City Council Takes Lead on ATM Surcharge Ban

By Jim Stebinger

The City Council Tuesday night is expected to make Santa Monica the first California city to ban the fees banks charge when consumers use a "foreign" Automated Teller Machine.

The battle to ban ATMs has stalled in the state capitol and is meandering in other trend setting California cities. Whatever happens in council, the battle is still not over, as the issue will continue to be fought on the local, state and perhaps federal level.

"I think there will be tremendous public support," said Councilman Kevin McKeown, one of the sponsors of the proposed ordinance. "The fees are very anti-competitive. People are forced to use the big bank ATMs. The little banks have been shut out."

Banks have charged fees to cover the cost involved in transferring money from a bank to the host bank since the machines came into vogue. The fee is split between the two banks. Since 1996, however, banks have added a surcharge - commonly $1.50 - and have also kept their share of the original transfer fee. Reportedly, 99 percent of all bank ATMs now charge the fee, up from 45 percent as recently as two years ago

Consumer groups say the surcharge fee is unnecessary. It is, in their eyes, no more than a double charge for the same service and represents an added toll imposed when consumers seek to access funds. By their reasoning, the $20 you want can cost you $4.00 in fees if you go to another bank's ATM.

Banks argue that ATMs are a costly service and that the fees are vital if they hope to compete with the unregulated ATMs that are not owned by banks. That fast-growing category of ATMs is not a target of legislation.

Santa Monica's entry into the struggle came in the spring when the city attorney's office was asked to examine the issue and see if the city had legal authority to impose such a ban. Two states, Iowa and Connecticut, have imposed similar bans. In California, Santa Cruz, Berkeley and San Francisco have also been the site of ban-the-fee efforts.

San Francisco legislators ducked the issue and the matter was put onto a ballot to be voted on in November. In Berkeley, an ordinance was tabled indefinitely despite an initially enthusiastic response by the city council. At last report Santa Cruz was still considering an ordinance. In Sacramento, Sen. Betty Karnette (D-Long Beach) authored legislation (SB 270) to accomplish the same purpose. It failed in committee in May but Karnette reportedly plans another attempt.

City lawyers have found no legal grounds to stop the council from passing the ordinance. A Northern California legislator asked the California Attorney General for his opinion on the legality of a ban, but the formal reply has not been handed down.

A ban has the strong backing of Councilman Mike Feinstein who finds the surcharges "obscene."

"We can't get to our money without paying a toll at the end of the bridge," Feinstein has said. He feels that this is a basic consumer protection issue and that government has been "delinquent" in protecting the consumers - particularly those who use ATMs frequently.

It is definitely a big bucks issue. No one knows how many ATMs there are in Santa Monica, but John Golinger, consumer program director for CALPIRG, a consumer protection organization, estimates that there are 11,000 bank owned ATMs in California. A further 2,000 are owned by credit unions and up to 8,000 are independently owned or leased to retail outlets or even individuals.

And those 8,000 independents are key players in this game because they are not targeted under the legislation. If they become more profitable, the argument runs, they will proliferate, and if banks cannot compete they will shut down or sell their own ATMs.

But opponents of the surcharge turn the argument around. They note that any person who enters a convenience store pays the exact same fee to use its ATM. At a bank, however, customers are charged different fees depending on which bank they use, so the fees are a marketing tool to attract or reject customers.

Golinger thinks that the banks are also trying to use the fee to ruin competitors. If you bank at a small bank with few ATMs, he points out, you will inevitably use "foreign" ATMs. The fees you run up will act to drive you to a bigger bank with more ATMs to use to evade the fee.

The attempt to ban the surcharge has drawn the ire of banking and business interests across the state. California Bankers Association spokesman John M. Stafford calls the efforts an unconstitutional assault on consumer choice.

The bankers say that independently owned and operated ATMs are increasing rapidly in number. In fact, a recent drive down Ocean Park Blvd. took motorists past an "own your own ATM" banner."

Stafford says it is unconstitutional to deny banks the right to a surcharge if the independents are left free. Yet all the legislation is aimed at banks. He sees that as an unacceptable "anti-bank" assault.

The bankers claim that the boom in non-bank ATMs is fueled entirely by the right to charge fees - some higher than bank fees. Stafford says all the bank fees are justified and do not constitute a double charge.

Stafford denies that fees work to cripple smaller banks. Fewer than two percent of consumers switch banks to avoid fees, he claims, and says that the smaller banks have no objections to the fees. These banks sometimes charge such fees themselves, or use their "no-fee" status as a draw. Banks small and large lined up shoulder to shoulder against the proposed San Francisco legislation, the association says.

Predictably, Golinger and Stafford have opposing views on why previous legislative attempts have failed. Golinger says legislation was held back because the banks argued that the fee was new and the marketplace had options and would work against the fee. The legislature accepted the argument, he believes, but has been proven wrong.

Now, legislators are waking up and moving into action. Stafford, however, claims that the fees have insured customer convenience by fueling ATM growth and that the "discredited economic theories" behind the ban attempts have been rejected.

The bankers say that the surcharge fees have resulted in more ATMs being built, with more convenience and even the appearance of "next-generation" ATMs that also sell stamps and tickets. The bankers also say you can avoid fees by using your own bank's ATM's or by getting cash at 82,000 point of sale locations - buy a candy bar at the supermarket and get $20 back.

The bankers also argue that people pay the fee intentionally. Stafford says that 60 percent of ATM surcharge revenue comes from 20 percent of ATM users - who, by California law, must be informed of the fee before it is charged.

ATMs are not a low-cost service to operate, Stafford argues, and must enact more than 1,000 transactions a month to cover costs. The machines cost $30,000 to $60,000 each and there are large rental and operational costs. Those costs include repair, leasing, cash replenishment, network fees, phone lines and revenue sharing.

Finally, the bankers warn surcharges will mean that many bank ATMs will be shut down or sold, that the development of the industry will be stifled, and that banks may simply ban non-customers from using their ATMs.