Despite a gathering political firestorm, bankers look back with no regrets at the year since MasterCard and Visa dropped their bans on automated teller machine surcharges.
Machine deployments are up, as are the profits resulting from the fees. But the industry has suffered in a public relations sense and legislators are fuming about consumers' footing a bigger bill.
"We've seen almost exactly what we thought," said William G. Raymond, senior vice president in charge of ATMs for BankAmerica Corp.
"There has been some decline in the short run of foreign transaction volume," he said, referring to transactions that customers make at machines not owned by their banks. "Certainly there's been a rush to increase the number of ATMs in the marketplace."
ATMs, once looked upon as a way for banks to save money on labor costs, have become profit centers, sprouting up on corners, in restaurants, hotels, and shopping malls where consumers might pay an extra $1, $2, or more for cash withdrawals.
The remote deployment strategies spurred record ATM sales last year-in excess of 33,000 machines, 40% more than in 1995, according to Bank Network News, an industry newsletter.
Carmody & Bloom Inc., a Ridgewood, N.J., consulting firm, said 65% of U.S. charged use fees to noncustomers as of February, compared to 40% last August.
Before last April, 14 states allowed surcharging, but the company did not track the trend.
"I suspect it will get to the 80% mark within two years," said Alan Pohlman, executive vice president of Carmody & Bloom.
The nationwide move to surcharging-before last April, 14 states allowed it-was spurred by changes in the rules of MasterCard's Cirrus network and Visa's Plus System. It attracted unfavorable media attention and protests from consumer groups.
"People hate surcharges," said Janice Shields, a consumer advocate and director of the Institute for Business Research in Washington. "They know they're getting charged twice for something that saves banks money."
"Consumers always react negatively to price increases," said Mr. Raymond at BankAmerica. "I think banks have done a good job of managing their costs and providing the value that customers want."
He said many consumers are willing to pay for convenience-the rallying cry of the surcharge movement.
Bank of America, the largest bank deployer of ATMs, became the first major California institution to impose the fee last November. It was followed by Wells Fargo & Co. Both charge $1.50 per transaction to noncustomers, while the majority of banks charge $1 or less.
Mr. Pohlman sees prices trending upward. He estimated the new fees could add $1 billion annually in aggregate revenues, yielding a net profit of nearly $1,000 per machine each month.
Surcharging has raged through the Southeast and Southwest, reaching almost 90% of ATMs. In the West, the trend shifted into high gear over the past six months, with 87% now charging the fee, according to Carmody & Bloom. (Visa's Plus network said only 36% of its U.S. machines, or 50,000 units, surcharge.)
Though bankers contend surcharging is their right as owners to get what the market bears, the practice has peeved politicians at the state and federal level, most notably Alfonse M. D'Amato, chairman of the Senate Banking Committee. He denounced the fees as "double charges" and "a monopolistic practice that eliminates competition and distorts the free market."
The New York Republican vowed to reintroduce legislation from the last Congress that would ban surcharging. He has commissioned a study of the practice by the General Accounting Office. Many state houses are also considering legislation to regulate or ban the fees.
In Washington, the pending legislation could stop the top four ATM deployers from charging the fee for nine months, giving community banks the opportunity to deploy more machines.
Connecticut's attorney general is fighting to stop Fleet Financial Group from implementing the fees in that state. Fleet is the only big bank in New York to surcharge so far, provoking Sen. D'Amato's ire.
Shared networks were built on the premise that the customer's bank pays an interchange fee to the ATM owner. Bankers who support surcharging often neglect to mention that interchange income-ranging from 30 cents to 50 cents per transaction-when they claim noncustomers are getting a free ride.
That fee, plus a markup, is often passed on to the consumer along with the surcharge, which could bring the total to more than $3 for each withdrawal. Hence the lawmakers' accusation of a "double-dip"-and their concern that smaller competitors are disadvantaged.
"I bet you'll see legislation," said Diane Casey, the Washington-based director of financial services consulting for Grant Thornton of Chicago. "If you're looking for an issue that's warm and fuzzy with consumers, this is it."
Though surcharging has been characterized as a big-bank versus small- bank issue, a Grant Thornton survey of community bankers found that 32% are surcharging, and 16% of those that don't impose the fees plan to in 1997.
In California, the biggest banks' surcharges sparked a countermovement from some formidable competitors, including Union Bank of California, Sumitomo Bank of California, Sanwa Bank, and Glendale Federal Bank. Along with other thrifts and the CU Cooperative System representing 300 credit unions, the group conducted a media campaign to publicize their no- surcharge network of more than 2,000 ATMs.
"Consumers in the California market feel the bigger banks are gouging them," said Gene Galloway, executive vice president, Sanwa Bank. "We're using this as a business tool to draw new customers."
Similar movements are afoot, typically among independent banking groups, in Kentucky, Pennsylvania, and the Northeast.
While bankers may disagree on surcharging, they generally agree about legislation. They don't want the interference.
"We continue to oppose legislation to ban surcharging," said Viveca Ware, director of payment systems for the Independent Bankers Association of America.
However, in January the trade group sent letters to Cirrus and Plus requesting rule changes that would allow ATM owners to choose between surcharging and interchange income, eliminating the controversial double charge. It also wants to allow banks to reciprocally waive surcharges with other banks, which goes against the nondiscrimination policies of the national networks.
"Our position is the market should decide pricing, not a Washington- based solution," said John Hall, spokesman for the American Bankers Association.
An ABA survey of 1,000 consumers over the weekend of March 21 found that nearly 60% of consumers have changed their ATM use patterns. Only 28% of consumers interviewed said they had paid the fee in the past 60 days.
Thomas O. Bennion, chairman and chief executive officer of Honor Technologies, the Florida-based company resulting from the merger of the Honor, Most, and Alert networks, said volumes had been depressed since surcharging went into effect.
Though he has seen a "slight uptick in the past couple of months, growth is nothing like it was before surcharging." Mr. Bennion's network covers much of the Southeast, from Washington to Florida, where surcharging is rampant.
"We estimate 90% of the ATMs in the network are surcharging-big banks, little banks, everybody," said Mr. Bennion. "You can't blame them, there's a lot of money there."
But he pointed out that with the sharp increase in ATM deployments, more machines are chasing after the available transactions, reducing volume per machine. Even so, an ATM that surcharges can be profitable with far fewer transactions.
The smell of money is attracting new, nonbank competitors. IFS Financial Corp., a Woodlands, Tex.-based company with subsidiaries in insurance, mortgages, and investment advisory services, will invest $3 million to $5 million in ATMs. The company is deploying 270 machines in convenience stores at Conoco Oil Co. gas stations through a joint venture with McLane FSP, a subsidiary of Wal-Mart Stores Inc.
Hugo Pimienta sees a "window of opportunity. We want to roll out 2,000 ATMs within the next couple of years." He added, "If there was not a surcharge we wouldn't be doing this."
Ms. Casey of Grant Thornton recalled words she heard from a taxi driver in Phoenix: "Some buddies and I are forming a company to distribute ATMs to nightclubs. They're going to charge $5 per transaction."
"There are a lot of people getting in based on a poor understanding of what it takes to be successful-putting ATMs in the wrong places with poor estimates of volumes," said Mr. Raymond of Bank of America. "All those dentists sinking $200,000 into ATMs will find out they would've been better off in the stock market."
