Union Bank of California is doing an about-face on ATM surcharging.

The San Francisco-based bank is pulling out of a coalition of California financial institutions that had agreed not to surcharge for automated teller machine transactions. Beginning Aug. 30, Union will impose a $1.50 fee on noncustomers who use one of its 372 ATMs.

"In the final analysis, we need to expand our ATM network in order to remain competitive, and surcharging will allow us to do this," said D. Jeffrey Morrow, vice president for community banking.

Under the non-surcharging regime, Union was "limiting opportunities to increase services for own clients while providing a valuable convenience for noncustomers," he said.

Union, with $30.9 billion of assets, is the largest institution in the California coalition, known as the No-Surcharge ATM Alliance. The group is one of many networks formed by small banks across the country to compete against banks with large fleets of ATMs.

The founders of these networks hope that the appeal of free ATM access would outweigh the convenience of having a machine on every corner. In California the No-Surcharge ATM Alliance has 2,800 ATMs, significantly less than the 4,400 that Wells Fargo & Co. claims and the 7,700 at BankAmerica Corp.

Mr. Morrow said alliance institutions feared their customers would move their accounts to the two California giants to avoid having to pay surcharges when they used an ATM not owned by their bank.

"We haven't seen any evidence of that happening," he said.

What is more, Mr. Morrow said, some alliance members had dropped out of the group, removing its eye-catching decal with a red circle and slash through the word "surcharge" from their ATMs. Most left because they were bought by banks or thrifts that surcharge.

"Several of the institutions we have partnered with have decided they need to start surcharging," Mr. Morrow said. In fact, nearly 70% of the industry imposes surcharges, he said.

Industry observers said that Union Bank's decision signifies that the economics of allowing noncustomers to use ATMs for free often just do not add up.

"They were counting on a significant increase in traffic at their machines, both to boost interchange revenue and to attract new customers," said Joe Belew, president of the Consumer Bankers Association. "Neither of those strategies worked."

The ability to surcharge gives banks an incentive to deploy machines in more convenient locations for customers, he added.

"If you don't have that fee allowed, it is absolutely ironclad true that you're not going to have as many machines," Mr. Belew said.

However, consumer groups counter that banks are trying to rationalize the imposition of yet another fee on consumers.

"If the convenience argument that banks make were true, they would only be surcharging at ski areas and casinos," said Edmund Mierzwinski, consumer program director at U.S. Public Interest Research Group.

"But they surcharge everywhere. They are desperate to spin their gouging of the customer."

The No-Surcharge ATM Alliance included Sumitomo Bank of California, Glendale Federal Bank, Bayview Federal Bank, Sanwa Bank of California, Coast Federal Bank, and several small community banks. CU Cooperative System, an association representing about 300 credit unions with 1,300 ATMs, is also part of the group.

Sumitomo agreed in March to be purchased by Zions Bancorp of Salt Lake City, which imposes ATM surcharges. Glendale Federal dropped out after it was bought in February by First Nationwide Holdings, the parent of Golden State Bancorp. Coast Federal was acquired by H.F. Ahmanson & Co., which was then bought by Washington Mutual Inc. in March.

While Mr. Morrow said that he expected the alliance to continue after Union Bank's departure, other industry executives predicted that it would fall apart as more and more institutions realize that surcharging is a healthy source of fee income.

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