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

ï¿½    American Bankers Association, a national
 trade association representing financial
 institutions of all sizes;
ï¿½    Consumer Bankers Association, a national
trade association representing retail banking
interests of financial institutions;
ï¿½    Electronic Funds Transfer Association, an
inter-industry trade association dedicated to the
advancement of electronic payment systems and
commerce;
ï¿½    Independent Community Bankers Association, a
national trade association representing community
banks; and
ï¿½    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:

ï¿½    message processing,
ï¿½    calculation of ATM fees, and
ï¿½    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.

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