Senate Committee on Banking, Housing and Urban Affairs

Chairman D'Amato, Senator Sarbanes and members of the committee, my name is Edmund Mierzwinski and I am the Consumer Program Director for the U.S. Public Interest Research Group. U.S. PIRG is the national lobbying office for the state PIRGs, which are non-profit and non-partisan consumer and environmental advocacy groups with members around the country.

I appreciate the opportunity to testify before you at this oversight hearing on the critical issue of doubled-dipping ATM surcharges. As you know,, the PIRGs have investigated and challenged numerous unfair bank practices over the years. The bank's fee income strategy is simple: raise fees, invent new fees and get more people to pay more fees, by increasing minimum balance and other requirements. At the same time, while banks have ratcheted up interest rates on credit cards and other consumer loans, deposit interest rates remain stagnant.

Now, we commend the committee for holding this hearing in response to the banks' latest scam: charging consumers twice to use the ATM once. We are here to summarize the results of our March 1997 survey of ATM surcharging. Based on the results of that survey, we urge you, Chairman D'Amato, to immediately reintroduce and enact S. 1800, your excellent proposal to ban double-dipping ATM surcharges. We commend all the committee members who co-sponsored it with you.

RESULTS OF PIRG'S 1997 ATM SURCHARGING SURVEY

On April 1, 1996, the two largest ATM switching networks, VISA's Plus and Mastercard's Cirrus, followed the lead of several regional ATM networks and ended their prohibition against member banks surcharging non-accountholders using their ATMs. This cruel April Fool's joke allows banks to charge consumers twice to use the ATM only once. The surcharge is in addition to the "off-us" fee over 80% of banks already charge their accountholders to use another's ATM. On April 1, 1997, PIRG released a national survey comparing surcharging practices in March 1997 to the results of an October 1, 1996, "six months later" survey.

Despite the increase in the number of ATMs surcharging, some positive signs exist. Two states, Connecticut and Iowa, have banned surcharging by regulation. At least a dozen states, and Congress, are considering bans on surcharging. Also, several coalitions of banks and credit unions, particularly in California and New England, are aggressively marketing their own "nosurcharge" policies.

FINDINGS

-- Forty-five percent of 860 ATMs in 27 states and the District of Columbia surcharged non-accountholders in March 1997. The percentage is nearly double the 23% found in a 19-state, 458 ATM survey conducted by PIRG in September 1996.

-- The average ATM surcharge was $1.15 in 1997, up from 97 cents in 1996, more than doubling the cost of many ATM transactions, when average "off-us" fees of $1.01 are included.

In 1995, a PIRG survey found that over 80% of banks already charged their customers an "off-us" fee of $1.01 when they used another owner's ATM. A portion of this off-us fee, known as the interchange fee, already is used to compensate the ATM owner and the ATM network. (Banks that don't charge "off-us" fees still pay interchange fees, but choose to offset the costs, rather than charging their own customers. For example, the bank earns income from interchange fees received for use of its own ATMs.)

The surcharging ATM owner, then, receives the $1.15 average surcharge off-the-top, plus a portion of the average $1.01 "off-us"' fee. (Interchange fees vary depending on the network and are paid by the consumer's bank. A typical interchange fee might provide 10 cents to the network and 65 cents to the ATM-owner. See page 136, Hearing Record, Fair ATM Fees For Consumers Act, S. 1800, S. Hrg, 104-740, 11 July 1996).

It is our view that PIRG's methodology is (1) quite conservative and that (2) many banks may have started to surcharge since March 1997, so the number of ATMs surcharging may be even higher than we found 3 months ago.

-- The most common surcharge found was $1.00 (59% ), followed by $1.50 (31%). Surcharges ranged from 25 cents to $2.50.

Average bank surcharges were $1.16. Average non-bank surcharges were 93 cents. The 3 credit unions that surcharged averaged 67 cents.

-- Revenue from ATM surcharging could increase ATM fee revenue by $1.9 billion a year, at current surcharging rates.

Using industry estimates for transactions, 9.7 billion 1995 ATM transactions x 0.45 percent surcharging rate X 0.38 percent "off-us" transaction rate x $1.15 average surcharge = $1.9 billion in surcharge revenue.

In 1995, banks increased revenue from fees to over $15 billion. In 1995, commercial banks recorded their fourth straight year of record profits, earning over $48 billion. The FDIC's 3rd quarter report finds banks "on a pace to surpass $50 billion in annual earnings for the first time." (Commercial Banking Performance, Third Quarter 1996, Federal Deposit Insurance Corporation, (FDIC).)

-- Large banks charged higher surcharges and surcharged more. Surcharging rates and average surcharges were directly proportional to bank size.

Banks ranked by Year-end 1996 deposits, data obtained from Federal Deposit Insurance Corporation (FDIC).

Surcharging rates by big banks, which own the most machines, pose a serious competitive threat to smaller banks and credit unions, which usually offer a good low-priced alternative for consumers. But if enough small bank customers switch accounts to big banks to avoid surcharges, then the big banks, facing less competition, will raise the fees they charge their own customers even more.

As reported widely last month, a super-regional Midwestern bank, Bank One, recently announced it will be charging its own customers to use its new off-premise ATM machines, so the trend has already begun.

Small banks and credit unions attack surcharges as not only anti-consumer, but anti-competitive. (See page 98, Hearing Record, Fair ATM Fees For Consumers Act, S. 1800, S. Hrg, 104740, 11 July 1996). Last week, despite their strong antipathy toward any government regulation, some community bank associations renewed their proposal that the Congress or the regulators at least limit banks to collecting only one fee, either an interchange fee,or a surcharge, but not both.

-- Although banks claim surcharges are needed to cover the costs of "remote" ATMs, surcharging rates at machines located at bank branches (47%) are nearly identical to rates at bank-owned machines located away from banks (50%).

One large surcharging bank, Bank of America, demonstrates the fallacy of this bank defense: it surcharges at bank branches, but not in grocery stores. In fact, the major reason banks surcharge is because they can.

Although banks claim that the surcharge has resulted in an incredible increase in the rollout- of ATMs, in fact, the number of ATMs has been increasing rapidly, at over 10% a year, for many years.

-- Despite Plus and Cirrus rules requiring surcharging members to post a clear sign on ATMs, 12% of surcharging ATMs owned by banks had no sign disclosure. An additional 3% had unclear, hard to read, or small signs.

The only clear sign found on any ATMs was the bright "No Surcharge" logo used by the California anti-surcharge coalition. Banks that do surcharge use a wide variety of sloppy, small signs placed in hard-to-see locations and hidden among the clutter of ATM logos and service marks. Among the surcharging ATMs with no sign posted was the Nationsbank ATM located only one block from the U.S. Capitol on Pennsylvania Avenue.

Unfortunately, Federal Reserve Board Regulation E, which governs ATM transactions, allows surcharging banks to use either' a sign or a screen disclosure. But many machines do not provide the screen warning until after the consumer has inserted his or her card, entered a PIN, viewed an advertising message, selected an account, and inserted an amount. By then, the consumer is trapped into paying the fee. Unless surcharging is banned, prominent clear warnings on machines must be made mandatory be federal law. Further, Regulation E must be amended to require the on-screen disclosure at the beginning of the transaction.

-- Surcharging rates were highest in the South, where the dominant institutions, including Nationsbank and First Union, all surcharge, led by Georgia (95%), North Carolina (88%), Virginia (88%).

In California, although three major banks with over 7,000 ATMs, Wells Fargo, Great Western and Bank of America, recently adopted surcharge strategies, a coalition of 7 banks and the west's major credit union association announced a competing "No Surcharges Here!" campaign. A similar campaign is underway in new England.

The California "No Surcharge" coalition includes at least 2,100 ATMs in 5 western states (CA, UT, AZ, OR, WA) owned by a growing number of institutions, including Bayview Federal, Coast Federal, Sanwa Bank, Glendale Federal, Union Bank of California Sumitomo Bank and the Credit Union Cooperative System. Other credit union ATMs around the country are also in the coalition. (Source, Press Releases, leaflets, RamResearch).

In March, 92 of 217 Massachusetts banks, with 700 ATMs, and the Community Bank League of New England, with 400 more ATMs, announced a similar campaign, countering an anticipated major surcharge push by Fleet and Bank of Boston, which dominate the market in Massachusetts, with 3300 ATMs. ("Mass. Banks Spilt On ATM Surcharges," Boston Globe, 24 March 1997).

-- 27 of 28 Wells Fargo ATMs in 6 states charged surcharges of $1.50. The sole exception was a machine in the California State Capitol, with a large red sticker proclaiming that "Wells Fargo Will Not Charge A Fee For Cash Withdrawals Made At This ATM." The California legislature is considering proposals to ban ATM surcharges. Similarly, all but one of 8 Sunwest ATMs in New Mexico surcharged. The exception was located in the State Capitol.

-- Two states, Connecticut and Iowa, have banned ATM surcharges by order of the Banking Commissioner (Fleet Bank has sued Connecticut).

ATM surcharge ban or moratorium legislation is either still under consideration or has been considered by at least 12 legislatures, including Arizona, Pennsylvania, New Jersey, California, Oregon, Washington, Massachusetts, Missouri, Texas, New York, Montana and Maryland.

RECOMMENDATIONS TO LOWER CONSUMER BANK FEES:

(1) ENACT ATM SURCHARGING BAN: Passage of legislation to ban ATM surcharges will lower the fees that consumers pay to use ATMs and will also send a clear message to the banks that fee gouging must be stopped.

(2) URGE ANTI-TRUST REVIEW OF ATM NETWORK POLICIES: The anti- competitive implications of ATM surcharging argue strongly for antitrust and anti-competitive review. Testimony before this committee last July by small banks and ATMs points to the critical need for such a review of the anti-competitive market power of the big banks. The committee should examine the wellestablished finding of independent academics, consultants and consumer groups, that big banks charge higher fees than small banks. Even the Federal Reserve Board, in its 1995 fee survey, agrees that banks.owned by out-of-state institutions charge higher fees than locally owned banks. The committee should examine whether big bank fee strategies are an assertion of anticompetitive monopoly power warranting anti-trust investigation.

(3) REIN IN OCC PREEMPTION: As you know, 2 states, Connecticut and Iowa, have banned ATM surcharges by Banking Commissioner Order. U.S. PIRG is gravely concerned that, even though no federal law conflicts with these bans, the OCC may move inappropriately, and at the behest of the big banks, to preempt their applicability to national banks. Even though we would prefer that your federal ATM surcharge ban be enacted, Chairman D'Amato, until that occurs, we believe that the several states should retain their full rights and privileges under the Constitution and our federal system to protect their consumers better than existing federal law.

Further, the political climate for enacting a federal ATM surcharge ban will improve if several states act first. However, one reason no state legislature has yet acted favorably to ban ATM surcharges is the chilling effect of the Comptroller's extant preemption policies, which are outrageous.

U.S. PIRG and other consumer groups believe that the Office of the Comptroller of the Currency has already abused its preemptive authority on numerous occasions, so this charge is not made lightly. In 1992, the OCC preempted a New Jersey Lifeline Banking Law, even though no federal law requires banks to provide lowcost accounts (OCC Interpretative Letter #572-1992), and subsequently compounded the abuse by failing to comply with Congressional intent in the 1994 Interstate Branching Efficiency Act to reverse that preemption, despite a 1995 request from the New Jersey Banking Commissioner to do so. (See letter of U.S. PIRG to Senators Faircloth and Bryan (Financial Institutions Subcommittee OCC Oversight Hearing of 1 May 1997); Also see Consumers Union letter to the subcommittee on broader OCC preemption issues, including proposed preemption of a 1996 Rhode Island law on consumer protections in bank insurance sales.)

(4) OPPOSE H.R. 1306: CSBS BILL TO EXPAND OCC AUTHORITY OVER INTERSTATE BRANCHES OF STATE BANKS

We are also disappointed that the House acted so quickly on very dangerous legislation which, among other problems, would allow interstate branches of state-char@-ered banks to only comply with state laws that national banks comply with. The effect of this special interest amendment proposed by the Conference of State Bank Supervisors is to expand the impact of OCC preemption rulings, further chilling state legislative proposals to rein in high bank fees.

We strongly urge the Senate Banking Committee to take this non-technical, anti-consumer amendment off the fast track it appears to be on. No reason exists to move this legislation quickly, every reason exists to delay it and hold hearings on it.

CONCLUSION

I appreciate the opportunity to testify here today before the committee. Rising bank fees are pricing some Americans out of federally insured banks and gouging others. The ATM surcharge, when banks charge consumers twice to use the ATM once, represents a particularly unfair form of price-gouging. U.S. PIRG strongly recommends immediate enactment of legislation to ban the ATM surcharge.

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