Article

Independent ATM owners push for selective surcharging

The NAAIO is meeting with networks to persuade them to allow ISOs to charge different surcharge fees for different cards.

November 8, 2010

The National Association of ATM ISOs and Operators (NAAIO) is meeting with card networks to persuade them to allow ISOs to charge different surcharge fees for different cards. The service is known as selective surcharging.

If the card networks agree to the change, ATM operators would be free to exercise independent pricing decisions on all their ATMs, including charging different surcharge fees to cardholders for different cards used at the same ATM, said Brooks Harlow, NAAIO's Seattle-based lawyer. 

Selective surcharging would eliminate card networks' current rules. Surcharges are allowed on a non-discriminatory basis, said Harlow. "An ATM operator must apply the same surcharge to transactions at the same ATM terminal," he said. 

Harlow declined to name the card networks, but Darryl R. Ware, co-owner of WWS ATM Sales & Service in Brewster, N.Y., who has participated in the negotiations, said NAAIO has met with Visa and MasterCard. A call to MasterCard for comment was not returned. A Visa spokesman said he could not comment because the company has not seen NAAIO's report. The other networks are PULSE, NYCE, Star, Accel/Exchange and Shazam.

A surcharge fee is what an ATM operator charges non-customers who use the financial institution's ATMs to withdraw cash. According to Bankrate.com, banks charged non-bank customers an average surcharge fee of $2.22 in the fall of 2009. Most surcharge fees, however, range between $2 and $3 per cash withdrawal.

Cardholders would benefit from selective surcharging because they would pay a lower surcharge fee when withdrawing cash from an ATM that is not part of their bank's surcharge-free ATM network.

"Consumers using cards that pay a higher net interchange effectively subsidize the card networks that pay lower interchange," Harlow said. "In a market without network restraints, ATM ISOs would be motivated to offer lower surcharges to customers using cards that pay higher net interchange. Right now, if a network cuts interchange or raises its fees, ATM ISOs have no choice but to raise surcharges on all consumers."

Selective surcharging also would benefit ISOs because they could deploy ATMs in more locations.

"Since the network rules are driving up surcharges, consumer resistance to higher surcharges reduces transaction volumes. ATMs must be removed from marginal locations," Harlow said. NAAIO concerns about current surcharge rules are contained in a report that it recently delivered to the organization's board of directors.

The National Association of ATM ISOs and Operators previously has met with the card associations on other issues, such as explaining how ISOs operate. 

The latest round of negotiations occurred after the U.S. Justice Department reached a settlement with Visa and MasterCard, the world's two largest card networks. The proposed settlement, which must be approved by the U.S. District Court of the Eastern District of New York, would allow merchants to offer discounts, incentives and information to consumers to encourage the use of payment methods that are less costly.

The settlement applies to consumer purchases made at the point-of-sale. It does not cover debit and prepaid cards used at the ATM, said Harlow.

"The Justice Department's recent lawsuit should be a huge wake up call to networks that continue to cling to restrictive rules in the ATM market," he said.

One industry observer said the Justice Department's action is confusing.

"Consumers who pay for merchandise with a certain card at the point-of-sale will receive a discount, but if they use same card at an ATM deployed in the same store, they won't receive a discount on the surcharge fee," said Leon Majors, president of the Payments Systems Practice at Phoenix Marketing International, which is based in Salisbury, Md. Majors believes it will take years of writing and rewriting rules before the issue is finally resolved.

Patricia Hewitt, director of debit advisory services at Mercator Advisory Group in Maynard, Mass., is not sure how selective surcharging would work. When a cardholder swipes his card at an ATM to withdraw cash, the surcharge fee appears on the ATM screen. 

"With selective surcharging, would a menu of surcharge fees appear on the ATM screen, depending on what card the cardholder uses?" asks Hewitt. "If that is the case, NAAIO would have to spend a lot of time educating cardholders about selective surcharging."

Selective surcharging also faces another challenge. She said consumers do not carry a lot of cards, which would limit them to switching cards to find the one with the lowest surcharge fee.

Hewitt also mentioned that most cardholders withdraw cash from their banks' ATMs. Those ATMs do not charge customers surcharge fees, she said. If cardholders cannot find their bank's ATM, they can receive cash back at the point-of-sale after making a purchase. Stores do not charge a surcharge fee for cash back at the point of sale, Hewitt said.