Automated Teller Machine (ATM) Fees: Legislation and Issues

CRS Report for Congress
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Automated Teller Machine (ATM) Fees:
Legislation and Issues
Pauline Smale
Economic Analyst
Government and Finance Division
Congressional interest in the structure of fees associated with ATMs (automated
teller machines) was increased as a result of a 1996 Visa U.S.A. and MasterCard
International decision. Effective April 1, 1996, the two companies repealed their policies
that banned surcharges at ATMs for the national networks they operate. An ATM
surcharge refers to a fee charged directly to the consumer by an ATM owner or operator,
not the institution of deposit. Until this action, the great majority of ATM fees were
imposed by the account-holding institution. Pursuant to Federal Reserve Regulation E,
these fees must be disclosed to the consumer when an account is opened and in periodic
statements. The account-holding institution can charge its customer for using the
institution's own ATMs. The deposit-holding institution can also charge its customer for
using another institution's or a nonbank's ATM to access funds. The surcharge fee would
be in addition to fees charged by the account-holding institution. Rescinding the ban and
the imposition of surcharge fees has been controversial. Several bills to impose a federal
ban on surcharges have been introduced since the ban was repealed but no further action
was taken. Congress did include ATM fee disclosure provisions in P.L. 106-102. The
issue of imposing a federal ban on surcharge fees has resurfaced in the 107th Congress.
This report will be updated as warranted.
The first ATMs introduced in the early 1970s were located on the premises of the
depository financial institutions that owned them. Consumers could only use an ATM
operated by their account-holding institution. As ATMs became more familiar and the
volume of ATM transactions grew, ATM networks were developed. Networks provided
a way to share the costs of ATM technology, and with them the number of off-premise
machines grew. Regional and national networks allowed consumers to access their
accounts using ATMs owned and operated by institutions or nonbanks with which they
had no account relationship. Networks greatly expanded consumer use of ATMs. The

Congressional Research Service The Library of Congress

networks presented an opportunity for smaller institutions to become involved by reducing
their investment costs. Some institutions only issue ATM access cards and pay network
fees to use terminals owned by others.
As the business of ATMs grew, so did the general trend towards imposing fees on
transactions. In 1976, 5,900 machines had been installed and only 8% of the ATM bank
operators charged transaction fees.1 By 1982, 38,000 machines had been installed, and2
still only 16% of the ATM bank operators charged transaction fees. By the mid-1990's
the most common ATM fee levied was for transactions at ATMs owned and operated by
others (referred to as “nonproprietary” or “foreign” ATMs). Arrangements for using
“foreign” ATM’s are usually made through regional or national network agreements. The
account- holding institution has the option of charging its customers a fee for transactions
initiated at foreign ATMs. By year-end 1995, there were 122,706 ATMs; 9.6% of banks
charged their customers fees at the banks' own ATMs, and 85.3% charged for transactions
at nonproprietary ATMs.3 Traditionally, ATM surcharges were not imposed because they
were prohibited by the networks.
Fees are also paid by the institutions who are network members. There are three
basic categories of network fees. The network may charge a fee to be a member. The
second fee category is a switch fee, this fee is paid by the account holding institution to the
network organization for the costs of routing a transaction initiated by the cardholder.
The third type of fee is an interchange fee, this fee is paid by the account holding
institution to an ATM owner when the cardholder uses a nonproprietary ATM.
As consumer acceptance of ATM technology grew so did consumer demand for this
convenient means of accessing their funds at locations away from their financial institution.
Off-premise ATMs have been installed at increasingly remote locations such as airports,
rail stations, hospitals, prime tourist locations, stadiums, and cruise ships. Operators of
these terminals have found them to be more expensive to maintain for various reasons,
including cyclical usage, higher rental costs for machine space, security needs, and upkeep
of the terminal. According to them, a surcharge was needed to recoup investments and4
generate income from consumers using the services. Visa and MasterCard responded to
these developments by rescinding their ban on surcharges at ATMs operated by members
of their networks. After the 1996 decision other networks and ATM owners followed suit
and imposed surcharges.

1 Lipis, Allen H., Thomas R. Marschall, and Jan H. Linker. Electronic Banking. New York, John
Wiley & Sons, 1985. pp. 8 and 13.
2 Ibid., pp. 8 and 13.
3 Philip Hudson, The American Bankers Association, and Governor Lawrence B. Lindsey, The
Federal Reserve System, in statements before the Subcommittee on Financial Institutions and
Consumer Credit of the House Banking and Financial Services Committee on April 24 and 25,


4 See for, example, Cirrus System, INC., Statement Before the Financial Institutions and Consumer
Credit Subcommittee on Banking and Financial Services, April 24, 1996, p.3; and Paul Allen, Visa
U.S.A., Inc., Statement Before the Financial Institutions and Consumer Credit Subcommittee of
the Committee on Banking and Financial Services, April 24, 1996, p.8.

A major concern behind the surcharge controversy is that this fee is in addition to the
fee a consumer's own financial institution may impose for a foreign ATM transaction. The
consumer can be required to pay twice for one transaction.
The Electronic Fund Transfer Act and the Federal Reserve's Regulation E, which
implements the Act, contain disclosure provisions that affect ATM transactions. When a
consumer opens an account or requests an ATM access card, all fees charged by the
account-holding institution must be disclosed in writing. Information on fees must also
appear on periodic statements. In addition, the consumer must be notified (in writing) 21
days in advance of any change in fees. Regulation E also requires disclosure of ATM
surcharges for non-customer transactions at the ATM location by a sign posted at the
terminal. As an alternative, the ATM operator has the option of displaying the fee on the
terminal screen, permitting the consumer the option of canceling the transaction to avoid
the fee. Surcharges must also be disclosed on the terminal receipt.
Both the Visa and MasterCard systems ("Cirrus" and "Plus") have disclosure rules
of their own. Members of their networks must, if they impose surcharges on non-
customers, both post a sign at the ATM with the surcharge structure displayed and display
the surcharge on screen through interactive prompts that give the customer the option of
canceling the transaction.
The Practice of Surcharging
The Board of Governors of the Federal Reserve System and the General Accounting
Office (GAO) have conducted surveys for the purpose of quantifying the practice of
surcharging by banks and thrifts. The Federal reserve publishes an annual report to
Congress on fees and services at depository institutions. The report includes information
on ATM fees. The GAO has conducted two surveys on ATM deployment and surcharge
fees in response to Congressional requests for this information.
The most recent Federal Reserve report5 is based on two surveys conducted in June
of 1998 and 1999. The surveys collected data from approximately 700 banks and 350
savings associations (thrifts). The surveys found about 87% of the banks and 75% of the
thrifts offered ATM services in 1999, levels that did not significantly change from 1998.
In 1999 about 83% of the banks that owned ATMs imposed surcharges compared to
about 78% in 1998. About 70% of the thrifts imposed surcharges in 1999 compared to

57% in 1998. In 1999, the average fee at banks was about $1.26 up from $1.20 in 1998.

The increase at thrifts was smaller, from $1.15 in 1998 to $1.18 in 1999.
The GAO has published two reports6 on ATM deployment and surcharge fees in
response to congressional requests for information. The reports are based on survey data

5 Board of Governors of the Federal Reserve System. Annual Report to the Congress on Retail
Fees and Services of Depository Institutions. Washington, July 2000. 162p.
6 U.S. General Accounting Office. Automated Teller Machines: Banks Reported That Use of
Surcharge Fees Has Increased. Washington, May 1997. 24p. GAO/GGD-97-90 and Automated
Teller Machines: Survey Results Indicate Banks’ Surcharge Fees Have Increased. Washington,
April 1998. 28p. GAO/GGD-98-101.

collected in February 1997 and February 1998. Both surveys were limited by time and
resource constraints. Information was not collected from either credit unions or nonbanks.
In 1997 data was collected from a total of 246 randomly selected banks and thrifts.
The 1998 survey was expanded to 501 institutions. Based on the 1997 and 1998 surveys,
GAO estimated approximately 70% of all U.S. banks and thrifts operate ATMs. The
survey results did indicate an increase of about 13% in the total number of ATMs deployed
between February 1997 and February 1998. In addition, about 66% of this growth was
attributed to ATMs located off-premise.
GAO estimated about 39% of the institutions operating ATMs imposed a surcharge
in 1997 and in 1998 that number increased to about 64%. In 1997 the average surcharge
fee was $1.17 while the most common charge was $1.00. In 1998 the average fee grew
to $1.27 and the most common charge rose to $1.50.
The GAO also obtained information on withdrawal transactions per ATM. The
survey results indicated the average number of withdrawal by account holders decreased
by 15% from January 1997 to January 1998. During the same time period the average
number of non-customer withdrawals declined by about 24%.
The data collected by the GAO and the Federal Reserve indicates the surcharge fee
quickly became commonplace after the ban was lifted in 1996. Also the amount of the
surcharge fee is rising. GAO survey results indicate that some ATM cardholders are
avoiding surcharges by not using foreign ATMs. At the same time, the increase in the
number of off-premise ATM installations indicates consumer demand for access to funds
at remote locations. The growth in off-premise installations also indicates that these
terminals must be profitable to their owners.
Ongoing Policy Issues
Oversight hearings provided Congress with a forum to frame the issues and monitor
the impact of surcharges. Major concerns voiced at those hearings are summarized below.
Opponents state the surcharge is part of the generally unwarranted trend of more
numerous and higher fees and service charges being imposed by depository financial
institutions on their customers. The surcharge is considered particularly onerous because
the consumer is paying twice for one ATM transaction (any fee for use of a foreign ATM,
and the surcharge).
The surcharge is viewed as a competitive disadvantage by some smaller banks and
thrifts. These institutions fear their customers will shift accounts to larger institutions with
broad-based ATM ownership to avoid fees. The up-front cost of ATMs is a major reason
why many of these institutions joined networks.
Opponents also argue low-income consumers will be disproportionately affected by
the new fees. They argue that consumers living in neighborhoods poorly served by
financial institutions may have few options to avoid using an ATM with a surcharge. In

addition, consumer advocates believe an ATM user should be made aware of all possible
ATM fees at the terminal location.
Proponents of allowing surcharge fees view access charges as part of the evolution
of the ATM business. Surcharges defray the costs of providing ATM services in low-
volume areas and in expensive off-premise locations. In addition, ATMs now provide
many more services than the original cash dispensers, and upgrading technology has
resulted in increased costs. Proponents state that rescinding the surcharge ban does not
mean that the new fees will be imposed by all owners on all ATM terminals; the
marketplace will have a great influence on these decisions.
Proponents also argue that the current Regulation E disclosure provisions for
surcharges and other ATM fees provide consumers with all the information they need.
Noting that deposit-taking institutions have a large variety of account arrangements with
their customers that can result in a number of different fee structures, they contend that
it would be an overwhelming task for the terminal owner or operator to provide
information on all the alternatives offered by account-holding institutions.
Legislation and Regulation
The 1996 policy change that permitted surcharges at ATMs was controversial and
the fees continue to draw criticism. Legislation introduced in the 104th, 105th, and 106th
Congresses to ban surcharges did not pass. P.L.106-102 enacted on Nov.12,1999, does
not reinstate the ban but the statute addresses disclosure of surcharge fees.
P.L. 106-102 requires disclosure of surcharges imposed by ATM owners on a non-
customer ATM user. ATM operators assessing surcharges have to post a notice on the
machine stating that a fee will be charged. In addition, a notice stating the amount of the
surcharge will appear on the screen, when the consumer initiates the transaction, giving
the consumer the option to proceed with the transaction after receiving the notice. A
paper notice issued from the ATM machine may be used in lieu of the screen posting if it
is issued before the consumer is irrevocably committed to the transaction. In addition, the
Act requires that a notice of the possibility of surcharge fees must be provided to the
consumer when an ATM card is issued.
On March 1, 2001, the Board of Governors of the Federal Reserve System published
a final rule (which amends Regulation E) to implement the ATM disclosure provisions
contained in P.L.106-102. While the rule was effective immediately, mandatory
compliance was delayed until October 1, 2001 to allow ATM operators time to make
needed system changes.
The Act also required the GAO to conduct a study and report to Congress on the
feasibility of requiring a notice of all possible fees at ATM terminals. In July 2000, the
GAO issued a report exploring the feasibility of providing real-time (the moment at which
the cardholder performs an ATM transaction) disclosure of all possible fees.7 Industry
representatives interviewed for the report agreed real-time disclosure was technically

7 U.S. General Accounting Office. Automated Teller Machines: Issues Related to Real-time Fee
Disclosure. Washington, July 2000. 39p. GAO/GGD-00-224.

feasible but would require extensive restructuring by the industry. They stated the time
and costs associated with the types of changes required could also be extensive. The costs
of implementing real-time disclosure could lead to higher fees.
The issue of surcharge fees has resurfaced in the 107th Congress. Legislation, H.R.
1047, addressing ATM fees was introduced on March 15, 2001. This bill does not ban
surcharge fees altogether but disallows surcharging at ATMs that display paid advertising.
The intent is to prevent consumers from paying a surcharge for using an ATM that
generates ad revenue to cover costs. No further action has been taken on this legislation.