Community financial institutions, fearful of losing customers to larger banks with bigger automated teller machine networks, are forming a new type of anti-surcharge alliance.

Instead of agreeing not to surcharge customers of any institution-as smaller banks have been doing in many pockets of the country-these banks are banding together to surcharge cardholders of financial institutions outside their alliances.

All banks, thrifts and credit unions within the partnership agree to let one another's customers use their ATMs free.

Community banks have long rallied against ATM fees, which put banks with fewer ATMs at a disadvantage. To give customers access to as many surcharge-free machines as possible, banks in states including California and Massachusetts have formed partnerships in which they agree not surcharge customers of any foreign institution.

But many banks that joined that type of alliance have found the arrangement too costly. As an alternative, they have devised the hybrid scheme of holding customers of alliance members harmless and levying fees on customers of nonmembers.

The policy is known as "selective surcharging."

"The fundamental notion that is that there is a sizable number of community banks and others who are interested in facilitating a no- surcharge environment," said Alan Pohlman, executive vice president of Carmody & Bloom of Ridgewood, N.J.

Mr. Pohlman said the strategy makes financial sense, as it allows the banks to reap some revenue from surcharges. But he questioned the need for the alliances, saying consumers have grown accustomed to ATM surcharges and community banks might not be able to sign up enough machines to make a difference.

Another complicating factor for the selective surcharge alliances are traditional operating rules at regional and national ATM networks, which state that members cannot favor one institution over another.

A few networks have changed their rules to accommodate the new groups. Others are holding fast to the policy of nondiscrimination, and some are reassessing their policies.

One new alliance, Intercept Switch, was formed in Atlanta last month to take advantage of an amendment to Georgia banking laws that allows financial institutions to surcharge selectively. The group will run transactions through the Pulse network, which also has changed its rules.

Intercept has signed up 100 institutions in nine southern states, but various state laws and network rules have prevented most members from using the service.

The only ones up and running on the system are 14 community banks in Georgia, who are waiving surcharges on one another's customers.

Intercept "will help community financial institutions level the playing field versus the large regional players," predicted Jeff Berns, vice president of Intercept.

One Intercept bank, Bartow County Bank in Cartersville, Ga., has begun charging non-Intercept customers $1 per transaction.

Fee-free machines are "another product we can offer customers and be competitive," said Anderea Williams, a vice president and cashier at Bartow.

For Bartow, a member of the Honor regional network, membership in Intercept was also made possible by Honor's decision last year to amend its nondiscrimination rule.

Thomas O. Bennion, president and chief executive officer of Honor Technologies Inc., said regulating interbank surcharges was not a concern. "The market over time will take care of it," he said.

Stan Paur, president and chief executive officer of Pulse, said interest among members banks compelled that network to drop the nondiscrimination rule.

"Our office had received a number of inquiries from members that wanted to strike arrangements between other institutions," Mr. Paur said. "In some cases we found out that, in fact, people were already doing that without informing us."

Other networks have reached different conclusions. Star System Inc. of San Diego, Cash Station Inc. of Chicago, and Magic Line Inc. of Dearborn, Mich., have all decided not to allow the practice.

"We are extremely concerned about member confusion," said John Bascom, president of Magic Line. "We believe there ought to be a consistent approach."

Other networks have stepped into selective surcharging more tentatively. Shazam, of Johnston, Iowa, has permitted a subset of members-most in Missouri-to begin the practice. MasterCard International has kept nondiscrimination for its Cirrus network, but has amended the rule to allow the formation of bilateral agreements, a spokesman said, effectively leaving room for selective surcharge groups.

Visa U.S.A.'s Plus network has rejected the idea altogether.

"The Visa Plus network has always maintained regulations which are designed so that Plus cardholders are treated no less favorably than any other member's cardholder," said Susan Forman, a Visa spokeswoman.

Philip A. Valvardi, president of MAC, the regional network owned by Electronic Payment Services Inc. of Wilmington, Del., said his company is evaluating its policy. When MAC's 25-member advisory council meets in February, it will consider whether a rule change to permit selective surcharging would compromise business goals.

"We do have some concerns how these types of things would impact the brand itself and the network," Mr. Valvardi said.

Though banks, thrifts and credit unions in the South have the blessing of Honor, they might run into some opposition with the national networks. "We encourage them to go out there and talk with any networks they have relationships with," said Mr. Berns of Intercept.

David Lipkin, a partner at Drinker, Biddle & Reath of Philadelphia predicted that the issues involved in selective surcharging would lead to litigation as the networks try to protect their brands.

"You're going to have some problems about the erosion of their equity in the substantial investments" the networks have made, Mr. Lipkin said.

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