C. How ATM Surcharges And Foreign Fees Contribute To Bank Profits

In 1999, banks had their ninth straight year of record profits. The $71.7 billion reported to the FDIC exceeded last year’s record of $61.8 billion by 16%, or $9.9 billion. According to the FDIC, “continued strength in non-interest revenues, particularly fee income,” is a critical part of commercial bank income. For example, non-interest income accounted for 44% of net operating revenues in the fourth quarter 1999.

In the Federal Deposit Insurance Corporation’s quarterly reports on bank income and expenses, ATM surcharges are incorporated in the lump-sum category, “other non-interest income.” This fast growing category includes credit card fee income and other fees. Foreign ATM fees are incorporated in the category “Revenue from deposit account service fees.”

Specific 1999 data on contributions from service fees on deposit accounts and other non-interest income, are not yet available, but 1989-1998 data on these income categories shows impressive growth. In 1989, service charges on deposits, including foreign fees, were $10.3 billion, rising to $19.8 billion in 1998. Other non-interest income, including surcharges, rose from $29.0 billion in 1989 to $77.2 billion in 1998.

In March 2000, BankRate.com projected that ATM surcharge revenues would total $2 billion in 2000, consistent with previous PIRG and U.S. Congressional Budget Office estimates that ATM surcharge revenues annually total over $2 billion.[4] Although the total number of foreign transactions has declined slightly, the percentage of banks surcharging and the amount of the surcharge have both increased, maintaining surcharge revenue at over $2 billion.

Data from the banks’ lawsuits against Santa Monica and San Francisco are illustrative. In declarations to the court, Bank of America and Wells Fargo estimated that their surcharge revenues annually in these two cities alone, totaled $5,840,000. Other banks had combined annual surcharge revenue of $1,182,820. So, banks in those two cities alone earn $7 million annually on surcharges[5]. These totals for ATM surcharges revenue do not include interchange fee revenue, foreign fee revenue, and other ATM fee income.

Surcharging actually saves banks money. In 1997, a study by the Federal Office of Thrift Supervision reported that the average human teller transactions costs a bank $2.93, while the average ATM transaction costs the bank 27 cents. ATMs are cheaper than branches and tellers.

It has been argued that surcharge fees are necessary to cover the costs of new ATM deployment. However, thousands of consumers may never benefit from using one of these new ATMs. Further, assuming that surcharging has led to the deployment of an additional 40,000 ATMs, the "cost" of $2 billion in surcharges amounts to $50,000 a year per "new" ATM. Yet, cash-only machines now cost as little as $5,000. Most studies estimate the true cost of maintaining machines at only $12,000/year, including depreciation costs.

Throughout the ATM surcharge legal battle, nationally-chartered banks have argued that the National Bank Act of 1863 prohibits state and local action regulating ATM surcharges of nationally-chartered banks. Historically, banks have argued that this general law preempts any consumer laws as it applies to national banks, even though, for example, in this case, it fails to even mention ATM fees and includes no explicit preemption of state ATM laws. Advocates argue, on the other hand, that the clear and explicit anti-preemptive language of the specific law pertaining to ATM and other electronic transactions, the 1978 Electronic Fund Transfer Act, should prevail. Here is the critical “savings clause,” or anti-preemption language of the EFTA, describing its relation to state laws:

“This subchapter does not annul, alter, or affect the laws of any State relating to electronic fund transfers, except to the extent that those laws are inconsistent with the provision of this subchapter, and then only to the extent of the inconsistency.  A State law is not inconsistent with this subchapter if the protection such law affords any consumer is greater than the protection afforded by this subchapter.” [15 USC 1693a(6)]

A. Stronger State Laws Should Always Be Allowed To Stand

Consumer groups, and the states and cities, believe that local action should be allowed whenever it protects consumers better than federal law, or whenever there is no federal law, provided that there is no conflict between complying both with local laws and any federal law on the same subject matter. In this case, there is clearly no conflict. Since national banks and their regulators can point to no federal law governing ATM fees, they have developed a convoluted case based on OCC’s view of “conflict” preemption theory derived from the general powers of the NBA. They believe that even in circumstances where the federal law fails to protect consumers at all, or provides less protection, that state consumer laws should always be preempted anyway. Their logic is that virtually all state consumer laws conflict with the broad powers that the NBA supposedly gives national banks to do whatever they want, even where no federal law protects consumers. Regardless of their views, most subject matter consumer banking laws are written the way EFTA is written, allowing for passage of stronger state laws that are not inconsistent with federal law.

As CALPIRG and other consumer groups argued last month to the Ninth Circuit Court of Appeals in their friend of the court brief supporting the cities’ efforts to overturn a district court injunction blocking their surcharge bans:

The District Court erred in ruling that the National Banking Act, 12 U.S.C. §§ 21, et seq. (“NBA”), preempts the Santa Monica and San Francisco ordinances, which seek to protect customers from the excessive non-customer ATM surcharges.   Far from preempting the ordinances at issue, Congress specifically authorized local governments to enact laws which afford consumers “greater protection” in their ATM transactions in the Electronic Fund Transfer Act , The “primary objective” of the EFTA  “is the provision of individual consumer rights” “in [the] electronic fund transfer systems.” The EFTA specifies that regulation of ATMs is within its authority….[On the other hand], the United States Supreme Court has repeatedly and unmistakably held that Congress must express a “clear and manifest” desire to preempt state laws in areas of its historic police power of the states.[6]

Throughout the ATM surcharge rebellion, the chief national bank regulator , the Office of the Comptroller of the Currency (OCC), has supported efforts by national banks to overturn or ignore state or local authority. Consumer groups also argue strongly in their brief that OCC has misinterpreted not only the alleged preemptive authority of the National Bank Act, but also its own power. The brief continues:

The District Court was persuaded by OCC’s informal letters sent to the Banks in anticipation of this litigation.  It stated: “The Supreme Court has made clear that interpretations of the National Bank Act by the [OCC] are entitled to great weight.  In this case the Comptroller of the Currency has made abundantly clear that he considers the ordinances at bar to be preempted by the [NBA].”  Once again, the District Court failed to acknowledge or accept the true state of the law with regard to deference to OCC rulings.

Based on OCC’s zeal in issuing informal, non-published letters or opinions regarding the preemptive scope of the NBA, Congress required the agency to promulgate formal opinions subject to a notice and comment period.  In this instance, the OCC failed to follow the established procedures for issuing a formal decision and, instead, issued interpretative letters to support the Banks’ litigation position.  Contrary to the District Court’s holding, the Supreme Court has expressed an unwillingness to defer to informal OCC opinions, such as those at issue here, even in cases in which the NBA is applicable.  See Smiley (“Of course we deny deference ‘to agency litigation positions that are wholly unsupported by regulations, rulings or administrative practice.’  The deliberateness of such positions, if not indeed their authoritativeness, is suspect.”)

Similar arguments, that the courts erred in granting deference to the political efforts of the OCC have been raised in a brief supporting the California cities filed by the nine states of California, Connecticut, Iowa, Minnesota, New York, Nevada, Oregon, Washington and West Virginia. In its petition to the Supreme Court, seeking review of the Eighth Circuit’s reversal of a District Court decision overturning its EFTA law, the state of Iowa, makes the same points.

B. OCC Preemption Determinations Have Had a Chilling Effect On State Consumer Protection Efforts

In general, the pattern and practice of the Office of the Comptroller of the Currency (OCC) to abuse its preemption authority has hindered the ability of the states to regulate bank and credit card fees, ban usurious triple-digit payday lending[7], or enact low-cost checking accounts. In 1992, the OCC preempted (held that national banks do not need to comply with it) a New Jersey Lifeline Banking law, despite the absence of any federal law explicitly requiring banks to provide lifeline banking accounts. Despite a regulatory petition filed in 1995 to overturn that preemption, no Comptroller has taken action to do so.[8] The existence of the New Jersey preemption determination (#92-572) has had a chilling effect on state legislative attempts to enact further lifeline laws or enact other pro-consumer laws. In an attempt to rein in what Congress called the OCC’s “overly aggressive” preemption determinations, the 1994 Riegle-Neal Interstate Branching and Efficiency Act amended the NBA to require the OCC to both publish a notice and meet a higher standard before preempting state consumer and community reinvestment laws. Unfortunately, as noted in the consumer group brief to the Ninth Circuit, above, the OCC has attempted numerous end-runs around that law.[9]

Banks argue that ATM surcharges are needed to cover the cost of remote ATMs. They claim that ATM growth is being spurred by ATM surcharges. Actually, ATM surcharging is part of the big banks' anti-competitive strategy to squeeze out smaller banks and credit unions by encouraging their customers to switch their accounts to banks with larger ATM networks. When confronted with the argument that, in fact, banks are surcharging at local branches as well as in far-off convenience stores, casinos and at ski areas, banks reply that, "consumers should pay for convenience" and "consumers have a choice between ATMs that surcharge and those that do not."

PIRG believes that consumers should choose their bank on the basis of its fees, including its ATM fees. Surcharging makes that selection process imperfect. First, the big banks changed the rules in the middle of the game, after convincing small banks not to capitalize their own ATM networks, but instead, to join theirs. Second, when a consumer is walking down the street looking for an ATM that doesn’t surcharge, he or she is faced with the dilemma of paying an “inconvenience” charge, not a convenience charge. In Boston, over half the bank-owned machines are owned by Fleet. In San Francisco, 362 of 423 bank-owned machines (86%) are owned by Wells Fargo or Bank of America.[10]

However, the real question of choice in the marketplace is not between surcharge and no-surcharge ATMs. It is between high-cost and low-cost banks and credit unions. If surcharging helps the big banks get bigger, all consumers lose, since big banks have higher fees. When only big banks are left, consumers will have no choice, except to pay higher fees, whether or not they want the "convenience."

A. The Market Isn’t Working. Surcharges Keep Going Up

Competition isn't working: If the marketplace were working and competition existed, ATM owners would compete on the basis of price. For example, machines in less expensive locations, such as the machines attached to branches, would not impose surcharges, while remote machines would impose surcharges. At the very least, we would see higher surcharges at some machines and lower surcharges at others. Instead, we see only higher and higher surcharges. This is especially true in an environment of rising numbers of machines, where ATM growth has skyrocketed to 225,000 total machines in 1999, but fees have not declined, despite the saturation.[11]

Competition in a free market should decrease prices for consumers. However since April 1, 1996, when surcharging was permitted by the ATM networks, there has been a massive increase in ATM deployment, but no reduction in ATM fees.

In fact ATM fees have steadily risen over time.

·         In 1999, PIRG found that the most common surcharge had increased from $1.00 to $1.50, found at 57% of all banks, up from 40% of banks in 1998.

·         Now, in 2000, at least one bank, Cleveland’s Fifth Third, is imposing a $2 surcharge.

·         Another, Mellon Bank, (PA) is charging $1.75.

·         Surcharge percentages are at least 95% for big banks, over 90% for all banks.

·         There is no price differential between on-premise and remote ATM location surcharging. In a free market, the higher cost machines would have higher fees.

Other analysts find similar results: According to a March 2000 study by BankRate.Com:

“More institutions are surcharging non-customers, and charging more, for use of their ATMs. Although the most common charge remains $1.50, 56 percent of the institutions charge non-customers $1.50 or more for this service. This is an increase in the number of institutions requiring these high surcharges from 49 percent in October 1999 and 44 percent a year ago.” [Businesswire, 20 Mar 00].

Why isn’t competition working? Why isn’t the ATM marketplace competitive? As antitrust expert David Balto has suggested:

Those who advocate for surcharges suggest that surcharging is simply a "free market" at work. But is the market competitive?

Typically in a competitive market we would expect that price would be pushed down to marginal cost. That is, with any product, if there is sufficient consumer choice, consumers will seek out those competitors that offer the best combination of price, quality, and service. For an undifferentiated product like ATM access, one would expect that firms would compete aggressively on price, and prices would be driven down to marginal cost. Yet, as the evidence shows, in spite of an increase in the number of ATMs and the number of ATM deployers, the average price for surcharges has consistently increased over time.[12]

Balto goes on to argue that ATM surcharging could lead customers to move from small banks to big banks, as the big banks use ATM market power to offset the generally lower fee structures on all accounts offered by smaller institutions:

ATM surcharges changed the pro-competitive aspects of ATM sharing. With surcharges, large banks can impose higher costs on the customers of small banks and credit unions. In turn, the large banks can try to induce customers to defect from these smaller institutions. In essence, ATM surcharges return the competitive dynamic to that which existed before ATM shared networks were formed.  

Moreover, surcharges present a perverse form of price competition where firms can actually gain customers by raising prices (and the costs of their rivals). As Professor Paul Horvitz observes: "there is little downside to such a strategy -- either you gain substantial market share or earn substantial fee income." [Paul M. Horvitz, “ATM Surcharges: Their Effect on Competition and Efficiency,” 18  Journal of Retail Banking Services  57, 61 (Autumn 1996).]

It is important to recognize that small banks and credit unions often can be of far greater competitive significance than their size suggests. Recent studies by the Federal Reserve Board and consumer groups have shown that credit unions and small banks on average offer higher interest rates and lower fees for deposit and checking accounts. Simply they are often the leaders in providing the most efficient, consumer friendly level of service. Often they are far more committed and knowledgeable of local community concerns. Losing, or even hobbling these efficient, low-cost rivals will harm all consumers. Thus, preserving a level playing field may be important to bring consumers a competitive retail banking market.

Balto then makes the following important argument:

ATM surcharges, especially surcharges imposed by the larger banks, could deter the ability of these smaller institutions to effectively compete. Because these smaller institutions cannot offer as large a network of "surcharge free" ATMs, consumers may depart to the larger banks. By focusing competition on the size of a bank's ATM network, competition in terms of interest rates and fees may be weakened.

Balto’s thesis is also argued in an article by Federal Reserve Board economist James McAndrews, who agrees that ATM surcharging has potential to affect competition negatively. If enough customers migrate accounts to larger banks for ATM “convenience,” the fewer, bigger banks may gain the market power necessary to set deposit interest rates for all consumers artificially low.[13]

B. Surcharging Is One of Numerous Anti-Competitive ATM-related Practices of Big Banks

 Small banks and credit unions also contend that surcharges are just one of the anti-competitive ATM practices imposed by ATM networks. As bank mergers continue, ATM network control and ownership also concentrates in the hands of the bigger players. Community banks argued before Federal Reserve Board hearings on recent mergers that the larger institutions would change ATM network rules in ways that would make it more difficult for small banks and their customers to participate. They would raise customer fees, bank membership fees, and impose unfair restrictions on participation. As the California Independent Bankers testified before a Federal Reserve Board hearing on the Bank of America merger with Nationsbank:

A key concern in large interbank mergers, and one that does not get the attention it warrants, is the effect on ATM networks. Market concentrations resulting from bank mergers and acquisitions have potential anti-competitive implications for ATM network markets (specifically control of ATM switches).

ATM networks are joint ventures between competing banks. ATM networks are self-regulated, private sector entities, owned and controlled in the majority of cases by large banks, that set their own pricing and related operating rules subject only to the constraints imposed by the antitrust laws. Given the structure of ATM networks, certain anti-competitive aspects are inherent. For community banks, these anti-competitive aspects are more pronounced as they generally have little influence over network fees, bylaws or operating rules. Access at a fair price to ATM and other electronic financial services networks is critical for community banks to insure their customers also have fairly and competitively priced access to these networks to transact their banking business.[14]

C. Partial Solution Of Selective Surcharging Nearly Blocked By Anti-Competitive Practices

“Some people pay a surcharge at the ATM. SUM don't.”

-- From the SUM Program website.

As another example of anti-competitive practices by bigger banks, until the U.S. Department of Justice (DOJ) intervened in 1998, large ATM networks had prohibited small banks from forming "selective surcharge" alliances. In numerous states, small banks and credit unions had sought to compete with bigger banks by forming sub-networks that didn’t surcharge each other’s customers, but did surcharge others. Selective surcharge alliances are a way for small, community banks to fight back against the unfair market power of the ATM network owners.

However, establishment of the alliances was blocked by unfair rules imposed by the networks. Had small banks been able to form selective surcharging alliances earlier, more might have formed. Nevertheless, the fragile, partial success of one selective surcharging alliance is illustrative.

The Massachusetts-based SUM program of the NYCE ATM network has managed to fight the trend. It is a community-bank based selective surcharging bulwark against big bank surcharging, although it precariously nests within NYCE, a big-bank owned network. Following the DOJ intervention that allowed its formation, SUM has expanded significantly from its Massachusetts roots into Connecticut and New York. A few of its members even have branches in other states, including one each in Kentucky and Tennessee. However, the SUM program of the NYCE ATM network, and similar efforts by credit unions around the country, are the exception, rather than the rule.