ATM Fee Backlash

Local Rebellions Against Unfair Surcharge Spread

The ATM surcharge has more than doubled the cost to consumers for using foreign ATMs. The surcharge contributes dramatically to the profits of ATM owners, lessens the benefit to consumers of shared ATM networks and encourages the growth of bigger banks.


Four years ago, on April 1, 1996, the national ATM networks, Plus and Cirrus, first allowed their member banks to impose a second double fee, called a surcharge, on non-customers using their ATMs. Before 1996, ATM owners in shared ATM networks had always been compensated by receiving part of the so-called “foreign fee” that most banks already charged their own accountholders who used an ATM owned by another bank. The part sent to the ATM owner is called an “interchange fee.” Even in those circumstances where a bank didn’t impose a foreign fee on its own accountholders using others’ machines, the ATM owner always received an interchange fee, which is a bank-to-bank payment. The network itself also receives a fee from the consumer’s bank, called a “switch” fee.

That second fee now received by ATM owners, the ATM surcharge, has more than doubled the cost to consumers for using foreign ATMs and isn’t shared with anyone. The surcharge contributes dramatically to the profits of ATM owners, lessens the benefit to consumers of shared ATM networks and encourages the growth of bigger banks. According to both the Federal Reserve Board’s Annual Reports to Congress and PIRG studies, bigger banks charge bigger fees, across the board. Not only is ATM surcharging unfair to consumers, since it is charging them twice for one transaction, it is also anti-competitive, since it encourages consumers to switch their accounts to bigger, higher-fee banks, ultimately limiting consumer choice.

In response to the unfair, anti-competitive surcharge, the Congress and more than half the states sought, unsuccessfully, to ban surcharges between 1996-98. Not surprisingly, the powerful bank lobby was able to stymie these surcharge repeal efforts. Advocates came closest in Massachusetts, where a surcharge ban passed the Senate unanimously and had a majority of House cosponsors, but was not brought up for a vote by the House Speaker. Two state Banking Commissioners, in Iowa and Connecticut, did use existing authority to impose administrative bans on surcharges. Meanwhile, the cost of using foreign ATMs rose from 1995’s $1, to 1999’s $2.50 or more.


Cost of “Convenience”

1995-1999 Rise = 151%




Foreign Fee









Data: U.S. PIRG


It appeared in the summer of 1999 that efforts to repeal the surcharge were dead. The courts had overturned the Iowa ban and the banks expected a similar decision in Connecticut. State legislative action was stalled. Then, however, the rebellion over unfair fees spread to the local level. Taking a page from the book of tobacco control and campaign finance reform advocates, opponents turned their attention to city surcharge bans. In October 1999, the City Council of Santa Monica, California voted to ban surcharges. On Election Day, November 2, 1999, San Francisco voters banned surcharges by a margin of 66-34%. Since then, several major cities, including New York and Chicago, began taking the first steps toward banning surcharges. On February 15, 2000, the town of Woodbridge, NJ banned surcharges, by a 9-0 vote. Meanwhile, in a little-noticed filing, the Pentagon proposed banning surcharges on all military bases. That decision is pending.

Following the victories by the California cities, the banks, aided by federal regulators, immediately obtained court injunctions against enforcement of the local laws, arguing that the National Bank Act preempts both state and local action over national banks. The cities, the states and consumer groups argue instead that the federal Electronic Funds Transfer Act clearly gives them authority over ATM fees.

Now, the two California cities are fighting to reinstate their bans in the Ninth Circuit Court of Appeals. The state of Iowa has asked the U.S. Supreme Court to reinstate its ban. Connecticut’s attorney general is fighting a legislative campaign to reenact that state’s ban, which was eliminated not by federal courts, but by a state court holding only that the Banking Commissioner misinterpreted his authority.

Throughout the battle, the banks have primarily made three arguments. First, they have argued that consumers got a free lunch before surcharges (and that surcharges are somehow not a second, double fee). Second, nationally-chartered banks and federal regulators have argued that the National Bank Act preempts any authority over them by either states or localities. Finally, banks have argued that the marketplace should decide the level of ATM fees, not lawmakers.

This paper attempts to do two things. First, it summarizes the status of ATM surcharge ban proposals across the country. Second, it examines, and provides evidence to dismiss, each of the banker’s arguments.