STRATEGIC PARTNERS
These testimonies presented to the Senate Banking, Housing and Urban Affairs Committee encapsulate both sides of the surcharge argument. Part one of two by James Belcher, contributing writer
March 7, 2002
On July 15th, 1998 the surcharge survived a partisan vote (11-7) by the Senate Banking, Housing and Urban Affairs Committee. Chairman Alfonse D'Amato (Rep.-NY), the only Republican voting for the ban, vowed to continue his battle and bring a full vote to the senate floor.
Eight witnesses from both the government and corporate sectors presented testimony to the committee. Summaries of each if the testimonies follow. Links to the verbatim testimonies conclude each summary.
We invite your reaction to these testimonies in our message boards. For a spirited anti-surcharge view we suggest you visit the Web site of John Freeman, state representative for Michigan's 34th House District. Mr. Freeman calls surcharging a "scam" and provides data attempting to convince consumers that banks seek to gouge them with surcharges.
Prepared Testimony of Ms. Susan S. Westin
Associate Director
Financial Institutions and Market Issues
General Accounting Office
Ms. Westin's testimony provided the committee with hard data upon which to build their own opinions. The GAO surveyed about 500 randomly selected banks and generally found that transactions declined overall, while surcharged transactions declined the most, indicating that consumers used their own banks' ATMs more to avoid fees. This supports the argument that surcharge-sensitive cardholders do not need legislation to protect them from the surcharge.
The repeal of the ATM surcharging ban has increased bank deployment of ATMs, the number of ATMs with surcharges, and the average surcharge amount, according to the General Accounting Office's (GAO)'s latest study of ATM fees. The GAO surveyed 500 domestic banks at random about their surcharging practices, and also collected responses from several large non-banks (credit unions, non-depository financial institutions, etc.). The GAO conducted a similar survey last year. Comparing results from the two studies gives a clear picture of more ATMs with higher surcharges, and a presumably larger pool of surcharge income for deployers.
While the percentage of banks with ATMs stayed about the same over the one-year period between the two studies (February 1997- February 1998), the total number of ATMs operated by the banks offering ATMs rose by about 15,000. Sixty-six percent of this increase was in ATMs deployed off of bank premises. The GAO also found that large banks operate more ATMs overall than medium and small banks, and that most large banks had added about 100 ATMs since 1997.
How many more ATMs surcharge now than a year ago, and what's the typical fee? The GAO found that the percentage of banks which surcharge on at least some of their ATMs went up 25 percentage points in one year, to 64%. Furthermore, the number of ATMs with surcharges increased by over 50%, to over 104,000. Seventy nine percent of ATMs now carry a surcharge. The average fee, including banks that do not surcharge, is now $1.00. If non-surcharging ATMs are excluded, the number rises to $1.27. The typical fee rose from $1.00 to $1.50; the maximum reported
fee remained at $3.00. The percentage of ATMs with fees of $1.50 or more also rose, up to 40% from the 1997 level of 21%. Non-bank fees tended to be lower than for banks, but still increased, and the maximum reported surcharge for a non-bank in the study was $8.00. While the GAO did not attempt to prove a link between surcharging and number of transactions, the agency did report on the average number of withdrawal transactions per ATM. Customer transactions of this sort decreased 15%; transactions for non-customers decreased 24%.
Full text of testimony
Prepared Testimony of Mr. Jan Paul Acton
Associate Director
Natural Resources and Commerce
Congressional Budget Office
Congress should wait to see if changes in ATM use and competition for ATM customers will compensate for changes in various ATM fees before passing new legislation, according to the Congressional Budget Office (CBO). The CBO recently examined ATM fee structure in light of competition among banks, other ATM owners, and ATM networks.
The CBO identified five basic fee classes. Membership fees (paid by the ATM owner to be part of an ATM network), switch fees (paid by the card issuer to the network on each transaction made by its cardholders), and interchange fees (paid by the card issuer to the ATM owner for each transaction made by its cardholders), are all set by the ATM network.
Foreign, or "user" fees (paid by the cardholder to the card issuer on transactions outside the bank's network) are set by the card issuer, and surcharge fees (paid by the cardholder to ATM owners who assess such fees) are set by the ATM owner.
The CBO found that switch fees have actually been dropping, with proportionately greater savings for large banks, since the fees are discounted for institutions with larger numbers of customer transactions. The CBO did not comment on the fairness of the fee structure. Interchange fees have remained relatively stable, bringing
comparatively greater profits for ATM owners as electronics and telecommunications costs have dropped. Some critics argue these fees are kept artificially high by the network member banks with the most ATMs. The CBO doesn't find the argument compelling, however--the fees have remained about the same even as the number of players has dwindled, which presumably would raise prices by reducing competition.
The CBO's report suggests that the competition which influences these fees, combined with changes in consumer behavior, mean that high surcharging may not last, especially at bank ATMs. ATM-owning banks consider the total fee structure when setting surcharges, and use the lure of large fee-free ATM networks to attract and increase deposits. And while nonbank ATM deployers use remote locations to justify high surcharging, supply and demand is generally driving consumers to avoid ATMs with such fees.
Full text of testimony
Prepared Testimony of Mr. Edmund Mierzwinski
Consumer Program Director
U.S. Public Interest Research Group
ATM surcharging is a big bank-led effort to price gouge which should be banned, according to consumer watchdog group U.S. PIRG (Public Interest Research Group). Two U.S. PIRG surveys over the last year have tracked increases in surcharging and the market forces which affect ATM fees. The group concludes that interchange fees compensate ATM owners and networks sufficiently, making surcharging unnecessary. The group also says that ATM fees are anti-consumer, given the backdrop of bank consolidation which it says has resulted in higher bank fees overall; the group says only 3% of all banks now offer free checking accounts,
for instance.
U.S. PIRG's most recent ATM surcharge survey found that the 300 largest of the approximately 9,000 banks nationwide control almost two-thirds of all ATMs. Eighty-three percent of these biggest banks now surcharge. U.S. PIRG views this as a competitive threat to smaller banks and credit unions, with more consumers turning to the large networks of fee-free ATMs offered by large banks. One-third of small bank consumers in a recent poll said they'd switch to a large bank to avoid surcharges. U.S. PIRG also noted that no-surcharge alliances are breaking down as more banks seek to increase income. The group reported that contractual rules
in areas where big banks are the primary ATM network owners are making it increasingly difficult for small banks and credit unions to establish no-surcharge zones. Surcharges at small banks are also increasing sharply, up 67% in one year. Comparatively, only 13% of surveyed credit unions surcharged.
The group predicts that big banks will raise fees more as competition from small banks lessens. The study also suggested that current fee disclosure is ineffective, and that consumers are getting mixed and inaccurate information about ATM fee amounts. In addition to banning surcharges, U.S. PIRG recommends that the ATM industry be reviewed for antitrust and anti-competitive practices. The group cites lobbying by big banks as evidence of such action; bank lobbyists have claimed that the Office of the Comptroller of the Currency will preempt proposed surcharge legislation in several states.
Full text of testimony
Prepared Testimony of the Honorable Richard Blumenthal
Attorney General
State of Connecticut
The State of Connecticut is supporting a proposed ban on surcharging as it awaits judgment on a lawsuit by Fleet Bank challenging the state's current anti-surcharge stance. The state rejects the idea that a surcharge ban would make ATMs unprofitable. Connecticut notes that nonbanks have begun deploying ATMs in the state, in spite of the state's current interpretation of the National Bank Act prohibiting direct charges of Connecticut customers for ATM use. The state says that
surcharging in small communities where ATM choices are limited makes the fees unfair. Connecticut claims that surcharges are also unfair to travelers who may not know where to find a surcharge-free ATM; the state wants the surcharge ban to extend to all states for this reason.
Connecticut claims that ATMs reduce banks' cost of doing business through ATMs, which should make surcharging unnecessary. The state also claims that the ATM industry generates enough income through other fees that banks should not need surcharges to make their operations profitable. Connecticut suggests that financial institutions should renegotiate their existing fee arrangements if this is not the case.
Both Fleet Bank and the State of Connecticut have requested summary judgment concerning the state's interpretation of existing surcharge legislation. While the state currently prohibits direct charges of ATM-using customers, it leaves open the possibility of ATM owners charging the cardholder's bank for such use. Both sides are still awaiting a final decision on the matter.
Full text of testimony
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