STRATEGIC PARTNERS
A state Supreme Court decision in December opened the door to ATM surcharges in Connecticut, but Attorney General Richard Blumenthal is leading a legislative charge against the fees.by Kevin Gibson, contributing writer
May 1, 2000
In yet another case of "to surcharge or not to surcharge" in the ATM industry, the state of Connecticut is embroiled in a civil war over the regulation of such fees. A state Supreme Court decision in December overturned state Banking Commissioner John Burke's interpretation of a 1975 law banning service charges by banks, saying the law predated widespread use of ATMs and therefore did not apply. Larger banks began adding convenience fees to transactions conducted by non-bank members, but legislation has been introduced in the state's House of Representatives to reinstate the ban. Similar legislation in 1999 passed the House but died in the Senate. Now H.B. 5014 seeks to do what its predecessor couldn't. On March 7, the bill was voted out of the House Banks Committee and will get a hearing in the full House sometime before the session ends on May 3. Yet early reports indicate that Senate support of the bill hasn't improved. Smaller banks have resisted adding a surcharge and various factions of government and business continue to clash on the issue. The debate, in principle, apparently comes down to the issue of government regulation versus free enterprise. "It seems to me the entire (banking) industry should be adamantly opposed to price controls," said Jim Schepker, a spokesman for Fleet Financial. "If you allow free enterprise to work, it works." Fleet is one of three banks so far to begin charging non-customers a $1 fee for ATM transactions, along with First Union and BankBoston. What consumers and some lawmakers object to is that many banks already impose a fee on their customers for using another bank's ATM. The second charge, according to some, constitutes "double-dipping." Deputy House Minority Leader Brian J. Flaherty, responding to the Supreme Court decision in December, said in a prepared statement, "This shows all the more reason why we need a state law prohibiting banks from charging an extra fee to use an ATM. As ATMs proliferate and their use grows, ATM fees are a significant concern for consumers. More and more, people resent being charged a fee to withdraw their own money." Connecticut's most persistent surcharge foe is probably Attorney General Richard Blumenthal. "Each of these transactions costs about 27 cents," Blumenthal said in a phone interview, "and the banks have the means of recovering these costs by an interchange fee. They don't need to charge $1.50. It's become a profit center; it's another means of nickel and diming and now dollaring (consumers) to distraction." Free market forces But banks like Fleet, which originally pursued overturning Burke's interpretation of the 1975 law, disagree. Schepker argues that the additional charges constitute a choice -- a bank customer is free to drive to his or her own bank to make a transaction. Using another bank's ATM is simply another choice for the consumer, and it costs the bank money to maintain an ATM. "We call them convenience fees because to us that's what they are," Schepker said. "We're offering an alternative, so we charge a convenience fee." "The landscape has dramatically changed in Connecticut," Schepker continued,"and not so much because we prevailed in court. We had been in litigation for three years. Now that it's resolved, it has freed up other things to begin happening. Those things free up the free enterprise system to work." One sign of the free market at work: Following the December court decision, a selective surcharge network called SUM entered Connecticut. Membership appears to be growing in the alliance of smaller banks that have banded together to provide ATM services without charging each other's customers. And many small independent banks have opted not to surcharge. Webster Bank is one of those. "Basically, Webster bank had supported the Connecticut banking commissioner's ruling on ATM surcharging," said Michael Bazinet, a Webster spokesman. "We're not charging, some other banks are not charging, the new SUM network is not charging -- so consumers seem to have a choice." Webster is not waiting out legislation or any court findings, Bazinet said, but is merely responding to the market. "If it were an even playing field, we would prefer not to surcharge. However, we are carefully watching the use of our 220-machine ATM network to see if there is an adverse impact on our own customers. "We are not in favor of government regulation of fees. We feel it should be a market-driven decision. It should be a matter of the consumers and the market making the decision." New bill in town Meanwhile, Burke, at a Feb. 17 public hearing, introduced a bill that would authorize out-of-state banks and credit unions to establish ATMs within Connecticut and authorize non-banks to establish and/or maintain ATMs there. A summary of the hearing outlined Burke's position that the proposal, S.B. 11, would grant parity to out-of-state financial institutions and would increase competition in the state by opening up the market to non-banks and out-of-state financial institutions. Indeed, Burke was quoted shortly after the state Supreme Court overruled his interpretation of the law as saying, "In allowing these entities into the ATM marketplace, the Connecticut consumer will have additional choices and the increased competition will establish the reasonableness of the fee structure." Government regulation of ATM fees would not go away entirely under S.B. 11, however. An amendment was added earlier this month that would cap any convenience fees at $1.50. According to the current regulations, out-of-state financial institutions must have a branch in Connecticut in order to establish an ATM and all ATMs must be established by a financial institution. These rules also go back to the original 1975 law, but they were never overturned. Because of these requirements, few ISOs have maintained ATMs in the state. Once ATMs are established, though, the regulations don't appear to specifically forbid intervention by an ISO. At least one independent, EDS, has managed machines for a financial institution -- although the Plano-Texas based company no longer does so. If Burke's proposal is adopted, it would explicitly allow both out-of-state financial institutions and independents to deploy machines in the state. Commenting on Burke's proposal, Department of Banking spokesman Dave Tedeschi said, "We feel this particular bill is a consumer proposal that would open up the market to non-banks and out-of-state banking institutions." Tedeschi said there would be a required registration for non-bank machines simply so the Department of Banking would have "some type of control over what kinds of entities would be able to establish ATMs." Doubtless, this won't deter an invasion by independent deployers if the commissioner's bill becomes law. ISO interest "We're interested in being able to deploy ATMs wherever we can, of course," said Noah Weider of San Diego-based Xtra Cash ATM. Xtra Cash has about 3,800 ATMs deployed nationwide with machines inMcDonald's restaurants and Bradley's department stores, among other locations. Weider believes the market should be open to all comers. He doesn't think Fleet or any other banks will have an advantage over ISOs if the market continues to open. "Not at all," he said. "It's a totally different market. Banks are still looking for a transaction count over 1,000. We can go into a location doing 200 to 500 transactions a month." States shouldn't have the authority to ban surcharges, Weider said. "The reason there are so many ATMs is because we can surcharge. Even in Connecticut, nobody is going to put a gun to anybody's head to make them pay a surcharge. You can still go to your own bank." Nevertheless, Blumenthal still disagrees with the notion of a surcharge, market-driven or otherwise. "That's a very plausible point of view," he said, "but the problem is the larger banks charge these fees and create pressure on the smaller banks to do so as well... The smaller banks may feel that they are under pressure to charge." What happens with current legislation in the state, as well as the fate of ongoing litigation in California and Iowa, could dramatically change the face of Connecticut's ATM business. Financial institutions and independents alike are watching closely. "There's definitely going to be some more activity," said Webster Bank's Bazinet. "It will certainly be an important issue in the state legislature," Schepker said. "We are confident, as in the past, good judgment will prevail and consumer interest will be protected." If competition does become wide open, Schepker said, "I think Connecticut will quickly catch up to the rest of the nation." That means the number of ATMs in the state -- roughly 1,500 according to the Connecticut Bankers Association -- could rise dramatically. The number of financial institutions with ATMs (currently about 80) probably would rise, and it's impossible to say how many independent ATMs might appear. "We have merchants and others waiting in the wings," Connecticut Bankers Association President Gerald Noonan said. Noonan dared to make a prediction about the outcome of this civil war. "I think the legislature will end up not taking action," he said. "Last year it went through the House and died in Senate. With a short session like this, it's hard to educate people, and it's really new. We'll do the best we can and hope reason prevails."
