States, Cities Tussle With Banks Over ATM Surcharges

On Nov. 2, San Francisco voters approved a referendum banning bank Automatic Teller Machine surcharges imposed on consumers for using another bank’s ATM. Two weeks later, a federal judge issued a preliminary injunction sought by Wells Fargo and Bank of America. It blocks San Francisco’s ban, as well as a Santa Monica prohibition that went into effect a month earlier.

The judge’s action gave the two California cities something in common with Connecticut and Iowa — all four jurisdictions are embroiled in federal suits brought by banks trying to kill bans on ATM fees.

The Massachusetts legislature has tried and failed at least twice to pass a similar ban. Three other states, Arkansas, Mississippi and Wyoming limit ATM fees, but don’t prohibit them.

States and localities should leave ATM fees alone because consumers “can vote with their feet” and not use ATMs operated by banks other than their own, says John Hall of the Washington-based American Bankers Association. “Let the free market determine ATM prices, not the government,” adds Hall.

At stake is an estimated $2.1 billion that banks generate annually from “foreign ATM” fees, according to the U.S. Public Interest Research Group (PIRG), a national lobbying office for state nonprofit consumer advocacy groups. But the dispute also touches on a federalism issue: who has the final call on ATM fees, the federal government or the jurisdiction where the machines are located?

“We’re a strong states’ right supporter — we believe that federal law should provide a floor for consumer and environmental protections, and that states should retain the authority to enact stronger laws that protect their consumers better,” says U.S. PIRG spokesman Ed Mierzwinski.

Mierzwinski and other critics of of ATM fees all refer to ‘double dipping,’ a practice where consumers are charged by their bank as well as the foreign ATM’s bank. When you use the ATM of another bank, that institution charges anywhere from 50 cents to $3 for the privilege.

The consumer’s bank typically charges another $1.20 on top of that in service fees. Fifty cents of that goes to the bank owning the foreign ATM, 10 cents goes to the ATM network and the rest goes to the consumer’s bank, says Mierzwinski.

Banks used to only levy the $1.20 charge, regardless of whose bank owned the ATM. That all changed in April 1996, when banks were contractually allowed to start charging foreign ATM fees.

The leading state in the fight against foreign ATM surcharges is Iowa, which passed its ban back in 1976. That was challenged last year when Bank One sued Iowa in federal court in an effort to overturn the state’s prohibition.

Iowa won on the district court level, but Bank One was victorious in the 8th U.S. Federal Circuit Court of Appeals in St. Louis. Now, the legal battle is again before the U.S. District Court in Des Moines.

Iowa “will consider whether to ask the U. S. Supreme Court to hear these issues,” says Bob Brammer with the Iowa Attorney General’s Office. ” We believe there’s still a long way to go in this litigation.”

In Connecticut, Banking Commissioner John Burke issued a 1995 order prohibiting foreign ATM fees. Fleet Bank and First Union subsequently filed a lawsuit against Connecticut in federal court, arguing the state has no authority to restrict the activities of federally chartered banks. A decision is pending.

A major advantage, or disadvantage — depending on one’s perspective — to deciding the ATM surcharge battles in federal courts is that federal law is fuzzy regarding what states can and can’t do to regulate ATM activities.

Independent U.S. Rep. Bernie Sanders of Vermont is currently working on a bill clarifying that states and localities are free to ban or limit fees imposed on ATM users.

In the meantime, surcharge critics say the fees harm smaller banks that lack battalions of ATM machines in major urban centers and suburbs. A spokesman for an association of 5,500 small banks acknowledges that concern, but echoes her bigger brethren when it comes to ATM fees.

“We have never favored any type of legislative ban on surcharging,” says Viveca Ware of Independent Community Bankers of America. “Our general view is that the government should not set the prices that banks can charge for their services.”