The ATM Surcharge e-Bulletin - December 2001

Supporters of ATM surcharges have long argued that consumers have many opportunities to withdraw cash for free. They often point to supermarkets and retail stores that offer cash back at no charge to customers paying by debit card.

Indeed, free cash back has been used to promote debit card use in much the same way that banks built consumer confidence in ATMs, which were also free until surcharging began in 1996.

Now, companies are starting to charge a fee for debit card, or "point of sale" (POS), purchases. In September, Price Chopper, a supermarket chain operating in the Northeast, began charging customers 50 cents for cash back on purchases under $25.

A Price Chopper spokesperson says the fees are needed to cover the company's own costs for the service. Networks, however, typically charge less than 25 cents to process POS transactions. One of the largest networks in the Northeast, NYCE, charges 0.45 percent of the sale, up to a maximum of 12.5 cents per transaction.

Industry observers have noted that Price Chopper owns its own POS terminals, as well as in-store ATMs. The chain charges a $1 surcharge on ATM transactions and may have implemented the new POS fee to make-up for lost surcharge revenue as customers avoid the ATM by getting cash back at the checkout.

Nationally, POS transaction volume is rising rapidly and grew more than 60 percent this year. ATM volume has continued to expand, but at slower and slower rates. This year, ATM volume was up 26 percent. The increased emphasis on POS likely reflects consumer attempts to avoid surcharges.

Most networks allow companies to impose surcharges on debit card purchases. Some, including Visa's Interlink (which is not accepted at Price Chopper), do not.

Two trade associations representing 500,000 independent insurance agents have sued the Office of the Comptroller of the Currency (OCC) in federal court. The lawsuit, filed in mid-November, seeks to invalidate a recent OCC decision to preempt a West Virginia consumer protection law.

The OCC decision, issued in September, 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. One provision overturned by the OCC, for example, requires that insurance sales and lending activities take place in separate areas of the bank, each with its own separate staff. Another bars banks from selling insurance to customers with loan applications pending.

In 1999, under the Gramm-Leach-Bliley Financial Modernization Act (GLBA), Congress opened the way for banks to become fully engaged in the insurance business. GLBA says that banks must comply with state insurance regulations, but states may not "prevent or significantly interfere with" the ability of national banks to sell insurance.

At the request of the banking industry, the OCC is reviewing insurance laws in several states to determine whether they interfere with national bank powers. The long-awaited West Virginia decision provides an indication of how the agency will view similar consumer protection laws on the books in about twenty states. Federal law provides little protection for consumers, as Congress has long viewed insurance regulation as a state responsibility.

The OCC's primary justification for preempting the West Virginia law is that it imposes additional costs on banks. By forcing banks to operate less efficiently than they might in the absence of such rules, the law interferes with their ability to sell insurance and to maximize their competitive position.

"We firmly believe the OCC preemption determination violates not only the letter, but the spirit of the Gramm-Leach-Bliley Act, which leaves oversight of insurance activities squarely in the hands of state regulators," says Robert A. Rusbuldt, CEO of the Independent Insurance Agents of America (IIAA). "If left unchallenged, the OCC's actions could lead to the creation of a dual regulatory system for insurance: a federal one for banks with less oversight and a state-based system for insurance agents."

The IIAA and the National Association of Professional Insurance Agents (PIA) have filed a lawsuit challenging the OCC's decision in federal court. The suit challenges both the substance of the OCC's decision and the agency's authority to make such decisions.

"Any idea that Congress intended to give a federal agency power over the legislative decisions of a state governing body is absurd," contends PIA Executive Vice President Gary Eberhart. "The OCC's agenda is to free banks from state regulation, including state-based consumer protection measures. Our members will not stand for it."

Two organizations representing state officials may file amicus briefs in the case. The National Conference of Insurance Legislators passed a resolution objecting to the OCC's decision. The issue is also on the agenda of a December meeting of the National Association of Insurance Commissioners.

For more information:

• OCC decision
• Independent Insurance Agents of America
• National Association of Professional Insurance Agents
• National Conference of Insurance Legislators
• National Association of Insurance Commissioners

OCC SIDES WITH STATES ON PAYDAY LENDING

Payday lenders hoping to evade state consumer protection laws by hiding behind national banks were dealt a blow in late September when the Office of the Comptroller of the Currency (OCC) weighed in on behalf of state authority in a Colorado lawsuit.

Earlier this year the state of Colorado sued ACE Cash Express, one of the nation's largest payday lenders, for violating the state's consumer protection laws by repeatedly renewing, or "flipping," payday loans. ACE has argued that it is immune from state regulations by virtue of its partnership with Goleta National Bank.

Many payday lenders have forged such partnerships in recent years as a way of evading state laws. Federally chartered banks are exempt from certain state laws governing loans and interest rates. Payday lenders claim that, because of their affiliation with national banks, they are likewise shielded from state rules. In most cases, the bank is only nominally involved and bears little or no risk.

In a brief filed in the Colorado suit, the OCC states that these partnerships do not in fact confer national bank powers and immunity from state law on payday loan companies. As the primary federal agency regulating national banks, the OCC's opinion carries significant weight in the courts.

The OCC has been under increasing pressure from consumer advocates and state officials to stop payday lenders from hiding behind national bank charters. The Colorado attorney general is seeking an end to the illegal practices and a court order to require ACE to repay excess interest and other illegal fees to customers.

For more information:

• Rent-a-Bank Payday Lending: How Banks Help Payday Lenders Evade State Consumer Protections - a new report from the US Public Interest Research Group and the Consumer Federation of America

OCC BACKS BANKS' ATTEMPT TO BLOCK TEXAS LAW

In September, a federal judge issued a preliminary injunction that prevents Texas from enforcing a new law that bars a bank from charging non-customers a fee to cash checks drawn on the bank's own accounts.

Five national banks---Bank of America, Bank One, Comerica, JP Morgan Chase, and Wells Fargo---filed suit against Texas to block the law. The Office of the Comptroller of the Currency (OCC) has sided with the banks.

In a brief filed in the case, the OCC contends "that national banks are authorized as a matter of federal law to charge fees for the banking services they provide." The agency's argument rests on the National Bank Act (NBA), which authorizes national banks to exercise, "subject to law, all such incidental powers as shall be necessary to carry on the business of banking." Charging fees, the OCC contends, is an incidental power and cannot be restricted by state law.

Texas disagrees with such an expansive reading of the NBA. The NBA does not in fact authorize banks to charge fees and expressly preserves the right of states to regulate national banks.

Many large banks have begun to charge a fee for cashing a check written by one of the bank's own customers and drawn on one of its accounts. For the five banks suing Texas, the fees range from $3 to 1.5 percent of the value of the check. They earn an estimated $80,000 to $150,000 a month from non-customer fees.

Texas Banking Commissioner Randall James believes that "cashing checks drawn on the bank is a normal and necessary part of discharging their core obligation" to checking account customers. Several other states, including Alabama, Georgia, Tennessee, and South Dakota, have also prohibited the fees.

Five years after ATM owners began imposing ATM surcharges on non- customers, the cost of using another bank's ATM machine has nearly tripled, from $1.01 to $2.86 today. That's the conclusion of the US Public Interest Research Group's latest report on ATM fees. The survey of 367 financial institutions found that big banks are more likely to impose surcharges, and to charge a higher rate, than small, locally owned banks.

The report also documents that some banks are now charging consumers an annual ATM card fee. Eighteen percent of all banks imposed annual card rental fees averaging $13.76 on either ATM card or ATM debit card holders or both. Twice as many big banks (24 percent) as small banks (12 percent) impose the annual card rental fee. "Charging us twice to use the ATM only once isn't enough," noted US PIRG's Ed Mierzwinski. "Now the banks want to rent us our ATM cards as well."

For more information:

• US PIRG Report

PAYING MORE AND GETTING LESS

A recent survey conducted by Bankrate.com found that the cost to consumers of ATM surcharges has increased nearly 12 percent each year since 1998 and now accounts for $2.2 billion annually. The average surcharge has also reached an all-time high of $1.44. Between the surcharge levied by the ATM owner and the foreign fee charged by their own bank, consumers can expect to pay about $3 per withdrawal. The survey also examines other bank fees and finds that consumers are often "paying more and getting less."

For more information:

• Bankrate.com