An Analysis of the Unfairness of the Surcharge
and an Examination of the Flawed Bank of Arguments
in Support of the Surcharge

1. ATM Surcharges Are Double Fees And Charging Consumers Twice For One Transaction Is an Unfair Double Dip

A. Consumers Do Pay For Lunch Twice and Banks Do Double Dip

Over the last few years, pesky bank public relations flacks have worked hard in an attempt to re-define their own industry term "ATM surcharge" to the softer, more benign-sounding terms "access fee" or "convenience fee." Their not-so-transparent effort is more sophisticated than it seems--it is part of a larger effort to confuse consumers, the media, and policymakers into the mistaken belief that ATM owners were not compensated by non-customers before national surcharging began in 1996. Incredibly, they have claimed that "there is no such thing as a free lunch" or "who could expect banks to give away our services for free?"

In fact, since banks first formed shared ATM networks, and allowed other banks' customers to use their ATMs, ATM owners have been compensated by a customer's own bank, through a fee known as the interchange fee. According to numerous studies, the interchange fee, set by the ATM network member-owners and paid by the customer’s bank to the ATM owner, averages between 40-60 cents per transaction. The customer’s bank compensates the network itself with a "switch" fee of between 2-12 cents.

Where do the "interchange fee" and "switch fee" come from? That’s up to the bank. However, most banks now pass it along by imposing a foreign fee on their own customers that use other banks' machines, although some may waive this fee for high-balance customers. According to the 1999 Federal Reserve Board Annual Report to Congress, in 1998, 82% of multi-state banks and 73% of local banks imposed foreign fees. The Federal Reserve Board noted that, following the imposition of national surcharging in 1996 and 1997, the number of banks charging foreign fees had dropped, but that in 1998 the incidence of foreign fees "increased significantly and sharply."

The surcharge, therefore, is a second, unnecessary and unfair fee for consumers to pay - similar to paying for lunch twice. For banks, the surcharge is a second, pure profit fee to collect - similar to a double dip ice cream cone.
 

B. How The ATM Fee Structure Works

Here is a chart based on a 1998 Congressional Budget Office report to Congress.

ATM FEES

Type of Fee	Who Pays It?	Who Receives It?	Who Sets It?	Amount
Network Membership (a)	Card-issuing bank	Network	Network	$0-125,000/yr
Switch (b)	Card-issuing bank	Network	Network	2.5-12 cents
Interchange(b)	Card-issuing bank	ATM owner	Network	20-60 cents (c)
Foreign Fee (b)	Cardholder	Card-issuing Bank	Card-issuing Bank	$0-2.50
Surcharge(b)	Cardholder	ATM owner	ATM owner	$0-3.00

SOURCE: Congressional Budget Office based on the Debit Card Directory, 1998 Edition (New York: Faulkner & Gray, 1997), and General Accounting Office, Automated Teller Machines: Survey Results Indicate Banks' Surcharge Fees Have Increased (April 1998).
a. The membership fee is usually paid either monthly or annually.
b. This fee is paid per transaction.
c. The range stated is for a cash withdrawal. Interchange fees vary for different types of transactions. For example, the interchange fee is usually higher for a deposit transaction than for a balance inquiry.

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 Federal Deposit Insurance Corporation (FDIC) exceeded last year’s record of $62 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 FDIC’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, supporting previous PIRG and U.S. Congressional Budget Office estimates that ATM surcharge revenues annually total over $2 billion. 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.

ATMs actually save 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.

2. Competition Isn’t Working - Surcharges Continue To Go Up And More Banks Are Surcharging 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. 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 branches as well as in 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." 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. Competition 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.

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 an increase in ATM deployment and virtually 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, at least one bank, Cleveland’s Fifth Third, is imposing a $2 surcharge. Another, Mellon Bank, (PA) is at $1.75. We have seen little 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].

B. Surcharging Is Anti-Competitive

In addition to being unfair to consumers, as demonstrated above, ATM surcharging is not working in a competitive way. We have not seen price competition in any form. Machines located on bank premises have surcharges just as high as ATMs located in remote locations, despite the fact that remote machines cost banks more to maintain than machines that can be refilled right out of the cash drawer! We also have not seen some banks offering lower surcharges, as a means of attracting volume. Neither of these phenomena, which you would expect to see in a competitive marketplace, have occurred. 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.

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 fees imposed across-the-board 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." [citation omitted]

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 states:

A broader risk of surcharges is their potential to alter long-term competition among banks. By exempting the customers of ATM owners from surcharges, the current system reduces the role of the shared ATM network to which a bank belongs and expands the role of the bank’s own chain of machines. This arrangement encourages customers who prize convenience to establish deposit accounts with banks that have ATMs located in the customers’ preferred locations rather than with banks that offer the highest interest rates on deposit accounts. Hence, surcharges can change the nature of competition among banks for deposits by reducing customers’ sensitivity to deposit interest rates. Indeed, banks may choose to increase the intensity of competition in ATM locations and to decrease the intensity of price competition in deposit interest rates. Models of nonprice competition show that such competition can lead to some undesirable consequences, including two that are relevant to ATM surcharges. First, banks could "overdeploy" ATMs. For example, to avoid becoming less competitive, two banks may deploy ATMs in the same location, a strategy that would result in lower transactions per machine but would not necessarily increase customer convenience. Moreover, because of the increased costs of servicing two machines in one location, the competition between the two machine-owners might not always lead to lower prices. To the extent that customers become more responsive to the number and the location of a bank’s ATMs and less responsive to deposit interest rates, weakened deposit interest rate competition among banks could result in lower interest rates on deposits in the long run. This consequence may be considered a reasonable trade-off by those customers who place a high value on convenience and have chosen the bank with the most convenient ATM network; however, customers who do not rely as heavily on ATM location would bear the costs of the added convenience.

3. Why States And Cities Have The Authority To Ban Surcharges

Throughout the ATM surcharge legal battle, nationally-chartered banks have argued that the National Bank Act of 1861 prohibits state and local action regulating ATM surcharges of nationally-chartered banks. Historically, banks have argued that this law preempts numerous consumer laws, even though, for example, 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 1978 Electronic Funds Transfer Act, which regulates ATMs, should prevail. Here is critical anti-preemption language of the EFTA:

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.

Consumer groups, and the states and cities, believe that local action should be allowed whenever it protects consumers better, as long as local laws aren’t in conflict with federal laws.

Finally, 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.

Next Section: Non-Bank ATM Owners: Independent Service Operators

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