    Automated Teller Machines: Issues Related to Real-time Fee Disclosure
    (Letter Report, 07/11/2000, GAO/GGD/AIMD-00-224).

    Pursuant to a legislative requirement, GAO provided information on
    real-time disclosure of foreign automated teller machine (ATM) fees
    levied by the card-issuing bank, focusing on: (1) alterations to the ATM
    system that would be needed to support real-time foreign fee disclosure;
    (2) estimated costs and timeframes associated with implementing
    real-time foreign fee disclosure; (3) potential competitive impact on
    ATM industry participants, defined to include various sized banks, ATM
    networks, ATM owners, and third-party processors; (4) potential impact
    on consumers; and (5) alternatives to real-time foreign fee disclosure.

    GAO noted that: (1) according to ATM industry representatives, real-time
    foreign ATM fee disclosure is technically feasible but would require
    extensive restructuring by all major participants in the ATM industry;
    (2)they stated that extensive alterations to the current infrastructure
    - hardware and software systems - would be needed to support both the
    real-time foreign fee disclosure scenarios GAO examined in detail and
    more simplified real-time disclosure options; (3) U.S, ATM system is
    built on technology that allows an ATM cash withdrawal or other
    electronic fund transfer activity to be performed with a single message
    transmission for authorization and settlement of the transaction; (4) to
    provide real-time foreign ATM fee disclosure, the ATM industry could
    adopt one of several possible disclosure scenarios; (5) each of these
    scenarios would require card-issuing banks, networks, and ATM owners to
    revise and upgrade their hardware and software, in addition to modifying
    functions such as message processing, calculation of ATM fees, and
    stand-in processing; (6) most of the industry representatives GAO
    contacted indicated that there were too many unknowns, including
    dependencies on other industry participants, for them to estimate with
    any precision the costs or timeframes involved with implementing
    real-time ATM fee disclosure; (7) cost estimates, for software and
    hardware changes alone, ranged from $5 million for a large third-party
    processor to tens of millions of dollars for large banks; (8) time frame
    estimates ranged from 2 to 3 years to implement real-time ATM fee
    disclosure; (9) some industry representatives suggested that the burden
    of real-time fee disclosure might fall more heavily on smaller firms and
    organizations; (10) if consumers are unaware of foreign fees for ATM
    transactions or dissatisfied with the way they are disclosed, then they
    might benefit from real-time fee disclosure; (11) however, the banking
    regulators reported that they received very few complaints on the
    disclosure of ATM fees; (12) some ATM industry representatives suggested
    other options for enhanced disclosure of foreign fees that would cost
    less than real-time disclosure; and (13) they suggested augmenting the
    existing required written disclosure with more prominent written
    reminders in monthly statements or modifying the general statement on
    the ATM screen that a consumer's bank may levy a fee in addition to the
    surcharge amount to include an average or range of the foreign fee
    amount.

    --------------------------- Indexing Terms -----------------------------

     REPORTNUM:  GGD/AIMD-00-224
         TITLE:  Automated Teller Machines: Issues Related to Real-time Fee
    	     Disclosure
          DATE:  07/11/2000
       SUBJECT:  Cost effectiveness analysis
    	     Fees
    	     Information disclosure
    	     Banking law
    	     Lending institutions
    	     Consumer education
    	     Electronic funds transfer
    	     Regulatory agencies
    	     Federal regulations
    	     Federal reserve banks

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    GAO/GGD/AIMD-00-224

    United States General Accounting Office
    GAO

    Report to Congressional Committees

    July 2000

    GAO/GGD/AIMD-00-224

    AUTOMATED TELLER MACHINES
    Issues Related to Real-time Fee Disclosure

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    B-284431

    Page 9GAO/GGD/AIMD-00-224 Automated Teller Machine
    B-284431

    July 11, 2000

    The Honorable Phil Gramm
    Chairman
    The Honorable Paul Sarbanes
    Ranking Minority Member
    Committee on Banking, Housing and Urban Affairs
    United States Senate

    The Honorable James A. Leach
    Chairman
    The Honorable John J. LaFalce
    Ranking Minority Member
    Committee on Banking and Financial Services
    House of Representatives

    As required by the Gramm-Leach-Bliley Act of 1999,1
    we explored the feasibility of providing real-time
    disclosure of all fees that would be charged to
    automated teller machine (ATM) cardholders during
    electronic fund transfers conducted at ATMs.2 A
    myriad of fees are associated with ATM
    transactions, including fees charged to the card-
    issuing financial institution and fees levied on
    the customer, either on a per-transaction basis or
    a monthly or annual basis. Customers are rarely
    charged a transaction fee when they use the ATMs
    of their card-issuing financial institution.3
    However, cardholders may be charged both a
    surcharge4 and a "foreign" ATM fee5 when they use
    an ATM that is not owned by the card-issuing
    financial institution. In this report, these
    financial institutions, which include banks,
    thrifts, and credit unions, will be referred to as
    "banks" except where distinctions among these
    institutions are relevant.

    As agreed with your offices, we focused our study
    on the real-time disclosure of foreign ATM fees
    levied by the card-issuing bank. Specifically, we
    obtained and analyzed information on (1)
    alterations to the ATM system that would be needed
    to support real-time foreign fee disclosure; (2)
    estimated costs and time frames associated with
    implementing real-time foreign fee disclosure; (3)
    potential competitive impact on ATM industry
    participants, defined to include various sized
    banks, ATM networks, ATM owners, and third-party
    processors; (4) potential impact on consumers; and
    (5) alternatives to real-time foreign fee
    disclosure.

    Results in Brief
    According to ATM industry representatives, real-
    time foreign ATM fee disclosure is technically
    feasible but would require extensive restructuring
    by all major participants in the ATM industry.6
    They said that extensive alterations to the
    current infrastructure-hardware and software
    systems-would be needed to support both the real-
    time foreign fee disclosure scenarios we examined
    in detail and more simplified real-time disclosure
    options. Currently, the U.S. ATM system is built
    on technology that allows an ATM cash withdrawal
    or other electronic fund transfer activity to be
    performed with a single message transmission for
    authorization and settlement of the transaction.7
    To provide real-time foreign ATM fee disclosure,
    the ATM industry could adopt one of several
    possible disclosure scenarios. Each of these
    scenarios would require card-issuing banks,
    networks, and ATM owners to revise and upgrade
    their hardware and software, in addition to
    modifying functions such as message processing,
    calculation of ATM fees, and stand-in processing.

    Most of the industry representatives we contacted
    indicated that there were too many unknowns,
    including dependencies on other industry
    participants, for them to estimate with any
    precision the costs or timeframes involved with
    implementing real-time ATM fee disclosure. The
    cost estimates, for software and hardware changes
    alone, that we were able to obtain from some
    industry representatives ranged from $5 million
    for a large third-party processor to tens of
    millions of dollars for large banks. Time frame
    estimates ranged from 2 to 3 years to implement
    real-time ATM fee disclosure.

    Banks, networks, and ATM owners of all sizes would
    likely incur significant fixed costs to install,
    test, and certify the hardware and software that
    would be needed to implement real-time ATM fee
    disclosure.  However, some industry
    representatives suggested that the burden of real-
    time fee disclosure might fall more heavily on
    smaller firms and organizations.  They suggested
    that economies of scale would give larger banks,
    networks, and ATM owners an advantage.
    Representatives of smaller banks predicted that
    they would be hurt if some larger banks chose to
    minimize the costs of disclosure by restricting
    access to their ATMs to their own cardholders.
    Finally, representatives of independent service
    organizations (ISO) suggested that the added costs
    of real-time disclosure could induce some ATM
    operators to shut down operations at some
    locations.

    The potential consequences of foreign fee
    disclosure may offset consumer benefits. If
    consumers are unaware of foreign fees for ATM
    transactions or dissatisfied with the way they are
    disclosed, then they might benefit from real-time
    fee disclosure.  However, the banking regulators
    reported that they received very few complaints on
    the disclosure of ATM fees, which suggests that
    cardholders were not dissatisfied with the
    disclosure they received from their banks. In
    addition, the consumer groups we interviewed did
    not advocate real-time disclosure of foreign fees;
    instead, their concerns focused on the fairness of
    the surcharge, which we did not address in our
    review. Further, industry surveys suggested that
    only a minority of ATM cardholders pay foreign
    fees and that the number of foreign ATM
    transactions they make is declining.8  At the same
    time, industry representatives suggested that
    requiring real-time foreign fee disclosure could
    produce unintended consequences, which we believe
    could, at least in part, offset any potential
    benefits of disclosure.

    Some ATM industry representatives suggested other
    options for enhanced disclosure of foreign fees
    that would be less costly and burdensome than real-
    time disclosure at the ATM. For example, they
    suggested augmenting the existing required written
    disclosure with more prominent written reminders
    in monthly statements or modifying the general
    statement on the ATM screen that a consumer's bank
    may levy a fee in addition to the surcharge amount
    to include an average or range of the foreign fee
    amount.

    Representatives of the ATM industry who reviewed a
    draft of this report agreed, overall, with the
    information presented.  We added some information
    or clarified some points based on their
    suggestions.  Their comments and our responses are
    summarized on pages 35 to 36.  We are not making
    recommendations in this report.

    Background
    ATM transactions involve several different
    participants or entities beyond the cardholder and
    the card-issuing bank. In this report, the term
    "ATM industry" is used to refer to card-issuing
    banks, ATM owners, ATM networks, and third-party
    processors. Other ATM industry participants or
    components that were not the main focus of our
    study include ATM manufacturers, software
    providers, and armored car companies.

    ATM cards are issued by banks, thrifts, and credit
    unions. Card-issuing banks are not required to own
    or operate ATMs. For example, some credit unions
    issue ATM cards to their customers without
    installing and maintaining their own ATMs and,
    instead, rely on the ATMs owned by other
    institutions. Nevertheless, most banks own and
    operate ATMs. The card-issuing banks, or their
    third-party processors, maintain a database of the
    cardholder account information (e.g., personal
    identification numbers (PIN), usage limits,
    account status, etc.) that specifies the accounts
    that can be accessed via the ATM card.

    ATM networks allow the ATM cards of member
    institutions to be used at the ATMs of another
    member institution. ATM networks, which can be
    proprietary, regional, or national, consist of a
    network switch-a device that determines over what
    path to send a unit of data-and a set of
    prescribed operating rules that are used by all of
    the member institutions. ATM networks route
    transactions between the ATMs and the card-issuing
    banks through the network switch and act as a
    clearinghouse to settle those transactions.
    Regional networks connect the card-issuing bank
    with ATM owners that are located in a particular
    region of the United States. National networks
    connect the card-issuing bank with ATM owners that
    are located throughout the United States and
    outside of the United States to route and then
    initiate settlement of cross-territory ATM
    transactions. These networks perform hundreds of
    millions of transactions monthly.

    ATM owners can be banks, merchants, or
    ISOs-companies that specialize in offering ATMs.
    In 1999, there were about 227,000 ATMs in the
    United States.9 According to some of the industry
    representatives, banks currently own about 60
    percent of the ATMs and merchants, and ISOs own
    the remaining balance. Banks, thrifts, and credit
    unions own and operate the ATMs on their premises
    and at off-premise locations and sites, such as
    supermarkets, gasoline stations, and airports.
    Merchants, such as convenience stores and
    retailers, may own the ATMs on their premises or
    contract with banks or ISOs to place ATMs on their
    premises. ISOs may own their ATMs as well as
    provide ATMs under contract to both banks and
    merchants (for which the ISOs provide processing,
    either directly or indirectly).

    Figure 1 depicts the relationship among a card-
    issuing bank, a regional or national network, and
    an ATM owner in ATM transactions.

    Figure 1:  Relationship Among the ATM Industry
    Participants

    Part 2 of Figure 1

    Source: GAO analysis of industry data.

    While many banks perform their own processing,
    many rely on third-party processors. Third-party
    processors, which can be a bank or nonbank entity,
    perform various data processing services for ATM
    participants. The types of services performed by
    third-party processors can vary greatly, depending
    on the needs of the card-issuing bank, ATM owner,
    or network. For example, third-party processors
    can provide transaction processing and data
    processing. Transaction processing involves
    switching and routing transaction information to
    and from relevant parties. Data processing
    includes billing, account balancing, clearing, and
    settlement of ATM transactions. Third-party
    processors also can act as the "driver" or
    operator of an ATM. That is, they may maintain the
    software at the terminal or the communication
    links. ISOs also can serve as third-party
    processors.

    Current Fee Structure of the ATM Market
    As shown in table 1, a cardholder and the card-
    issuing bank may be required to pay several fees
    to perform an ATM transaction. The amount of the
    fee a cardholder must pay depends upon the type of
    banking relationship that the cardholder has with
    the card-issuing bank and who owns the ATM used
    for the transaction. Fees may also vary according
    to the type of ATM transaction performed. A small
    percentage of financial institutions, estimated to
    be from 1 to 7 percent of banks and thrifts,
    charged their cardholders a fee for transactions
    performed at their own ATMs in 1998.10 A larger
    percentage of financial institutions, estimated to
    be from 61 to 78 percent of banks and thrifts,
    offered at least one account type that charged the
    cardholder a foreign fee when the transaction is
    performed at an ATM not owned by the bank in 1998.11
    ATM owners may also charge a surcharge or
    "convenience" fee for transactions performed at
    their ATMs with cards that they did not issue.
    Thus, cardholders that use ATMs that are not owned
    by their card-issuing bank may pay two fees-a
    foreign fee and a surcharge.

    Table 1: Types of ATM Fees Levied on the Card-
    Issuing Bank and Cardholder
    Type of fee   Who pays     Who receives  Who sets    Description
                 fee?         fee?          fee?
    Own-bank ATM  Cardholder   Card-issuing  Card-       Fee paid to the card-
    feea                      bank          issuing     issuing bank by the
                                          bank        cardholder when using card-
                                                     issuing bank's ATM.
    Foreign feeb  Cardholder   Card-issuing  Card-       Fee paid to the card-
                             bank          issuing     issuing bank by the
                                          bank        cardholder when using an
                                                     ATM not owned by the card-
                                                     issuing bank.
    Surchargeb    Cardholder   ATM owner     ATM owner   Fee paid to the ATM owner
                                                     by the cardholder using
                                                     cards not issued by the
                                                     ATM owner.
    Network       Card-        Network       Network     Fee paid to the networks
    membershipc   issuing                              for the costs of
                 bank                                 operations, advertising,
                                                     and other promotional
                                                     expenses.
    Switchb       Card-        Network       Network     Fee paid to the networks
                 issuing                              for routing transaction
                 bank                                 information over the
                                                     network.
    Interchangeb  Card-        ATM owner     Network     Fee paid to the ATM owner
                 issuing                              for the costs of deploying
                 bank                                 and maintaining shared
                                                     ATMs.
    aOwn-bank ATM fees may be set on an annual,
    quarterly, monthly, or per-transaction basis.
    bFee is paid on a per-transaction basis.
    cMembership fees are usually paid on a monthly or
    annual basis.
    Source: GAO based on Congressional Budget Office
    and Federal Reserve System data.

    The card-issuing bank also incurs several fees to
    process ATM transactions. The card-issuing bank
    may pay a "membership" fee to each of the networks
    that routes their transactions. (Nonbank ATM
    owners pay a "sponsorship" fee to a financial
    institution to become member of a network.) In
    addition, these networks charge the card-issuing
    bank a "switch" fee for each ATM transaction they
    process. The card-issuing bank also pays an
    "interchange" fee to the owner of the ATM that
    processed the cardholder's transaction.

    Typical ATM Transaction Flows
    Figure 2 is a simplified illustration of the
    transaction flow of an electronic fund transfer
    activity at an ATM owned by the card-issuing bank.
    Most ATM cardholders conduct transactions at ATMs
    owned by their card-issuing bank (referred to as
    on-us transactions). When the cardholder requests
    the transaction at the ATM, the terminal driving
    processor transmits the message through the bank's
    network to the authorization processor. The
    authorization processor checks the cardholder's
    account and concurrently provides authorization
    and settlement of the transaction. The
    authorization message is then transmitted to the
    ATM.

    Figure 2:  Transaction Flow Using ATMs Owned by
    the Card-Issuing Bank

    Source: GAO analysis of industry data.

    Figure 3 illustrates a simplified transaction flow
    for a cardholder performing an electronic fund
    transfer activity at an ATM that is not owned by
    the card-issuing bank (referred to as a foreign
    ATM transaction).12 The cardholder requests the
    transaction at the ATM. The terminal driving
    processor routes the message through the ATM
    owner's network to a regional or national network.
    The message is then routed through the internal
    network of the cardholder's bank to the
    authorization processor. The authorization
    processor checks the cardholder's account,
    authorizes the transaction, and provides
    settlement of the account. The authorization
    message is then transmitted to the ATM via the
    bank's network, a regional or national network,
    the ATM owner's network, and the ATM's terminal
    driving processor to the ATM.

    Figure 3:  Transaction Flow at ATMs Not Owned by
    the Card-Issuing Bank

    Source: GAO analysis of industry data.

    Current Fee Disclosure Requirements
    The Electronic Fund Transfer Act (EFTA),13 which
    was amended by provisions of the Gramm-Leach-
    Bliley Act of 1999 (GLBA), is the federal statute
    that primarily governs the disclosure of ATM fees.
    The rules and regulations that implement EFTA's
    disclosure requirements are set forth in the
    Federal Reserve's Regulation E.14 As shown in table
    2, Regulation E requires a bank to provide initial
    and periodic disclosures that reflect the amount
    of fees assessed for an electronic fund transfer,
    such as a withdrawal at an ATM. Banks must provide
    disclosures required by Regulation E, including
    the amount of any fee associated with electronic
    fund transfers at an ATM, at the time a consumer
    signs up for an ATM card or before the first
    electronic fund transfer. Banks are to also
    provide a statement that includes the amount of
    any fees assessed for electronic funds transfer
    for each month in which at least one transfer has
    occurred and provide a quarterly statement if no
    transfer has occurred. In addition, Regulation E
    requires banks to deliver written notice at least
    21 days before the effective date of any change in
    fees. The GLBA amendments cover the disclosure of
    fees imposed by ATM operators (i.e., surcharges),
    including those that are not banks. The act
    requires operators to post a sign on the machine
    and a message on the screen or the receipt that a
    fee will be charged and the amount of the fee.
    This sign must be posted before the customer is
    irrevocably committed to completing the
    transaction.15 However, in the period November 12,
    1999, the date of the enactment of GLBA, through
    December 31, 2004, this clause is not applied to
    ATMs that lack the technical capability to support
    the necessary on-screen or receipt-based
    disclosure.

    Table 2: ATM Fee Disclosure Requirements
    Statute                                    Foreign fee      Surcharge
    Regulation E                               Financial        Financial
                                               institutions     institutions
                                               are required to  that own ATMs
                                               disclose fees:   are required to:
                                               at the time the   notify the
                                               consumer         consumer of any
                                               contracts for    surcharges if
                                               EFT service or   the fee is
                                               before the       included in the
                                               first  EFT is    amount of
                                               made, and        transfer by
                                               on a statement   providing a
                                               for each month   receipt and by
                                               in which at      posting a sign
                                               least one        at the ATM or on
                                               transfer         the terminal
                                               occurs, or       screen, and
                                               on a quarterly   give the
                                               statement if no  consumer the
                                               transfers occur  opportunity to
                                               in 3 months.     cancel the
                                                                transaction if
                                               Financial        the fee is
                                               institutions     displayed on the
                                               must provide     terminal screen.
                                               written notice
                                               at least 21
                                               days before
                                               effective date
                                               of any change
                                               in fees.
    Gramm-Leach-Bliley Act of 1999             Not applicable   All ATM owners
                                                               must notify the
                                                               consumer of any
                                                               surcharges by
                                                               posting a notice
                                                               on the ATM, and
                                                               on the screen or
                                                               on a receipt,
                                                               and
                                                               before the
                                                               consumer is
                                                               irrevocably
                                                               committed to
                                                               completing the
                                                               transaction
    Note:  Regarding the surcharge, the regulation
    generally provides for exceptions to these
    requirements for transfers initiated outside of
    the United States.
    Source: GAO analysis of Regulation E (12
    C.F.R.205) and Gramm-Leach-Bliley Act of 1999 (P.
    L. No. 106-102, 702-03 (1999)).

    Scope and Methodology
    To obtain and analyze information on alterations
    to the ATM system that would be needed to support
    real-time ATM fee disclosure, we obtained
    documents from and interviewed representatives of
    selected card-issuing banks, ATM owners, ATM
    networks, third-party processors, and relevant
    trade associations. In preparing interview topics
    and questions, we drew on the expertise of our
    specialists in research design, computer systems,
    and economics. Our discussions focused on the
    technical feasibility of the current ATM systems
    to support real-time fee disclosure for electronic
    fund transfer activities, as defined in the EFTA
    and on U. S. ATM operations only.

    After gaining an understanding of the current ATM
    system, our computer system analysts developed
    several real-time fee disclosure scenarios. These
    scenarios included disclosure of fees on a real-
    time basis, disclosure of generic and customized
    card-issuing bank fee schedules, and disclosure of
    a flat-rate foreign fee. We presented these
    disclosure scenarios to selected industry
    representatives and obtained their views regarding
    the feasibility and associated technical
    requirements of these disclosure scenarios. In
    reporting our results, we focused on the real-time
    fee disclosure scenario that would most closely
    fulfill the disclosure contemplated by the
    legislative mandate and discussed with
    congressional contacts. This real-time fee
    disclosure scenario provides for the disclosure of
    the amount of fees that would be charged to a
    consumer at the point of the ATM transaction and
    gives the consumer a chance to accept or reject
    the fee before completing the transaction.

    Our congressional contacts agreed that the scope
    and complexity of topics to be discussed precluded
    our selection of a statistically valid random
    sample of card-issuing banks and ATM owners.
    Instead we selected these entities by asset size;
    type (bank, thrift, credit union, nonbank ATM
    owners); number of ATMs; and primary region of
    operation.  We discussed the technological issues
    of real-time fee disclosure with 10 banks and two
    nonbank ATM owners. The asset size of these banks
    ranged from $620 million to about $572 billion;
    and combined, they own approximately 24,000 of the
    227,000 ATMs. In addition, we interviewed
    representatives from two national ATM networks and
    four regional networks. We also met with two of
    the larger ATM third-party processors in the
    United States.

    We supplemented information obtained from the
    above selected entities with industry viewpoints
    obtained during meetings conducted with five major
    trade associations representing segments of the
    ATM industry.  These meetings included
    representatives of several banks and networks
    mentioned earlier.  The five trade associations
    were

    �    American Bankers Association, a national
     trade association representing financial
     institutions of all sizes;
    �    Consumer Bankers Association, a national
    trade association representing retail banking
    interests of financial institutions;
    �    Electronic Funds Transfer Association, an
    inter-industry trade association dedicated to the
    advancement of electronic payment systems and
    commerce;
    �    Independent Community Bankers Association, a
    national trade association representing community
    banks; and
    �    Network Executives Council, a group
     affiliated with the Electronic Funds Transfer
     Association, that represents regional ATM
     networks.

    To obtain estimates of the costs and time frames
    associated with implementing and operating real-
    time ATM fee disclosure, we requested and obtained
    information from the industry representatives that
    we contacted. Specifically, we asked that the
    representatives provide us with estimates of the
    cost to their firms to provide and support real-
    time ATM fee disclosure and the needed
    implementation time frames under the above-
    mentioned disclosure scenarios. As agreed with
    congressional contacts, we did not construct our
    own independent estimates of the costs and time
    frames. We also did not verify the accuracy of the
    data provided by the industry representatives
    regarding costs and time frames.

    To obtain information on the potential competitive
    impact on banks and the other components of the
    ATM industry, we obtained and analyzed available
    studies of economic factors associated with ATM
    fees and usage. In addition, we discussed this
    issue in our meetings with representatives from
    banks and other ATM owners, ATM networks, third-
    party processors, trade associations, and other
    independent sources, including the federal banking
    regulators, the Congressional Budget Office, and
    the Antitrust Division of the U.S. Department of
    Justice.

    To obtain information on the potential consumer
    impact of implementing real-time ATM fee
    disclosure, we reviewed relevant federal laws and
    regulations governing electronic fund transfer
    activity and consumer protection. We also
    interviewed officials from (1) the federal banking
    regulatory agencies (Federal Reserve System,
    Office of Comptroller of the Currency, Federal
    Deposit Insurance Corporation, Office of Thrift
    Supervision, and National Credit Union
    Association); (2) representatives of consumer
    groups that have been active on ATM fee issues
    (Public Interest Research Group and Consumers
    Union); (3) the ATM industry; (4) trade
    associations; and (5) other independent sources.

    To identify other alternatives to real-time ATM
    fee disclosure, we discussed this issue during our
    meetings with ATM industry participants and
    consumer groups. In addition, we interviewed
    selected experts in electronic commerce technology
    to obtain their input regarding potential
    alternatives and options regarding real-time ATM
    fee disclosure. We conducted our review from
    December 1999 to May 2000 in Washington, D.C.; San
    Francisco, CA; Sacramento, CA; New York, NY; and
    Portland, OR, in accordance with generally
    accepted government auditing standards.

    We requested comments on a draft of this report
    from (1) the senior executives responsible for ATM
    services at five financial institutions; (2) the
    president of a state league of credit unions; (3)
    the president of a regional network (who is also a
    representative of the Network Executives Council);
    (4) the executive vice president and general
    counsel of a regional network; (5) a director and
    general counsel of two consumer groups; (6) an
    academic, who consults in banking issues; and (7)
    an executive director and representatives of two
    trade associations.  In mid June 2000, we met with
    these senior officials in two groups, except for
    the consumer group representatives who had not
    responded to our request. Their oral comments are
    presented and discussed on pages 35 to 36. We also
    requested comments from the managing counsel of
    the Division of Consumer and Community Affairs of
    the Federal Reserve Board (FRB) of Governors. We
    requested FRB comments because the EFTA requires
    FRB to issue relevant regulations.  The FRB
    official provided technical comments that we
    incorporated.

    Real-time ATM Fee Disclosure Is Feasible but Would
    Require Hardware and Software Changes
    ATM industry representatives said that real-time
    ATM fee disclosure is technically feasible but
    would require extensive restructuring by the ATM
    industry. Real-time ATM fee disclosure could be
    provided in several different ways. However, they
    said that all of the options likely would require
    ATM owners, ATM networks, card-issuing banks, and
    third-party processors to substantially change
    their infrastructure, (i.e., their hardware and
    software systems including communications
    equipment, message processors, and databases).

    Currently, electronic fund transfer activities
    performed at an ATM rely on a complex sequence of
    synchronized tasks to be performed in less than a
    minute by the ATM, the data transmission networks,
    and the banks' processors. The ATM system is built
    on technology that allows an ATM cash withdrawal
    or other electronic fund transfer activity to be
    performed with a single ATM transmission for
    authorization and settlement of the transaction.
    To provide real-time foreign ATM fee disclosure,
    the current ATM system would have to be modified
    to (1) obtain the foreign fee information from the
    cardholder's bank, (2) display the foreign fee
    information to the cardholder, (3) allow the
    cardholder to accept or reject the fee, and (4)
    transmit fee acceptance or rejection information
    to the bank to consummate the electronic fund
    transfer activity. Industry representatives said
    that ATM owners likely would need to modify or
    replace their ATMs and terminal driving processors
    to support the display of foreign fee information
    and provide a means for cardholders to accept or
    reject the fee. In addition, the industry
    representatives stated that real-time ATM fee
    disclosure would require that changes also be made
    to the following functions:

    �    message processing,
    �    calculation of ATM fees, and
    �    stand-in processing.

    Because the ATM industry does not handle these
    functions in a standardized way, each ATM
    participant would have to consult with those it
    interacts with in conducting ATM transactions to
    determine the specific implementation method for
    these changes. While the current ATM system could
    be adapted to support real-time foreign ATM fee
    disclosure, ATM participants do not share a common
    view of how this might be accomplished.

    Message Processing Changes
    Each regional and national ATM network requires
    its members to adopt specified message formats,
    message flows, and other processing requirements.16
    Message flows and message formats are defined for
    all ATM transactions, including the request and
    authorization of transactions, settlement of
    transactions between ATM participants, and
    administrative messages. Because the ATM foreign
    fee information is not currently relayed from the
    card-issuing bank to the ATM owner, industry
    representatives said that new message flows and
    message formats would need to be defined to
    support real-time fee disclosure. Once defined,
    every participant in an ATM transaction would need
    to modify their software to handle the new
    formats. Although the majority of regional and
    national ATM networks based their message formats
    on an international standard,17 each network
    dictates its own variation of this message format.
    Therefore, there is not an exacting standard that
    is used by the regional and national networks. So,
    for example, if a bank has connections with four
    different networks, it likely will need to modify
    more than one piece of software to connect to each
    of the four networks.

    A "Two-Messages" Solution
    The industry representatives indicated that there
    are different ways to modify the message flows and
    message formats to support real-time fee
    disclosure. One possible design solution we
    discussed with industry participants is shown in
    figure 4.

    Figure 4:  A "Two-message" Solution

    Source: GAO analysis of industry data.

    In this scenario, following a cardholder's
    transaction request at an ATM, the ATM and
    terminal driving processor would request the
    foreign fee information from the card-issuing
    bank. The bank would retrieve the foreign fee
    information and return it to the ATM. The ATM
    would display the foreign fee information to the
    cardholder for acceptance. Following acceptance,
    the ATM and terminal driving processor would route
    the transaction back to the card-issuing bank. The
    bank would send an authorization message back to
    the ATM and the transaction would be completed.
    This design option would require two transmissions
    through the network instead of the one
    transmission that is normally required in the
    current system. In addition, new message formats
    would need to be defined for the fee request and
    the fee response information.

    An additional transmission with a message to
    obtain the foreign fee information could double
    the network traffic required to perform most
    transactions on both the bank's system and the
    network's. The industry participants we contacted
    have said that the current ATM infrastructure is
    not capable of handling a doubling of transaction
    volume. They said to handle the increased
    transaction volume, networks would have to
    purchase and install additional hardware and
    software, including new processors and data
    communications equipment. They said the extra pass
    or message would also lengthen the time it would
    take to complete an ATM transaction by 11 to 17
    seconds.  Currently, according to industry
    estimates, a basic cash withdrawal takes between
    23 and 33 seconds.

    A "One-Message" Solution
    Another design solution discussed with the
    industry participants would involve only one
    network transmission and would require the
    expansion of the current transaction response
    messages to include the foreign fee information.
    In this scenario, there would be no separate fee
    request. The cardholder's transaction request
    would be transmitted as it is currently, and the
    response message would be modified to contain the
    foreign fee information. However, the ATM would
    have to generate a reversal transaction to credit
    the customer's account for funds already deducted
    at the time of authorization if the customer were
    to reject the fee and abort the transaction.
    Except in the case of fee rejection, only one
    network pass would be required in this scenario,
    as illustrated in figure 5.

    Figure 5:  A "One-message" Solution

    Source: GAO analysis of industry data.

    If the fee were rejected by the cardholder, an
    existing reversal message18 would need to be
    modified to relay the fee rejection and the
    cancellation of the transaction by the cardholder.
    The message formats for transaction responses and
    reversal messages would require modification to
    relay the new data. In addition, industry
    representatives said that a transaction reversal
    is usually not performed instantaneously and that
    customers' funds may not be immediately restored.

    Calculation of ATM Fees
    Real-time foreign ATM fee disclosure would involve
    changes in the basic infrastructure of a bank's
    computer systems because most of the systems are
    not currently designed to calculate ATM fees on a
    real-time basis. The banks we contacted said they
    have separate computer systems to handle on-line
    processing19 and periodic batch processing,20
    whether the processing is done in-house or
    outsourced to a third-party processor. These
    banks' on-line processors support ATM, point-of-
    sale, telephone, and teller access to current
    account information. The banks' batch processors
    support posting paper checks and automated
    clearing house transactions, preparing monthly
    statements, and calculating service charges and
    are run on a periodic basis-usually daily or
    monthly, depending on the process. The
    authorization processors and terminal driving
    processors previously described are on-line
    processes that support ATM transactions at a bank.
    However, the banks said their ATM fees are
    calculated with the other account-activity based
    service charges on the batch processors. Figure 6
    illustrates batch processing in relation to an ATM
    transaction.

    Figure 6:  Batch Processing in Relation to an ATM
    transaction

    Source: GAO's adaptation of a diagram from Bank of
    America.

    Because the fees are calculated based on consumer
    behavior over a defined period on a separate
    platform from the ATM processing, the
    authorization processor does not have real-time
    access to the foreign fee information. These banks
    would need to move the calculation of the ATM fees
    from the batch processors to the on-line
    processors, resulting in software changes in both
    the batch and on-line processors.

    Banks typically offer a variety of account options
    to their customers to allow for relationship
    banking, wherein customers can opt to either pay
    fees or maintain a certain account activity level
    or account balance and be able to conduct foreign
    ATM transactions and other account activities
    without a fee. While some pricing plans assess a
    flat fee per transaction on each customer, others
    offer variable rate structures, based upon the
    number of ATM transactions performed or the
    balances maintained by the customer. Variables,
    such as account activity and average balance, are
    not known until the end of the statement cycle.21
    The bank representatives said that to provide real-
    time fee disclosure in an accurate manner, banks
    might need to modify the software that calculates
    fees in this manner to use alternative data, such
    as the average balance or account activity from
    the previous month. Another possible industry
    response would be to eliminate using these
    variables to assess fees. Any such change in how
    fees would be assessed and charged would also
    result in software changes to their processing
    systems.

    Stand-In Processing
    According to industry representatives, real-time
    fee disclosure may require networks to store
    foreign fee information to allow for stand-in
    transactions. Stand-in processing is a service
    provided by networks to their members to ensure
    continuation of cardholder service when a network
    cannot communicate with the on-line ATM processor
    of the card-issuing bank. In addition, some of the
    industry representatives said that some banks do
    not maintain an on-line ATM processor and stand-in
    processing is their normal mode of operation. To
    provide stand-in processing, networks typically
    need a list of the card and account numbers, PINs,
    and an account status. In order for networks to
    continue providing stand-in processing in an
    environment wherein real-time fee disclosure would
    be required, the networks would need to store
    foreign fee information from card-issuing banks.
    Networks would also need to make software changes
    to handle the fee disclosure on behalf of their
    client card-issuing banks. Depending on the
    implementation method, this process could require
    the banks to provide more detailed account
    information to the networks to perform the complex
    calculations required.22 In addition, network
    representatives said that networks might also have
    to make substantial investments in computer
    hardware to store the additional, necessary data.

    More Simplified Disclosure Options Would Require
    Similar Changes
    We considered the feasibility of other possible
    options for disclosing the foreign ATM fees in
    ways that would circumvent the complex issue of
    calculating individual consumer's fees. We
    considered the feasibility of banks providing
    information on their ATM fee schedules or the
    particular pricing plan that a customer had
    selected. We also considered the feasibility of
    disclosure if each bank adopted a flat-rate
    foreign fee. Based on our understanding of the ATM
    system infrastructure and according to industry
    representatives, as in the case with real-time fee
    disclosure, these options would also require
    extensive changes to their hardware and software
    systems, in addition to modifying the message
    processing and stand-in processing functions.

    Instead of calculating and displaying the exact
    foreign ATM fee for each ATM transaction, banks
    could disclose the schedule of fees for each
    banking plan it offers. A more customized option
    would be for the bank to identify a customer by
    his/her banking plan during the ATM transaction
    and disclose only the fee schedule relevant to
    that customer. Customers would be shown the fee
    they might be charged; but to calculate the actual
    fee, they would have to know the status of other
    fee determinants, such as account balances, the
    number of transactions already made during the
    statement cycle, etc.

    Industry representatives said that either
    alternative would still require changes to their
    hardware and software and the various functions as
    discussed previously.  For example, ATMs would
    have to be able to display the banking plans
    offered by all the banks whose cards could be used
    at the ATM. Banks typically offer a variety of
    account options and pricing plans, which are
    typically lengthy and complex, as illustrated in
    figure 7.

    Figure 7:  An example of a bank's fee schedule

    Souce: Courtesy of Chase Manhattan Bank.

    These representatives said that transmitting and
    displaying that volume of information would not
    only add to the challenges of altering the current
    ATM infrastructure, but it would lengthen the time
    needed to perform an ATM transaction and challenge
    the display capabilities of many ATM terminals.
    They said that the infinite variations in account
    and ATM transaction pricing, which sometimes
    depend on relationship banking, could create
    complications in displaying customized foreign fee
    information.

    Several banks said that if real-time foreign fee
    disclosure were required, they might adopt a flat-
    rate foreign fee to avoid the cost of calculating
    fees for each ATM transaction. Adopting flat rate
    fees would not eliminate the cost of additional
    messages for an ATM to obtain the fee from a card-
    issuing financial institution or overcome the
    problems of stand-in processing that we discussed
    earlier.

    Total Costs and Implementation Time Difficult for
    ATM Industry Participants to Estimate
    We asked card-issuing banks, ATM networks, ATM
    owners, and third-party processors to estimate the
    cost and the time it would take to provide real-
    time foreign fee disclosure. According to many of
    the ATM industry representatives, the effort and
    costs associated with providing real-time fee
    disclosure would be extensive. However, industry
    representatives said that the lack of specific
    details about how real-time ATM fee disclosure
    would be implemented and their dependencies on
    other ATM industry participants made it difficult
    to estimate the cost and time frames with any
    precision. Several ATM industry representatives
    enumerated the types of changes that would be
    required and a few provided qualified dollar
    estimates of costs and time required.

    Representatives of card-issuing banks stated that
    they would incur extensive costs to make the
    necessary software and hardware changes needed to
    support real-time ATM fee disclosure. For example,
    the representatives stated that one of the major
    costs of disclosing the actual fee for an ATM
    transaction would be to move cardholder fee
    calculations from a batch-processing mode into a
    real-time environment. The representatives of one
    large bank stated that the bank could not support
    real-time fee disclosure with its current
    infrastructure, which uses a batch system that
    runs at night to calculate cardholder fees. Not
    being able to calculate fees in batch-processing
    would require the banks to simplify their fee
    structures and would affect their ability to
    maintain relationship banking.  Because such
    changes would represent a fundamental shift in
    their ATM processing system, the industry
    representatives were unable to estimate the total
    associated costs. Card-issuing banks likely would
    incur additional costs to upgrade their ATM
    hardware and software. For example, some industry
    representatives estimated that it would cost tens
    of millions of dollars for changes to a large
    bank's hardware and software to provide real-time
    foreign fee disclosure.  Regarding operating
    costs, one trade association estimated that the
    card-issuing banks might have to absorb an
    additional $1 billion per year in processing
    costs-effectively doubling the fees associated
    with the current volume of ATM transactionsif real-
    time ATM fee disclosure required two, instead of
    one, ATM transmissions.

    Representatives of ATM networks also indicated
    that they would have to make major upgrades of
    their hardware and software systems if real-time
    ATM fee disclosure were required. For example, one
    of the representatives stated that his network
    system was currently operating at close to full
    capacity and that replacement of its hardware and
    software systems would be needed to handle the
    additional traffic that likely would be associated
    with real-time ATM fee disclosure. While these
    network representatives were not able to provide a
    precise estimate of these costs, they estimated
    that it could be in the billions of dollars for
    the industry as a whole. In addition, all of the
    representatives said that extensive software
    changes would be needed to implement any message
    formatting changes that would be necessary to
    support real-time ATM fee disclosure. According to
    some of the ATM network representatives, any
    hardware and software changes would necessitate
    extensive testing and recertification of the
    systems, which would add significantly to the cost
    of providing real-time ATM fee disclosure.

    The industry representatives stated that ATM
    owners likely would incur major costs to upgrade
    their ATMs to handle real-time fee disclosure.
    According to the representatives, many of the
    older or less sophisticated ATMs currently in use
    may not have the necessary display and processing
    capacity needed to handle real-time ATM fee
    disclosure. As a result, these ATMs would have to
    be replaced or upgraded. As of November 1999, the
    cost of new ATMs ranged from $15,000 to $50,000
    per machine, depending on functions.23 According to
    the ATM industry representatives, real-time ATM
    fee disclosure also likely would result in
    increased transaction time. This could result in
    the need for ATM owners to deploy more ATMs to
    provide the same level of service. Furthermore,
    some of the ATM industry representatives stated
    that real-time ATM fee disclosure may prompt ATM
    owners to upgrade their machines using dial-up
    connections to leased lines connections because
    dial-up technology was not intended to support an
    extended dialogue or interaction between the ATM
    and the bank.24 According to representatives of a
    third-party processor, the annual cost of leasing
    a dial-up ATM ranges from $4,000 to $6,000 versus
    $10,000 to $12,000 for a leased-line terminal. In
    addition, they stated that the monthly
    communication costs for a dial-up connection is
    about $30 to $45 compared with $250 to $400 for a
    leased-line connection. The ATM industry
    representatives stated that all ATMs likely would
    need to have software upgrades, such as rewriting
    the software that controls the screen displays, in
    order to support real-time ATM fee disclosure.

    According to representatives of the third-party
    processors, they would need to upgrade their
    software systems and some of their hardware
    systems to support real-time ATM fee disclosure.
    However, they stated that the real cost issue was
    not primarily related to changes in technology but
    in the extensive testing effort that would be
    required, which would involve all ATM industry
    participants. One third-party processor estimated
    that it would cost her firm from $5.1 to $7.9
    million in one-time expenditures to provide real-
    time ATM fee disclosure. Moreover, she estimated
    that it would take from 24 to 36 months to make
    the necessary changes to the firm's software and
    hardware systems. Two ATM industry representatives
    compared the effort and costs involved in
    providing real-time fee disclosure to the Year
    2000 readiness effort.25

    Foreign Fee Disclosure May Disadvantage Smaller
    Competitors
    Some industry representatives suggested that the
    burden of real-time fee disclosure might fall more
    heavily on smaller firms and organizations.  They
    suggested that economies of scale would give
    larger banks, networks, and ATM owners an
    advantage.  Representatives of smaller banks
    predicted that they would be hurt if some larger
    banks chose to minimize the costs of disclosure by
    restricting access to their ATMs to their own
    cardholders.  Finally, representatives of ISOs
    suggested that the added costs of real-time
    disclosure could induce some ATM operators to shut
    down operations at some locations.

    Banks, networks, and ATM owners of all sizes
    likely would incur substantial costs to install,
    test, and certify hardware and software required
    to implement real-time ATM fee disclosure.
    Industry representatives said that larger firms,
    which can exploit economies of scale, would be in
    a better position to absorb these costs.  They can
    spread any fixed costs of providing real-time
    disclosure over a larger number of transactions,
    resulting in a smaller increase in the average
    cost of providing service.26

    Similarly, network officials said that larger
    networks might be in a better position to absorb
    the costs associated with foreign fee disclosure.
    They stated that implementation costs likely would
    be recovered by charging higher fees; and the more
    transactions a network can process, the faster it
    can recover these costs.

    Industry representatives of smaller banks voiced
    concerns that the largest banks, which operate
    thousands of ATMs, might attempt to minimize the
    costs of disclosure by restricting access to their
    ATMs to their own cardholders.27  This could hurt
    small banks that rely heavily on ATMs owned by
    larger banks to service their customer base.

    Industry representatives also suggested that ISOs
    that primarily supply inexpensive ATMs for
    installation at lower volume locations and their
    client base-primarily merchants and smaller
    banks-would be especially disadvantaged if real-
    time ATM fee disclosure were required. These ATMs
    typically use low-cost, dial-up connections
    instead of the more expensive leased line
    connection. According to industry representatives,
    dial-up technology may be impractical to support
    the kind of communication required to offer
    cardholders an accept or reject option. In
    addition, industry representatives estimated that
    10 to 15 percent of the low-cost ATMs typically
    deployed by these ISOs do not have the display
    capacity to support on-screen disclosure.
    According to industry representatives, these ISOs
    and their client base may not be able to afford to
    purchase and operate more sophisticated ATMs.

    Unintended Consequences of Foreign Fee Disclosure
    Could Partially Offset Benefits
    If consumers are unaware of foreign fees for ATM
    transactions or dissatisfied with the way they are
    disclosed, then they might benefit from real-time
    fee disclosure.  However, the banking regulators
    reported that they received very few complaints on
    the disclosure of ATM fees, which suggests that
    cardholders were not dissatisfied with the
    disclosure they received from their banks. In
    addition, the consumer groups we interviewed did
    not advocate real-time disclosure of foreign fees;
    instead, their concerns focused on the fairness of
    the surcharge, which we did not address in our
    review. Further, industry surveys suggested that
    only a minority of ATM cardholders pay foreign
    fees and that the number of foreign ATM
    transactions they make is declining.28  At the same
    time, industry representatives suggested that
    requiring real-time foreign fee disclosure could
    produce unintended consequences, as discussed
    below.29

    Disclosure of Real-time ATM Fees May Provide
    Limited Consumer Benefits
    Generally, consumers can make better-informed
    choices when they are aware of costs at the time
    of a purchase. For example, disclosure of the ATM
    surcharge at the time of a transaction provides
    cardholders information with which to decide
    whether a transaction is worth the fee they must
    pay the ATM owner for using the ATM.  Receiving
    this information only after completion of the
    transaction would be too late for ATM cardholders
    who would not have made the transaction if they
    had known the cost in advance.

    However, regulators found little evidence of
    consumer dissatisfaction regarding fee disclosure.
    Regulators maintain databases of consumer
    complaints against institutions they regulate. We
    asked the Federal Deposit Insurance Corporation,
    Federal Reserve System, National Credit Union
    Association, Office of the Comptroller of the
    Currency, and the Office of Thrift Supervision to
    search their databases for complaints filed in
    1999 about inadequate disclosure of foreign fees.
    While their complaint categories did not identify
    this particular issue, the regulators reported
    that they received very few complaints on ATM fees
    to suggest that cardholders were dissatisfied with
    the disclosure they received from their banks.
    Regulators reported that approximately 31
    complaints involving electronic fund transfer
    service charges were filed in 1999.30 The
    regulators said that they did not consider
    consumer complaints on ATM fees a major concern.
    Consistent with the low volume of complaints
    received by banking regulators, a recent industry-
    sponsored survey of 700 ATM cardholders in 7
    states found that 86 percent felt that their banks
    kept them adequately informed about applicable ATM
    fees.31

    Representatives from consumer groups we
    interviewed did not advocate real-time disclosure
    of foreign fees and recognized that the cost of
    implementing fee disclosure could lead to higher
    fees. They added that while they were opposed in
    principle to surcharges imposed on cardholders by
    ATM owners, they did not oppose fees charged by
    card-issuing banks.

    It is unclear how many consumers would benefit
    from real-time fee disclosure. The Federal Reserve
    reported that in 1998 about three-quarters of the
    banks and thrifts they surveyed offered accounts
    for which ATM cardholders would be charged a
    foreign fee.32 However, a small percentage of
    cardholders actually pay foreign fees, since,
    according to representatives from banks and
    consumer groups, many customers choose account
    plans for which the fee is waived. According to
    industry estimates, at least one half, and perhaps
    as many as two-thirds of ATM cardholders have the
    types of accounts that can exempt them from
    foreign fees. These cardholders likely would not
    benefit from additional disclosure. Some banks
    offer account arrangements that provide a
    specified number of free ATM transactions per
    month. Fee disclosure might help these
    cardholders, when they do not know whether they
    have exceeded their allotted free transactions.
    Customers who pay a foreign fee on all
    transactions and are unaware of the foreign fee
    their bank charges, could also benefit from
    disclosure of this fee on an ATM screen. However,
    once cardholders are aware of the fee, they would
    obtain no additional benefit from disclosures.
    Thus, the benefits of real-time fee disclosure
    likely would be "one-time" rather than repeated.

    In addition, the imposition of surcharges appears
    to have discouraged cardholders from using foreign
    ATMs.  In the 3 years prior to 1996, foreign
    transactions had been growing at 9 percent per
    year. In 1997, they declined by 2 percent.33
    Industry representatives said that cardholders are
    pursuing alternatives to foreign ATMs, such as
    surcharge-free point-of-sale terminals where
    consumers can request "cash back" when making a
    purchase. In addition, they pointed out that
    cardholders can make greater use of ATMs at their
    own banks. The fact that many cardholders are
    avoiding using foreign ATMs to avoid surcharges
    also reduces the potential number of cardholders
    who would benefit from foreign fee disclosure,
    according to industry representatives.

    Under current ATM fee disclosure requirements, it
    is likely that cardholders who pay a foreign fee
    on ATM transactions already have been informed
    about the fee. Regulation E requires banks to
    disclose the fee when a customer opens an account
    and to reflect the fee in monthly statements in
    any month in which a fee is charged. Regulators
    said that their examinations showed no problems
    with compliance with these requirements. The
    surcharge fee disclosure sign and the ATM message
    remind customers that the surcharge fee is "in
    addition to any fees that may be assessed by your
    bank." To the extent that ATM cardholders already
    know the foreign fee they are paying, additional
    disclosure adds no benefit.

    Consumer Benefits Could Be Partially Offset by
    Increased Fees, Inconvenience, and/or Reduced
    Account Options
    Industry representatives explained that requiring
    foreign fee disclosure could produce unintended
    consequences. They suggested that the cost of
    providing disclosure might result in higher fees
    for ATM transactions, longer transaction and
    waiting periods at the ATM, reduced access to
    ATMs, and fewer options in banking arrangements.
    On the basis of our analysis and discussions with
    regulators, economists, and consultants, we
    believe that these unintended consequences could,
    at least in part, offset the benefits of
    disclosure.

    Industry officials observed that foreign fee
    disclosure could result in higher costs for
    conducting ATM transactions. They explained that
    card-issuing banks might attempt to recover the
    costs of implementing and providing disclosure of
    foreign fees. To do so, they might increase the
    fee for making foreign transactions or raise other
    account fees.  Industry and consumer group
    representatives said that ultimately bank
    customers likely would bear some or all of the
    cost of fee disclosure.

    Displaying the foreign fee and giving the
    cardholder the option to accept or reject the
    transaction would increase the time it takes to
    perform an ATM transaction. Currently, according
    to an industry estimate, a basic cash withdrawal
    takes between 23 and 33 seconds. Industry
    officials estimate that if a second transmission
    is required to disclose foreign fees at the ATM,
    it would require 8 to 12 seconds to process the
    fee inquiry and another 3 to 5 seconds for the
    cardholder to accept or reject the transaction.
    One official suggested that this increased waiting
    time would be especially unpleasant because
    cardholders would see the same fee in every
    transaction. The added time required to perform
    ATM transactions also would add to the waiting
    period at ATMs during times of heavy usage.
    Industry representatives said that this might
    require additional investments in ATMs to provide
    the current level of service.

    Foreign fee disclosure might also reduce the
    availability of ATMs. Industry representatives
    said that many ATMs-especially those not owned by
    banks-are only marginally profitable or are losing
    money. As previously discussed, some owners of
    ATMs may conclude their current transaction volume
    cannot justify the cost of modifying or replacing
    existing ATMs. Consequently, ATM cardholders may
    find that ATMs at some locations are no longer
    available. Further, industry representatives said
    that large banks, which operate ATMs in many
    states, may find it advantageous to limit use of
    their ATMs to only their cardholders, rather than
    make the changes required to disclose foreign fees
    to nonaccount cardholders. This would be harmful
    for smaller banks that own few ATMs since their
    cardholders rely heavily on ATMs owned by larger
    banks.

    Requiring disclosure of foreign fees could also
    result in more denied transactions at ATMs if
    foreign fee information is not available when
    networks are "standing in" for card-issuing banks.
    To provide fee disclosure, foreign fee information
    from card-issuing banks would have to be stored at
    another location in addition to the cardholder's
    bank to ensure continuation of cardholder service
    when a network cannot communicate with the on-line
    ATM processor of the card-issuing bank. If this
    foreign fee information were not available,
    transactions would have to be denied. Industry
    officials said that these denials would occur
    regularly because host systems are routinely taken
    off-line at night for maintenance.

    Industry representatives said that foreign fee
    disclosure might lead banks to limit account
    options to customers. For example, several
    representatives suggested that banks could
    eliminate the cost of real-time fee calculation by
    moving to a flat rate foreign fee. Other
    representatives suggested that banks that
    currently charge foreign fees might seek to avoid
    the disclosure requirement by abolishing these
    fees and raising charges elsewhere to cover the
    costs of ATM transactions. Still other
    representatives believed that these actions would
    harm customers and reduce competition because it
    would reduce ATM options a bank could offer to
    differentiate its product from those of its
    competitors.

    Alternative Options to Enhance Fee Disclosure
    Some industry representatives suggested that if
    enhanced disclosure of foreign fees were required,
    this could be accomplished with less costly
    alternatives. For example, they suggested that
    fees could be displayed more prominently on the
    monthly statements sent to cardholders.  We also
    noted  that additional sheets disclosing fees
    could be added to the monthly statements.34 Another
    alternative that industry representatives
    suggested was modifying the existing surcharge
    message display on the ATM screen so that it would
    be more noticeable. Currently this message
    includes a general notice stating that "this fee
    is in addition to any fees that may be assessed by
    your financial institution."

    Agency Comments and Our Evaluation
    The ATM industry representatives who reviewed a
    draft of this report said either that they found
    it to be objective and balanced, or that, overall,
    they agreed with the information presented.  They
    discussed some issues that they felt should be
    added or clarified in the draft.  Where
    appropriate, we added information in the text to
    address the issues that they raised.  The industry
    representatives raised four additional points that
    we include below.

    First, some of the representatives said that an
    ATM might not always distinguish an ATM card from
    a credit card inserted at an ATM to obtain a cash
    advance.  Changes to the ATM industry
    infrastructure in addition to those referred to in
    this report would be required, according to the
    representatives. We recognize that consumers can
    use credit cards at ATMs, but, as required in the
    mandate for this study and as noted in this
    report, our work focused on electronic fund
    transfer activities, as defined in EFTA, conducted
    using an ATM card.  We acknowledge the industry
    representatives' point that use of other types of
    cards at ATMs could compound necessary
    modifications to the industry's infrastructure to
    accommodate real-time fee disclosure.

    Second, some industry representatives said they
    thought this report should place greater emphasis
    on the potential effect of real-time fee
    disclosure on the efficiency of the ATM industry
    and less on the potential costs.  This report
    addressed both efficiency and cost, as required by
    the congressional mandate.

    Third, some industry representatives were
    concerned that some readers might get the
    impression that real-time fee disclosure would be
    onerous only for small institutions rather than
    for all industry participants.  Our report notes
    that the burden might fall more heavily on small
    institutions but states that extensive
    restructuring would be needed by the entire ATM
    industry.

    Finally, in commenting on alternative options to
    enhance fee disclosure, some industry
    representatives noted that providing additional
    paper disclosure would not be as easy as it might
    seem.  For example, the industry representatives
    said that additional paper enclosures could
    increase mailing and other costs.  Further, the
    representatives questioned the need for more fee
    disclosure given the lack of consumer concern or
    complaints regarding fee disclosure.  Our primary
    focus in this report was limited to the
    feasibility, cost, and time frames of real-time
    fee disclosure.  Therefore, while we did not
    examine whether additional fee disclosure was
    desirable, additional foreign fee disclosure in or
    on monthly statements would be a less costly way
    of achieving additional disclosure.

    We are sending copies of this report to
    Representatives Marge Roukema, Chairwoman, and
    Bruce F. Vento, Ranking Minority Member, House
    Subcommittee on Financial Institutions and
    Consumer Credit; Senator Charles Schumer, member
    of the Senate Committee on Banking, Housing, and
    Urban Affairs; the Chairman of the Federal Reserve
    Board; the Comptroller of the Currency; the
    Chairman of the Federal Deposit Insurance
    Corporation; the Chairman of the National Credit
    Union Administration; and the Director of the
    Office of Thrift Supervision; and other interested
    parties. We also will make copies available to
    others on request.

    If you or your staff have any questions regarding
    this letter, please contact Thomas J. McCool or
    Kay Harris at (202) 512-8678. Key contributors to
    this report are acknowledged in appendix I.

    Thomas J. McCool
    Director, GGD/Financial Institutions
     and Markets Issues

    Keith Rhodes
    Director, AIMD/Office of Computer and Information
     Technology Assessment
    _______________________________
    1P. L. No. 106-102,  704 (1999).
    2In this report, "real-time" means the moment at
    which a cardholder performs an ATM transaction.
    "Electronic fund transfer" activities that can be
    performed at ATMs include making deposits or
    withdrawals of funds and transferring funds from
    one account to another. Credit card advances are
    not electronic fund transfers but are, instead,
    extensions of credit.  Therefore, they are not
    included in the scope of this study.
    3Any fee assessed by a card-issuing financial
    institution on its customers when they use their
    financial institution's ATMs is known in the
    industry as an "own-bank ATM fee" levied in an "on
    us" transaction.
    4ATM surcharges, which are assessed by the ATM
    owner when noncustomers use their ATMs, are
    already required by law to be disclosed at the
    ATM. No similar requirement currently exists for
    foreign or own-bank ATM fees, which are levied by
    the card-issuing financial institution.
    Information on the surcharge fee amount, charged
    by the ATM owner and now disclosed to customers at
    the time of an ATM transaction, is stored at the
    ATM machine or the computer that operates it.
    5 Any fee assessed by a card-issuing financial
    institution on its customers when they use an ATM
    that is not owned by their bank is known in the
    industry as a "foreign fee" levied in an "on-them"
    transaction.
    6Discussions on infrastructure changes and cost
    estimates, as they relate to real-time ATM foreign
    fee disclosure, also apply to the real-time
    disclosure of own-bank ATM fees.
    7In banking transactions, settlement is the
    process of recording the debit and credit
    positions of the parties involved in a transfer of
    funds.
    8 Debit Card Directory 2000 Edition, Faulkner and
    Gray, p. 9.
    9 Bank Network News data as of March 31, 1999.
    10Annual Report to the Congress on Retail Fees and
    Services of Depository Institutions, June 1999,
    Federal Reserve System.  Data was reported by
    institution type (bank versus thrift) and by the
    size of the institution (small, medium, and
    large).
    11Ibid.
    12Foreign ATM transactions are also referred to as
    "on-them" transactions.
    1315 U.S.C. 1693 et seq.
    1412 C.F.R. 205.
    15The Federal Reserve's Regulation E currently
    requires ATM owners to notify cardholders of any
    surcharge fees if the fee is included in the
    amount of transfer either by posting a sign at the
    ATM or on the terminal screen. Regulation E
    requires that cardholders be given the opportunity
    to cancel the transaction if the fee is displayed
    on the terminal screen. Representatives of the ATM
    networks stated that it is also a standard ATM
    network industry requirement that a notice of
    surcharge be displayed at the ATM.
    16A message format describes the specific contents
    of a message, including the description, length,
    and format of each field. A message flow describes
    the sequence of messages required to support a
    transaction, including the request message and
    corresponding subsequent response or error
    messages.
    17ISO 8583 is the International Standard designed
    as an interface specification enabling messages
    relating to financial transactions to be exchanged
    between systems adopting a variety of applications
    specifications.
    18 Reversal messages currently exist to support
    cancellation of transactions due to power
    failures, shortage of cash in the ATM cash
    dispenser, etc.
    19On-line processing involves processing on real-
    time basis.
    20Batch processing involves processing a group of
    transactions at one time. Transactions are
    collected and processed against the master files
    at the end of the day or some other time period.
    21Financial institutions commonly prepare
    statements over the course of a month in account
    groups called cycles.
    22Due to the potential sharing of account
    information by ATM participants, bank officials we
    interviewed expressed concerns about possible
    antitrust and privacy issues. We explored
    antitrust implications with an official at the
    Department of Justice. On the basis of the
    disclosure scenarios we described, the official
    said he did not foresee unavoidable antitrust
    concerns. We asked Federal Reserve officials about
    privacy concerns, but they said that they were
    unable to comment at this time.
    23This information was taken from ATM Fact Sheet,
    American Bankers Association.
    24 ATMs link to the networks using either leased
    lines or dial-up connections. Leased lines provide
    communication connectivity between the ATM and the
    network on a continuous basis. Dial-up connections
    are established between the ATM and the network
    only when there is a transaction to be conducted
    and are terminated when the transaction is
    completed.
    25The Year 2000 readiness effort involved an
    inherent flaw in computer programs and database
    files-the absence of century designators-that
    unless corrected could have rendered entire
    computer systems inoperative. There are various
    estimates of the total costs associated with the
    Year 2000 compliance effort. According to the
    President's Council on Year 2000 Conversion, the
    U.S. financial industry spent an estimated $10
    billion to prevent Year 2000 problems.
    26 Some small banks and ATM owners contract with
    third-party processors, whose size may allow them
    the same economies of scale as large banks.
    27 If real-time disclosure of ATM fees is required
    and a bank decides to limit the use of its ATMs to
    its customers only to avoid the need to disclose
    foreign fees, it would still have to address the
    issue of real-time disclosure of applicable own-
    bank ATM fees and foreign fees for its customers.
    28 Debit Card Directory 2000 Edition, Faulkner and
    Gray, p. 9.
    29 Industry representatives also told us that real-
    time fee disclosure may create problems for
    international transactions.  Specifically they
    said that U.S. ATMs might reject transactions made
    with ATM cards not issued by U.S. banks and that
    U.S. cardholders might be confused by ATMs abroad
    that do not display foreign fees.  Our work
    focused on cardholders' transactions in the United
    States, since any change in disclosure
    requirements would apply only to U.S.
    institutions.
    30 As a point of reference, according to the
    American Banker Association, there were 11 billion
    U.S. ATM transactions in 1999.
    31"ATM Surcharging: The Consumer Perspective,"
    prepared by Dove Consulting Inc., and Analytica
    Inc., April 2000. The survey included a few
    questions on foreign fees.
    32Annual Report to the Congress on Retail Fees and
    Services of Depository Institutions, Board of
    Governors of the Federal Reserve System, June
    1999, p. 7.
    33 Competition in ATM Markets: Are ATMs Money
    Machines? (chapter IV), July 1998, Congressional
    Budget Office.
    34It is possible that future advances in technology
    may make it easier and cheaper to provide real-
    time disclosure. For example, if ATMs were
    upgraded to accept "smart" cards containing a
    computer chip, it might be possible to store some
    of the information about fees on the card.

    Appendix I
    GAO Contacts and Staff Acknowledgments
    Page 38GAO/GGD/AIMD-00-224 Automated Teller Machin
    e
    GAO Contacts
    Thomas J. McCool (202) 512-8678
    Kay Harris (202) 512-8678

    Acknowledgments
         In addition to the persons named above, Davi
    D'Agostino, Richard Hung, Harry Medina, Robert
    Pollard, and Karen Tremba made key contributions
    to this report.

    *** End of Document ***