks and credit unions, and the state's consumers.

The only other jurisdictions that currently prohibit ATM surcharges are the California cities of San Francisco and Santa Monica. Those bans, however, have been suspended pending the outcome of a lawsuit brought by Bank of America and Wells Fargo, also with the backing of the OCC. The banks have made essentially the same argument that was made in Iowa. The case is before the Ninth Circuit. Oral arguments were held in January and a decision is expected any day.

More:

More on Iowa's ATM law
For more on the earlier Bank One lawsuit, see back issues of this bulletin
To learn more about the legal issues involved and the OCC's long history of aggressive attacks on state and local banking laws, see the Preemption of State Banking Laws page on the New Rules web site.

II. PREEMPTION NEWS

CONGRESSMAN CRITICIZES OCC'S PREEMPTION ACTIONS

Speaking in April at the annual meeting of the Independent Insurance Agents and Brokers of America, U.S. Representative Michael Oxley sharply criticized recent preemption actions by the Office of the Comptroller of the Currency (OCC).

Rep. Oxley is a Republican from Ohio and chair of the House Financial Services Committee.

He took issue with "the OCC's efforts to unilaterally preempt state insurance law," and said that the OCC's actions violate the spirit of the 1999 Gramm-Leach-Bliley Act, which allows banks to sell insurance, but was not intended to override state laws and regulations.

Oxley said that when federal regulatory agencies "move in the wrong direction, it is our responsibility as authors of this historic legislation to bring them back in line." He said he will write a letter to the OCC and is "working directly with the Treasury Department to change the OCC's approach in the future." He also indicated that his committee may hold hearings.

The OCC is a division of the Treasury Department charged with regulating national banks. Over the last decade, the agency has preempted numerous state banking laws designed to protect consumers and maintain fair competition. States face an uphill battle trying to defend their laws in court, as courts are required to defer to the opinions of federal regulatory agencies.

With banks now moving into insurance, the OCC is beginning to weaken and dismantle state insurance laws.

In September, the agency concluded that national banks may disregard several provisions of the West Virginia Insurance Sales Consumer Protection Act. The law is designed to prevent banks from coercing loan applicants into buying insurance products. In March, the OCC struck down similar regulations in Massachusetts. More state laws are expected to be preempted in the coming months.

Federal law provides no comparable protection for consumers, as Congress has long viewed insurance regulation as a state responsibility.

The banking industry greeted Oxley's remarks with alarm. "He could be paying lip service to insurance agents, but if his motives are substantive and he is truly challenging the OCC, that is something we would be very concerned about," an unidentified industry official told The American Banker, a trade publication.

The ATM Surcharge e-Bulletin -May 2002

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