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Item 8-B

City Council Meeting 10-5-99 Santa Monica, California

TO: Mayor and City Council

FROM: City Attorney

SUBJECT: Introduction and First Reading of an Ordinance to Prohibit Surcharges at Financial Institutions= ATMs

Introduction

Earlier this year, the City Council directed City Staff to prepare an ordinance regulating excessive fees charged by financial institutions for the use of their Automated Teller Machines (ATMs). The attached proposed ordinance has been written in response to the Council=s direction and is presented to the Council for first reading.

Discussion

The rates and types of fees charged by financial institutions have increased significantly in recent years. According to a study by the United States Public Interest Research Group (USPIRG), from 1992 to 1995 the rate of bank fees nationwide increased in an amount that is at least double the rate of inflation. Much of this increase has come from the imposition of new fees.

One of the new fees is a surcharge that most financial institutions now impose on non-account holders for using their ATMs. This charge is a Asurcharge@ or extra charge because these financial institutions already receive a payment (called an Ainterchange fee@) from the ATM user=s home bank for providing the service of the ATM. This cost, in turn, is passed on to the customer by his or her home bank, in the form of a Aforeign fee.@ Together, the surcharge and the Aforeign fee@ can total $4.00 for a mere $20.00 withdrawal. According to the USPIRG, the national average total is $2.57 per transaction, an amount that equals more than a 10 percent charge for withdrawing $20.00 of an account holder=s own funds. Since financial institutions are already being compensated for providing their ATMs to non-account holders, the surcharge bears no relation to actual cost.

The ATM surcharge is now almost universal in California. A recent survey by the California Public Interest Research Group found that 99 percent of bank ATMs in the state impose a surcharge, up from 45 percent only two years ago.

Imposition of ATM surcharges also raises serious anticompetitive concerns. Large financial institutions with more ATMs (in California, just two banks own more than 60 percent of the ATMs in the state) are able to impose higher costs on account holders of small institutions who in many cases have little choice but to use the ATMs of the large institutions. Account holders who wish to avoid these surcharges must move their accounts from small institutions to large ones. This presents an unusual form of price competition where institutions can gain customers by raising prices. Small banks and credit unions serve important functions in the local community by servicing segments of the population that might otherwise be neglected. Losing or even hobbling these efficient and low cost institutions harms all customers, but particularly the elderly and those on fixed incomes, who rely on these smaller institutions because of the higher rates of return and lower fees they offer. (A report released in July 1999 by the Federal Reserve confirmed that larger banks charge Asignificantly higher@ fees on average than smaller banks.)

Moreover, imposing an arbitrary surcharge for ATM use is anticompetitive and unfair since it removes any competition from the process of fee-setting. Without the surcharge, financial institutions negotiate interchange fees and other fees with the ATM networks (Cirrus, Star, etc.), and with each other. This form of negotiation serves to keep fees reasonable, since all parties have an interest in keeping their own costs down. However, when the consumer bears the full brunt of a unilateral new fee, he or she has no leverage to negotiate with the financial institution, and the result is unreasonable fees.

The surcharge ban is supported by the American Association of Retired Persons (AARP), the AFL-CIO, CalPIRG and USPIRG, among others. The ban is opposed by the banking industry.

The banking industry has raised several legal arguments in opposition to the proposed ordinance. First, it claims that the ATMs of Anational banks@ (such as Wells Fargo and Bank of America) and federal savings associations (such as Washington Mutual) would be exempt from the ordinance, since they are regulated exclusively by federal law. However, federal law only governs certain aspects of banking; it does not occupy the whole field. The federal statute that regulates ATMs is silent in the area of ATM fees. Moreover, that statuteBwhich covers national banks and federal savings associationsBexpressly allows the states to enact greater consumer protections than the federal law provides. The remaining legal arguments offered against the proposed ordinance are unpersuasive.

Several California cities are considering a ban on ATM surcharges. An ordinance containing such a ban was drafted and recommended by the San Francisco City Attorney, and is on the ballot in San Francisco=s November 1999 election. The states of Iowa and Connecticut have already adopted similar laws. In Connecticut, the banking industry=s legal challenges to the surcharge ban thus far have been unsuccessful. As to Iowa, a federal Court of Appeals recently ruled that the state=s ATM law (a comprehensive regulatory scheme which includes a ban on surcharges) could not be enforced as to national banks. However, Iowa is challenging the ruling; and in any event, it is not binding in California, where the appellate courts have repeatedly confirmed the power of states to regulate all banks, including in the area of ATM fees.

The attached proposed ordinance prohibits surcharges at ATMs owned by financial institutions, but does not apply to ATMs owned by other kinds of businesses (such as supermarkets). One reason for the distinction is that the anti-competitive problem described above does not exist with non-bank ATMs, since there is no built-in incentive for users to favor certain ATMs over others; bank-owned ATMs, by imposing the surcharge on non-customers, damage competition in a unique manner. The City Council could also opt to restrict fees charged by all ATM owners. However, because this is a new area of local regulation which the banking industry certainly will oppose, staff recommends the proposed limited approach for the time being and recommends that the City Council revisit the issue of scope of regulation in the future.

Budget/Financial Impact

The only anticipated financial impact of the proposed ordinance is the cost of enforcement, which will be undertaken by the Consumer Protection Unit of the City Attorney=s Office.

Recommendation

It is respectfully recommended that the accompanying ordinance be introduced for first reading.

PREPARED BY:
Marsha Jones Moutrie, City Attorney
Adam Radinsky, Deputy City Attorney
Claudia Thompson, Legal Admin. Staff Asst.

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City Council Meeting 10-5-99 Santa Monica, California

ORDINANCE NUMBER ___ (CCS)

(City Council Series)

AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF SANTA MONICA

ADDING SECTION 4.32.040 TO THE SANTA MONICA MUNICIPAL

CODE, PROHIBITING SURCHARGES TO NON-CUSTOMERS AT AUTOMATED TELLER MACHINES IN SANTA MONICA

THE CITY COUNCIL OF THE CITY OF SANTA MONICA DOES HEREBY ORDAIN AS FOLLOWS:

Section 1. Findings and Purpose. The City Council of the City of Santa Monica hereby finds and declares that:

A. In recent years, financial institutions have begun imposing new and exorbitant fees on consumers. These fees have been increasing at more than double the rate of inflation.

B. Many of these fees are imposed for services which were routinely provided without charge only a few years ago.

C. One particularly onerous new fee is a surcharge that financial institutions impose upon non-account holders for using their Automated Teller Machines (ATMs). This fee is in addition to the fee that financial institutions already charge their account holders for using another institution=s ATM. Together, these two fees total an average of $2.57 per transaction, which equates to more than a 10% charge for withdrawing $20.00 of one=s own funds through an ATM.

D. These exorbitant surcharges are not necessary either to compensate financial institutions for use of their ATMs or to finance new ATM machines because the institutions are already compensated. Financial institutions already receive a payment (called an Ainterchange fee@) from the ATM user=s home bank for providing the service of the ATM. This cost, in turn, is passed on to the ATM user by his or her home bank in the form of a Aforeign fee.@ Since financial institutions are already being compensated for providing their ATMs to non-account holders, the recently-enacted surcharges represent a form of pure profit that bears no relation to actual cost.

E. The imposition of double charges detrimentally impacts competition by giving large financial institutions an unfair advantage over small banks and credit unions, which tend to provide higher interest, lower fees, and more consumer-friendly service, particularly to the elderly and young people.

F. The surcharge is also anticompetitive and unfair since it removes any competition from the process of fee-setting. For more than twenty years, without the surcharge, financial institutions negotiated interchange fees and other fees with the ATM networks, and with each other. This form of negotiation served to keep fees reasonable, since all parties had an interest in keeping their own costs down. However, when the consumer bears the full brunt of a new fee, he or she has no leverage to negotiate with the financial institutions, and the result is unreasonable fees.

G. Federal and state laws do not remedy the deleterious effects of these surcharges. Local legislation is therefore essential to safeguard the general welfare in Santa Monica by protecting consumers from exorbitant and unfair fees and protecting smaller financial institutions from anticompetitive business practices.

Section 2. Section 4.32.040 is hereby added to the Santa Monica Municipal Code to read as follows:

Section 4.32.040 Automated Teller Machine Surcharges.

(a) Definitions. The following words and phrases shall have the following meanings when used in this Section:

Access. To use any function on the ATM, including cash withdrawal and fund transfer.

Access Device. A card, code, or other means of access to a customer=s account, or any combination thereof.

Automated Teller Machine or ATM. Any electronic information processing device that accepts deposits or dispenses cash in connection with a credit, deposit, or convenience account. The term does not include devices used solely to facilitate check guarantees or check authorizations, or which are used in connection with the acceptance or dispensing of cash on a person-to-person basis, such as by a store cashier.

Financial Institution. Any bank, savings association, savings bank, credit union, or industrial loan company.

User. A natural person to whom an access device has been issued for personal, family, or household use.

(b) Prohibition on Certain Fees. A financial institution may not impose a fee of any kind on a user for accessing an ATM of that financial institution located in the City of Santa Monica with an access device not issued by that financial institution.

(c) Enforcement and Penalties.

(1) Civil Action. Any person injured by a violation of this ordinance may enforce its provisions by means of a civil action.

(A) Any financial institution that violates this ordinance shall be liable to the person injured for the actual damages as determined by a jury, or a court sitting without a jury, but in no case less than $250.

(B) Any financial institution that violates this ordinance shall also be liable for reasonable attorneys= fees and court costs as determined by the court. In cases where the financial institution has engaged in a pattern of willful violations, the financial institution shall be liable for punitive damages not to exceed $5,000 per violation.

(2) Injunction.

(A) Any financial institution that commits an act or engages in any pattern and practice in violation of this ordinance may be enjoined therefrom by any court of competent jurisdiction.

(B) Actions for injunction under this subsection may be brought by any person injured by a violation of this ordinance, by the City Attorney, by the District Attorney, or by any person or entity which will fairly and adequately represent the interests of the protected class.

(3) Nonexclusive Remedies and Penalties. Nothing in this Section shall preclude any person from seeking any other remedies, penalties or procedures provided by law.

SECTION 3. Any provision of the Santa Monica Municipal Code or its appendices inconsistent with the provisions of this Ordinance, to the extent of such inconsistencies and no further, is hereby repealed or modified to the extent necessary to effect the provisions of this Ordinance.

SECTION 4. If any section, subsection, sentence, clause, or phrase of this Ordinance is for any reason held to be invalid or unconstitutional by a decision of any court of competent jurisdiction, such decision shall not affect the validity of the remaining portions of this Ordinance. The City Council hereby declares that it would have passed this Ordinance and each section, subsection, sentence, clause, or phrase not declared invalid or unconstitutional without regard to whether any portion of the ordinance would be subsequently declared invalid or unconstitutional.

SECTION 5. The Mayor shall sign and the City Clerk shall attest to the passage of this Ordinance. The City Clerk shall cause the same to be published once in the official newspaper within 15 days after its adoption. This Ordinance shall become effective 30 days from its adoption.

APPROVED AS TO FORM:

_________________________

MARSHA JONES MOUTRIE

City Attorney