ATM Owners Must Follow Diverse State Laws

Getting money from an automated teller machine has become a common activity for most people. Moreover, it is also becoming more common for ATMs to do more than just dispense cash or take deposits.

The ATM is evolving into a machine that lets people do diverse things, such as download music or buy toiletries and greeting cards.

As interest in using the ATM for multiple consumer purposes grows, it is important for companies to know that owning and operating ATMs is a regulated activity in most states, even if the company is not a financial institution and even if the ATM currently only dispenses cash.

A state’s authority to regulate ATMs owned and operated by nonfinancial institutions is generally expressed in the banking provisions of state law but frequently is merely asserted by a state regulator as a matter of course. Many banking provisions of state laws only address financial institutions in connection with the operation of ATMs. As a result, some state banking regulators interpret the banking statutes to mean that all owners and operators of ATMs, even ATMs that only dispense cash, must comply with the banking provisions of state law.

However, some states have enacted legislation to expressly address the activities of ATMs that are not owned and operated by a financial institution. And other states regulate such ATMs under preexisting law. Ohio, for example, requires that ATM owners and operators be licensed according to the Ohio money transmitter law.

Because of the differing requirements of state laws, it is very difficult, from a regulatory perspective, for a nonfinancial company to set up ATMs nationwide. In almost every state, the nonbank ATM is limited to dispensing cash because other functions — such as taking deposits — would require a bank charter.

ATM rules and regulations vary greatly among the states; even the terminology differs from state to state. The machines are called everything from “electronic financial terminals” to “customer communication terminals” to “remote service units.”

Though most states do not prohibit a nonfinancial company from owning and operating ATMs that just dispense cash, almost 20 states either require state agency approval or notice. More than 10 of these states prohibit any ATM activity, even cash dispensing, unless the company enters into a sponsorship arrangement with a financial institution. The arrangement generally lets the nonbank operate the ATM but under the financial institution’s name.

It should be noted that some state banking authorities may require the sponsoring financial institution to have an office in the state. Moreover, some states may not recognize federal preemption of out-of-state, federally chartered financial institutions that sponsor ATMs and may apply their requirements to these institutions as well.

For example, in Nebraska all ATMs — even if they only dispense cash — must be owned by and operated under the name of a financial institution. However, a nonfinancial institution may make a sponsorship arrangement with any chartered financial institution as long as it is located in Nebraska. On the other hand, in Washington, D.C., there is no regulation of who owns and operates ATMs. Many convenience store ATMs in the capital are run by companies other than financial institutions. This may not be true much longer, however, because legislation is pending on ATM operations.

Other state law provisions cover fee disclosures, safety requirements, network requirements, and privacy, which are regulatory matters that may require compliance by whoever owns and operates an ATM. For example, more than 20 states have fee disclosure requirements, and one, Iowa, prohibits surcharging. ATM safety requirements are another fast-growing legislative concern in many states; however most such requirements address lighting and landscaping at outdoor ATMs.

Mr. Riley is a lawyer in the Washington office of Morgan, Lewis & Bockius.


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