Military Banking: Solicitations, Fees, and Revenue Potential (Letter
Report, 04/15/99, GAO/NSIAD-99-72).

Pursuant to a legislative requirement, GAO provided information on the
Department of Defense's (DOD) domestic banking program on military
bases, focusing on whether: (1) domestic military bases have followed
DOD procedures to provide for open solicitations in obtaining banking
services; (2) on-base financial institutions face competition for
banking services from other financial institutions and charge fees
competitive with other banks; and (3) opportunities exist for DOD and
military bases to generate additional revenues from banking services on
military bases and how this might affect banking services and customers.

GAO noted that: (1) in the 15 instances where domestic military bases
sought banking services since 1996, the military services openly
solicited proposals from financial institutions and selected from among
the proposals to authorize a bank or credit union to operate on the
base, as required by DOD regulations; (2) 11 of the solicitations
resulted in 2 or fewer responses; (3) in a few instances where no
proposals were received, DOD had to take special action to obtain
banking services; (4) GAO learned of no unsolicited proposals from
financial institutions to provide banking services on other bases; (5)
when a base received more than one proposal, commanders cited a range of
factors on which they based their selection decisions, such as fees,
operating hours, or services; (6) the applicable regulations and
instructions do not contain specific guidance for this selection
process; (7) solicitations did not specify selection criteria or the
weights associated with various factors considered; (8) the lack of
clear selection criteria makes it difficult to know the basis for
selection and ensure fairness in the selection process; (9) financial
institutions on military bases face significant competition both on and
off the base; (9) less than half of DOD's personnel use an on-base
financial institution as their primary banking provider, according to a
1997 DOD survey; (10) on many bases, a bank and a credit union compete
for business with each other and with off-base financial institutions;
(11) fees charged by base financial institutions were close to the
national average and within the range charged by all banks, on or off
base; (12) a few options exist for potentially generating additional
revenues for DOD from financial institutions operating on its bases; how
successful such options would be is unclear, and customers and banking
services could be adversely affected; (13) given that many banks' lease
agreements on military bases extend to 25 years, DOD could raise an
unknown amount of additional revenue by incorporating in new leases and
operating agreements the requirement to periodically renegotiate lease
payments based on changes in fair market value, although there is some
risk that lease payments might decline; (14) DOD could negotiate
automated teller machine (ATM) fee-sharing arrangements, as is sometimes
done in the private sector; (15) DOD could competitively solicit ATM
placements apart from other banking services; (16) the amount of
additional revenues that could be obtained would vary by market
conditions, including customers' reactions to likely increases in ATM
charges.

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

 REPORTNUM:  NSIAD-99-72
     TITLE:  Military Banking: Solicitations, Fees, and Revenue
	     Potential
      DATE:  04/15/99
   SUBJECT:  Military bases
	     Prices and pricing
	     Financial institutions
	     Revenue sharing
	     Evaluation criteria
	     Competition
	     Bid evaluation
	     Fair market value
	     Electronic funds transfer
	     Savings and loan associations

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ns99072 GAO

United States General Accounting Office

Report to Congressional Requesters

April 1999 MILITARY BANKING Solicitations, Fees, and Revenue
Potential

GAO/NSIAD-99-72

United States General Accounting Office Washington, D.C. 20548
Lett er

Page 1 GAO/NSIAD-99-72 Military Banking

GAO

National Security and International Affairs Division Lett er

B-281135 Letter

April 15, 1999 The Honorable Floyd Spence Chairman The Honorable
Ike Skelton Ranking Minority Member Committee on Armed Services
House of Representatives

In your Committee's report on the National Defense Authorization
Act for Fiscal Year 1999, you expressed concern about the
Department of Defense's (DOD) domestic banking program on military
bases and required that we review certain aspects of the program.
In response to that mandate, we determined whether (1) domestic
military bases have followed DOD procedures to provide for open
solicitations in obtaining banking services, 1 (2) on-base
financial institutions face competition for banking services from
other financial institutions and charge fees competitive with
other banks, and (3) opportunities exist for DOD and military
bases to generate additional revenues from banking services on
military bases and how this might affect banking services and
customers.

Results in Brief In the 15 instances where domestic military bases
sought banking services since 1996, the military services openly
solicited proposals from financial

institutions and selected from among the proposals to authorize a
bank or credit union to operate on the base, as required by DOD
regulations. Eleven of the solicitations resulted in two or fewer
responses. In a few instances where no proposals were received,
DOD had to take special action to obtain banking services. We
learned of no unsolicited proposals from financial institutions to
provide banking services on other bases. When a base received more
than one proposal, commanders cited a range of factors on which
they based their selection decisions, such as fees, operating
hours, or services. The applicable regulations and instructions do
not contain specific guidance for this selection process. Further,
solicitations did not specify selection criteria or the weights
associated with various factors considered. The lack of clear
selection criteria makes it difficult to know the basis for
selection and ensure fairness in the selection process.

1 The general procurement laws do not apply because the bases are
not procuring services for the direct benefit of the government
and are not using appropriated funds.

B-281135 Page 2 GAO/NSIAD-99-72 Military Banking

Financial institutions on military bases face significant
competition both on and off the base. Less than half of DOD's
personnel use an on-base financial institution as their primary
banking provider, according to a 1997 DOD survey. On many bases, a
bank and a credit union compete for business with each other and
with off-base financial institutions. Fees charged by base
financial institutions were close to the national average and
within the range charged by all banks, on or off base.

A few options exist for potentially generating additional revenues
for DOD from financial institutions operating on its bases; how
successful such options would be is unclear, and customers and
banking services could be adversely affected. First, given that
many banks' lease agreements on military bases extend to 25 years,
DOD could raise an unknown amount of additional revenue by
incorporating in new leases and operating agreements the
requirement to periodically renegotiate lease payments based on
changes in fair market value, although there is some risk that
lease payments might decline. Second, DOD could negotiate
automated teller machine (ATM) fee-sharing arrangements, as is
sometimes done in the private sector. Third, DOD could
competitively solicit ATM placements apart from other banking
services. The amount of additional revenues that could be obtained
would vary by market conditions, including customers' reactions to
likely increases in ATM charges.

Background DOD has arranged for banks and credit unions to operate
on military bases for decades, providing convenient banking
services for military and civilian

personnel assigned there. They also serve official purposes such
as disbursing funds or serving as a depository for funds generated
by other activities on military bases. According to DOD data, 116
domestic bases have banks and 223 have credit unions, which
together field over 1,000 ATMs. 2

DOD transferred management responsibility for its domestic and
overseas banking programs to the Defense Finance and Accounting
Service in 1998. The Office of the Under Secretary of Defense
(Comptroller), which

2 Based on DOD data as of September 1998. We did not validate the
data, but we noted that the list included bases targeted to be
closed under the base realignment and closure process, and in a
few instances omitted base information. Nevertheless, the data
appears to provide a general indication of the overall size of
DOD's banking program.

B-281135 Page 3 GAO/NSIAD-99-72 Military Banking

previously managed the programs, now provides policy guidance.
Banks on bases are subject to both state and federal regulations.

Procedures that apply to bank operations on military bases in the
United States 3 are different from those that apply to such
services on bases overseas. In the United States, banks and credit
unions typically operate on military bases based on written
operating agreements issued under DOD and service policy guidance.
In contrast, DOD contracts for overseas banking services under the
Federal Acquisition Regulation. 4 (See app. I for information on
DOD's overseas banking program.) Military affiliated credit unions
chartered in the United States are often permitted to establish
branch offices on U.S. military bases in other countries, but they
are not under contract with DOD.

No specific statute governs the solicitation and selection of
financial institutions to provide a full spectrum of banking or
credit union services on domestic military bases. 5 DOD has issued
regulations that call for military bases to initially solicit
proposals from nearby financial institutions. 6 The military
services also solicit nationally, if necessary. DOD regulations
delegate authority to the services to prescribe regulations for
soliciting financial institutions and selecting the institution
making the best offer. According to DOD officials, financial
institutions may also submit unsolicited proposals to provide
banking services on military bases. As of February 1999, DOD was
reviewing and revising its regulations and intended to publish the
proposed regulations for comment in the near future.

DOD's regulations currently direct the military services to
prescribe procedures for soliciting financial institutions and
require that the services review proposals to establish banking
offices and select the banking

3 Includes the Commonwealth of Puerto Rico.

4 See 48 C.F.R chapter 1 (1998).

5 The Competition in Contracting Act does not apply in this
instance because this law applies to the military services'
procurement of property and services directly benefiting the
government and for which payment is to be made from appropriated
funds (10 U.S.C. 2302 et. seq.).

6 DOD Instruction 1000.12, Procedures Governing Banking Offices on
DOD Installations, as codified at 32 C.F.R. Part 230; DOD
Directive 1000.11, Financial Institutions on DOD Installations, as
codified at 32 C.F.R. Part 231; and DOD Instruction 1000.10,
Procedures Governing Credit Unions on DOD Installations, as
codified at 32 C.F.R. Part 231a.

B-281135 Page 4 GAO/NSIAD-99-72 Military Banking

institution making the best offer. 7 These regulations provide
general guidance on how financial institutions are to be
solicited. The military services' regulations more fully describe
how proposals from financial institutions are to be solicited, for
example, by contacting nearby institutions and placing
advertisements in local newspapers. 8 However, none of the
regulations provide guidance on evaluating submitted proposals.

Under DOD regulations, solicitations for banking services
originate with individual base commanders' identification of a
need for banking services and a request that their service
headquarters authorize a solicitation for proposals for a
financial institution to operate on the base. Once selected, these
financial institutions are required to sign a lease for space
and/or an operating agreement specifying their services and fees.
Banks are to pay not less than fair market value for space they
occupy, 9 while credit unions may occupy facilities without charge
under certain conditions. 10 The term of a lease for government-
owned facilities generally does not exceed 5 years. Because banks
and credit unions may construct buildings on military bases, land
lease agreements may be long term, up to 25 years. Banks and
credit unions having their own facilities on base reimburse the
bases for government-furnished services, including utilities. DOD
regulations require that all leases contain a clause that allows
DOD to withdraw authorization for cause or because of DOD
decisions about base operations such as base closure,
deactivation, or substantial realignment.

Within the last 4 years, the Defense Commissary Agency and the
Army & Air Force Exchange Service have begun signing agreements
with banks and credit unions to operate inside their facilities.
In some cases, the financial institutions receive space at no cost
in return for helping with cash

7 32 C.F.R. 230.4(d)(1) and (2).

8 The services have issued their own separate regulations: Army
Regulation 210-135, Banks and Credit Unions on Army Installations;
Air Force Instruction 65-701, Banking Services on Air Force Bases
and Air Force Instruction 65-702, Credit Unions on Air Force
Installations; and Secretary of Navy Instruction 5381.5A,
Financial Institutions on Navy and Marine Corps Installations.

9 10 U.S.C. 2667 specifies that all money received under leases
entered into by the secretary of a military department shall be
deposited in a special account established in the Treasury for the
department except amounts paid for utilities and services. Fifty
percent of the money deposited in the account is available for
facility maintenance and repair or environmental restoration at
the base where the leased property is located and 50 percent is
for facility maintenance and repair and for environmental
restoration by the military department concerned.

10 Congress specifically authorized this benefit in 12 U.S.C.
1770.

B-281135 Page 5 GAO/NSIAD-99-72 Military Banking

management activities for retail operations. Leasing issues
regarding base involvement in decisions by commissaries and
exchanges, including leasing fees, are still under DOD review.

The Conference Report accompanying the 1999 Defense Appropriation
Act requires that any bank offering financial services to a base
must provide a full range of banking services, including ATMs. 11
This direction is consistent with DOD policy that generally only
financial institutions authorized to operate on the base may place
ATMs there. Where a base does not have enough personnel to sustain
operation of a full service bank, the base commander has the
authority to solicit proposals for a sustainable level of
financial services, such as ATMs. The domestic banking program
does not procure a service for the military and is not financed
with appropriated funds, so the general procurement laws do not
apply. 12

Consequently, there is no statutory requirement that the selection
of domestic banking services be performed on a competitive basis.
Likewise, there are no statutory or administrative requirements
that, once a financial institution is selected at a particular
base, the provision of banking services be recompeted in the
future.

DOD Openly Solicits Financial Institutions for Banking Services

The military services have conducted 15 solicitations for banking
services in the past 3 years. Our review of case files showed that
bases followed DOD's procedures requiring open solicitations.
However, solicitations during this time drew few responses and in
some cases none.

Most of the solicitations since 1996 were for financial
institutions that would provide a full range of banking services.
In three cases, small bases without banking services requested
only ATM service. Our review of case files of recent solicitations
for banking services indicates that the military departments
solicited proposals from local and national financial institutions
where a need for financial services existed because of new
requirements or because a bank ceased operations on the base.
Table 1 summarizes military departments' solicitations since 1996
and the justification for the solicitation and notes special
circumstances about the solicitations.

11 House Report 105-746, page 86 (1998).

12 See 10 U.S.C. 2303(a).

B-281135 Page 6 GAO/NSIAD-99-72 Military Banking

Table 1: Solicitations for Financial Institutions (1996- 98)

a AFB = Air Force Base. Source: Our analysis of DOD data.

Service/ base Banking

service solicited Reason for solicitation Number of

proposals received Comments

Army

Fort Irwin, Cal. Bank New service 0 Base worked with Association
of Military Banks of America to identify prospective bank and
solicit a proposal.

Arlington Hall National Guard Bureau, Va. Credit union New service
2 Two credit unions were eligible to compete based on membership
requirements.

U. S. Southern Command, Miami, Fla. ATM New service 5 The base
selected the offerer with the lowest surcharge for nonaccount
holders: $. 75. Camp Frank D. Merrill, Ga. ATM New service 0 One
bank expressed interest after the original solicitation closed.
The base undertook a new solicitation and received one proposal
that it accepted.

Navy/ Marine Corps

Naval Air Station, Corpus Christi, Tex. Bank Bank left 1 The base
agreed to provide support to the bank at no cost until it could
become profitable.

Naval Training Center, Great Lakes, Ill. Bank Bank left 3 The bank
not selected filed a protest with GAO, which GAO dismissed because
of lack of jurisdiction.

Marine Corps Air Ground Combat Center, Twentynine Palms, Cal.

Bank Bank left 3 A base selected a local bank, but the bank
declined. The base then accepted the proposal rated next highest.
Marine Corps Recruit Depot, Parris Island, S. C. Bank Bank left 5
Bank selected agreed to offer special services to the

base by providing recruits point of sale cards for purchase of
necessities on base during training.

Air Force

Beale AFB, a Cal. Bank New service 1 Base solicited banks to
operate in the commissary. Bolling AFB, a Washington, D. C. Bank
Bank left 2 Solicitation was for a bank to operate in the
commissary, but Air Force files were incomplete.

Charleston AFB, a Charleston, SC Bank Bank left 4 Base bank closed
operations after a merger. Base solicited banks to operate in the
commissary. Dover AFB, a Del. Bank Bank left 2 No local banks
submitted proposals. Edwards AFB, a Cal. Bank Bank left 2 Air
Force files were incomplete. Travis AFB, a Cal. Bank Bank left 2
Local banks expressed interest but did not submit

proposals. Proposals were from national banks. Will Rogers World
Air National Guard Base ATM New service 0 No banks or credit
unions submitted proposals. The

base then signed an agreement with an ATM vendor to provide
service in exchange for surcharge revenue.

B-281135 Page 7 GAO/NSIAD-99-72 Military Banking

As shown in table 1, the services did not receive many proposals
in response to a number of the solicitations. In three casesFort
Irwin and Travis Air Force Base in California and Dover Air Force
Base in Delawaresolicitations to local financial institutions did
not elicit responses, but banks from out of the area responded. At
Fort Irwin, initial solicitations to nine local financial
institutions did not produce any proposals, so the Army advertised
through the Association of Military Banks of America, a trade
association of on-base banks, and received one proposal.

The small number of proposals received through broad, nationwide
solicitations indicates that banks do not see on-base operations
as very profitable, especially where bases are small or in remote
locations. Most of DOD's recent solicitations were to fill voids
created when banks left bases, according to DOD officials. In some
cases, base banks were taken over in mergers, and the new
management decided to stop on-base operations. This was the
situation Fort Myer, Virginia, faced in 1994 when the new owner of
the on-base bank ceased its operation, turning over its building
to the base. Because DOD's solicitation did not result in any
proposals, DOD worked with the Association of Military Banks of
America to find a bank willing to operate on the base. As an
incentive, the base agreed to provide facilities and logistical
support at no cost for several years, although the bank hopes to
attain profitability and begin paying leasing and operations fees
within 2 years.

Selection Criteria Not Clearly Stated

While DOD and military service regulations provide guidance as to
solicitation procedures, they do not specify factors that base
commanders should use to select a financial institution or state
the weight that should be given to each factor. DOD regulations
simply state that the bank making the best offer is to be
selected. Our file review indicated that base commanders selected
from among proposals based on distinguishing factors such as fees,
hours, and range of services. We also noted that there is no
criteria to guide banks in preparing proposals. While solicitation
letters indicated in general the types of services the financial
institutions would be expected to provide, they did not clearly
state the relative importance of each requirement. The Army has
developed a standardized procedure for evaluating proposals that
includes developing weighted factors that define the importance of
each criterion for a particular solicitation. Additional clarity
in stating the selection criteria would help financial
institutions tailor their proposals to meet the installations'
priorities and ensure fairness in the selection process.

B-281135 Page 8 GAO/NSIAD-99-72 Military Banking

Base Financial Institutions and Fees Are Competitive With

Off-Base Banks

Our analysis shows that financial institutions on bases face
competition from several sources, both on and off the base.
Moreover, a 1997 DOD survey indicates that DOD personnel were
satisfied with banking services both on and off base. Our
comparison of data on fees charged by banks and credit unions
indicates that fees charged on bases were within the range of fees
charged by all commercial banks.

Financial Institutions Face Competition on and off Bases

DOD generally limits financial institutions on each base to one
bank and one credit union. According to DOD and service officials,
this arrangement provides competition between the two types of
financial institutions. DOD's data indicates that over 100 bases
have both a bank and a credit union, and over 100 more have only a
credit union. On the bases we visited, bank and credit unions
offered similar services and provided a choice to base personnel.

Bases with both banks and credit unions vary in size from about
1,800 personnel to over 50,000. Most large bases have both a
credit union and a bank: 29 of 33 bases (88 percent) with more
than 15,000 military and civilian personnel had two financial
institutions. Smaller bases less frequently had two institutions
on base: 61 percent of bases with 5,000 to 15,000 personnel and 31
percent of bases with 1,000 to 5,000 personnel had both a bank and
a credit union. None of the 14 bases with fewer than 1,000
personnel had two institutions on base. The largest bases have
populations that might support more than two full service
financial institutions. However, DOD officials told us that they
did not believe that most bases could support more than two
financial institutions.

Military personnel and DOD civilians also have many off-base
alternatives to the base financial institutions. In most cases,
there are banks in communities near bases where many DOD military
and civilian employees live. According to DOD officials, most
servicemembers who live on bases have transportation options that
make it possible for them to bank with financial institutions in
the local area if they choose. The growth in electronic and
telephone banking has provided additional competition for on-base
banks because remote banking services are conveniently accessible.

Available data suggests that DOD personnel were satisfied with the
banking facility they used most often whether they banked on or
off the base. In DOD's 1997 survey of military and DOD civilian
employees, a large majority

B-281135 Page 9 GAO/NSIAD-99-72 Military Banking

(89 percent) of the 8,403 U.S.-based survey respondents reported
that they were satisfied or very satisfied with the financial
institution they used most often. 13 Of the U.S.-based respondents
who used an on-base financial institution on their current base
most often, 88 percent said they were satisfied or very satisfied.
Only 37 percent of the respondents said that the financial
institution they used most often was a bank or credit union on the
base to which they were assigned. About 8 percent of the
respondents named the on-base bank as the financial institution
they used most often, while 29 percent named the on-base credit
union. The largest percentage of respondents (about 35 percent)
reported that they most often used a bank not on a military base.

Fees Charged Are Similar Both on and off Bases

Fees charged by on-base financial institutions were within the
range of those charged by all banks. According to DOD procedures,
on-base banks' fees may not exceed customary fees charged for off-
base operations. We reviewed data collected by the Federal Reserve
Board in June 1997 14 and compared the data with data DOD
collected (in August 1998) on financial institutions on bases. We
found that the average ATM fees for military banks for which data
were available were close to the average of all banks. The average
ATM fees for credit unions were less than the average of all
banks. However, banks and, with one exception, credit unions on
bases charged higher fees for customers that had insufficient
funds in their accounts than the national average, although the
range of charges on bases was within the range of all banks.

ATM Fees Banks and credit unions on bases, like those off bases,
generally do not charge their own account holders or members to
use ATMs they own. The Federal Reserve Board reported in its June
1998 report that less than 8 percent of all banks charge their
account holders for the use of ATMs the banks own. According to a
1998 financial survey by the Armed Forces Financial Network, 11
percent of military households reported paying a fee to use their
financial institutions' ATMs. However, according to the data on
ATM charges at 118 banks and 175 credit unions on military bases
we collected during this review, only two banks (1 percent) and no
credit

13 The 1997 DOD Financial Services Survey: A Study for the Office
of the Under Secretary of Defense (Comptroller), Defense Manpower
Data Center, DMDC Report No. 98-008, September 1998.

14 Annual Report to the Congress on Retail Fees and Services of
Depository Institutions , Board of Governors of the Federal
Reserve System, June 1998.

B-281135 Page 10 GAO/NSIAD-99-72 Military Banking

unions charged their account holders or members any fees to use
their ATMs. 15

Most banks on bases impose surcharges or fees for nonaccount
holders' or nonmembers' use of the ATMs they own, as do most
commercial banks. We reported that 64 percent of banks that
operated ATMs as of February 1, 1998, assessed surcharges on at
least some of their ATMs. 16 We also reported that in February
1998 the average surcharge for all banks with surcharges was
$1.27. In comparison, 91 percent of banks on bases we reviewed
assessed ATM surcharges on nonaccount holders and the average
surcharge was $1.19. Credit unions on bases less frequently charge
nonmembers that use their ATMs, but for the 29 percent that did,
the average charge was $1.03. Table 2 shows the average and range
of ATM fees and the percent of financial institutions on military
bases charging nonaccount holders.

15 Our sample included banks located on military bases from each
service.

16 Automated Teller Machines: Survey Results Indicate Banks'
Surcharge Fees Have Increased (GAO/GGD-98-101, Apr. 24, 1998).

B-281135 Page 11 GAO/NSIAD-99-72 Military Banking

Table 2: Charges for ATM Use by Nonaccount Holders or Nonmembers
on Military Bases

Note: The means presented refer to banks that assess surcharges
but not to banks that do not assess surcharges; the range and
percent refer to the whole sample. Source: Our analysis of data
provided by the services.

Most banks assess their account holders a charge to use an ATM
owned by another bank, as do most financial institutions on bases.
Fees charged by banks nationally ranged from $0.25 to $2.00 and
averaged $1.14 in 1997, according to the Federal Reserve Board
study. Fees charged by banks on bases ranged from $0.45 to $2.00
and averaged $1.20. Just over half of credit unions charged a fee
that averaged $0.94. Table 3 shows the average, range, and percent
of fees charged to account holders of banks and credit unions on
military bases that use other financial institutions' ATMs.

Service Characteristic Bank Credit union Army Mean $1. 17 $1.07

Range $0- 2. 00 $0- 2. 00 Percent charging a fee 93 46

Navy Mean $1. 17 $0.78 Range $0.45 to 2.00 $0- 1.00 Percent
charging a fee 100 3

Marine Corps Mean $1. 14 $1.10 Range $0- 1. 50 $0- 1. 50 Percent
charging a fee 78 31

Air Force Mean $1. 23 $0.97 Range $0- 2. 00 $0- 1. 50 Percent
charging a fee 88 48

All services Mean $1. 19 $1.03 Range $0- 2. 00 $0- 2. 00 Percent
charging a fee 91 29

B-281135 Page 12 GAO/NSIAD-99-72 Military Banking

Table 3: Charges by Banks and Credit Unions for Their Account
Holders' or Members' Use of an ATM Owned by Another ATM Provider
Note: The means presented refer to banks that assess surcharges
but not to banks that do not assess surcharges; the range and
percent refer to the entire sample.

Source: Our analysis of data provided by the services.

Other Fees On-base banks' average fee for a check returned for
insufficient funds was higher ($19.93) than the average of all
banks ($16.55) according to Federal

Reserve data. The insufficient funds charges by banks on bases
ranged from $8 to $29 compared to all banks' range of $5 to $30.
The average charge by credit unions on bases was $17.41 and ranged
from $10.00 to $35.00. Returned check charges by all banks and,
with one exception, credit unions on military bases fell within
the range of charges the Federal Reserve Board found.

Although the Federal Reserve Board study provided no average fees
for money orders, we found that banks and credit unions on bases
most typically charged $1.00 for this service. Charges by banks on
bases averaged $2.16 and ranged between $0.50 and $5.00. In
comparison, charges at base credit unions averaged $1.17 and
ranged from $0.00 to $6.00.

Service Characteristic Bank Credit union Army Mean $1. 21 $1.04

Range $0- 2. 00 0- 2.00 Percent charging a fee 93 57

Navy Mean $1. 06 $0.77 Range $0- 1. 50 $0- 1.00 Percent charging a
fee 94 32

Marine Corps Mean $1. 36 $0.86 Range $0- 1. 50 $0- 1.00 Percent
charging a fee 78 94

Air Force Mean $1. 24 $0.99 Range $0- 2. 00 $0- 1.00 Percent
charging a fee 92 61

All services Mean $1. 20 $. 94 Range $0- 2. 00 $0- 2.00 Percent
charging a fee 93 51

B-281135 Page 13 GAO/NSIAD-99-72 Military Banking

Potential for Raising Revenue From Base Financial Institutions Is
Uncertain

To respond to the mandate to examine options for generating
revenues from financial institutions, we identified three options
DOD could examine to potentially raise additional revenue from
financial institutions operating on military bases: (1) increase
lease charges; (2) seek to share revenues banks receive through
service fees, such as ATM fees; or (3) competitively solicit bases
for ATM placements apart from other banking services. 17

These options may require changes in the rules that now govern
banking on military bases. The precise impact of these actions on
the quality of life on military bases is uncertain. Some financial
institutions operating on the bases might be able to afford higher
payments than they currently make, while others might not. The
recent history of banks leaving bases due to low profits suggests
that additional fees might further reduce the attractiveness of
on-base operations.

Adjusting Current Lease Fees Based on Fair-Market Value

Since 1991, 10 U.S.C. 2667 has required that banks pay in cash or
in kind not less than fair market value for the use of government-
owned land or facilities on military bases. 18 To increase its
revenues, DOD could change future lease and operating agreements
to provide for periodically reviewing and adjusting lease fees
based on changes in fair market value.

Under current procedures, lease charges for financial institutions
remain constant through the life of lease agreementsup to 25
years. According to service officials, banks that signed leases
before 1992 pay a nominal fee through the term of their leases, in
accordance with regulations in effect before 1992. Banks that
signed leases after 1992 pay the current fair market value for the
term of their leases. DOD could change its procedures to include a
recurring assessment of fair market value on long-term leases to
ensure that banks' leases reflect current conditions. Neither the
Army Corps of Engineers, which determines fair market value for
Army and Air Force bases, nor the Navy's Engineering Division,
which determines fair

17 10 U.S.C. 2667(d) requires military departments to deposit any
money received from rentals into a special account in the Treasury
to be used for certain purposes, such as facility maintenance and
repair. Any other moneys received must be deposited into the
Treasury as miscellaneous receipts (31 U.S.C. 3302(b)) unless
otherwise authorized by law.

18 In some cases, DOD may provide facilities and operating
support, such as utilities, at no cost to banks based on their
profitability. At the time of our review, three banks received
facilities and operating support at no cost. These banks were
located on Fort Myer, Virginia; the Naval Air Station, Meridian,
Mississippi; and the Naval Air Station, Corpus Christi, Texas.

B-281135 Page 14 GAO/NSIAD-99-72 Military Banking

market value for Navy and Marine Corps bases, currently have
regulations that require periodic reviews of fair market value.

Fee Sharing of ATM-Related Surcharges

DOD does not currently assess any fees that are dependent on
financial institutions' revenues from banking operations on
military bases, and it is unlikely that financial institutions
would readily share such information with DOD. To raise revenues,
DOD could implement a fee-sharing arrangement related to ATM
surcharges.

The profitability of ATMs depends on the number of transactions
they makeparticularly transactions for nonaccount holders that pay
a surcharge. Banking officials said that banks in the private
sector sometimes pay set amounts and/or enter into fee-sharing
arrangements to place ATMs in high-traffic locations such as
grocery stores and airports. According to these officials, this
practice varies according to the desirability of the location,
based on access to customers and potential customers' alternatives
for obtaining cash.

Officials of banks and credit unions now authorized to operate on
bases said that their current placement of ATMs is not necessarily
driven by direct profits from individual ATMs. They said they
serve the base community by providing ATMs that are convenient for
the military community, for example, in barracks and at remote
training sites, but are not very profitable. Often, base officials
ask banks or credit unions to place ATMs in locations to benefit
the base community. For example, officials at the Marine Corps
Base at Quantico, Virginia, asked the base credit union to support
an ATM at its bachelor officers' quarters. The credit union
complied, although a credit union representative reported that the
ATM does not produce large profits.

Competition for ATM Placements

A related option to raise revenue for DOD might be to
competitively solicit placement of ATM operations on military
bases apart from full service banking operations. This option
might generate revenue by requiring that ATM sponsors pay a flat
fee or a percentage of revenues from transactions to DOD. Some ATM
vending companies might be willing to pay to locate ATMs in prime
locations on military bases. Some banking representatives stated
that increased competition through representation of additional
financial institutions would raise money for bases. Of the 15
recent solicitations DOD conducted, three involved solicitations
for ATM service only. In one case, the base was small and remote,
and the base initially

B-281135 Page 15 GAO/NSIAD-99-72 Military Banking

received no proposals. In another, the base was a headquarters
office building located in an urban area and received five
proposals. In the third case, a base that received no proposals
entered into an agreement with an ATM vendor to provide ATM
service in return for 30 percent of the surcharge revenue. DOD's
preference is to obtain full-service banking on its bases where
feasible so that DOD personnel will have convenient access to a
range of banking services and financial counseling.

The amount of revenue that could be raised by soliciting bids to
provide ATMs would depend on how financial institutions valued
selected sites on individual bases. While ATM vendors might be
willing to pay to locate ATMs in high foot-traffic areas,
according to DOD banking officials, it is unlikely that vendors
would support ATMs at less popular locations without a high
surcharge. DOD officials expressed concern about the potential
negative impact of separating the provision of ATM services from
its full service banking program. In a report to the House
Committee on Appropriations on competitive banking procedures, DOD
said that the only way stand-alone ATMs would create significant
revenues for DOD would be by levying substantial new ATM
surcharges on DOD military personnel and their families. 19
According to this report, such a charge would most negatively
affect junior-grade enlisted personnel because they are least able
to afford surcharges imposed on the use of ATMs. Further, the
report stated that the adverse financial consequences on
individual servicemembers would outweigh any benefits to DOD.

While this option might raise some revenue for DOD, it conflicts
with DOD's current policy of granting exclusive rights for ATMs to
its on-base financial institutions. It might make on-base
operations less attractive and further erode the full-service
banking capability DOD seeks. In addition, this option would be
inconsistent with the direction in the Conference Report
accompanying the 1999 Defense Appropriation Act that any bank
offering financial services on an installation must provide a full
range of banking services.

Impact of Efforts to Increase Fees Could Vary by Base

It is difficult to forecast in advance precisely what effects
would result from efforts to increase revenues generated for DOD
from banks and credit unions operating on military bases. Much
would likely depend on the profitability of existing operations.
In some situations financial institutions

19 Department of Defense, Report on Competitive Banking Procedures
, September 17, 1998.

B-281135 Page 16 GAO/NSIAD-99-72 Military Banking

might be expected to increase fees to try to make up the
difference in their profits, with their customers bearing the
additional costs. In some situations, banks might decide to cease
operations on bases, as some have done in the past based on
concerns over profitability.

Faced with higher fees, some current on-base bank customers might
take their accounts to other financial institutions with lower
fees, either on or off base. In its 1997 financial survey, DOD
found that low prices were a major factor in choosing a financial
institution for most respondents. In a 1998 survey conducted for
the Armed Forces Financial Network, a sizeable majority (78
percent) of DOD respondents reported that they would change their
current behavior to avoid ATM fees and would not use an ATM where
they were charged $2 or more. 20

DOD officials and representatives of financial institutions on
military bases told us that because the number of people with
access to on-base bank and credit union facilities is limited, the
profitability and stability of current on-base financial
institutions could be at risk if their net revenues were decreased
by increases in operating costs. In some cases, according to DOD
and banking officials, banks and credit unions would probably
leave their on-base locations if operating costs increased. If
banks that hold bases' Treasury general accounts 21 left, the
bases' costs to obtain these services would increase.

Of the three options, the one that would provide competitive
placement of ATMs on bases apart from other banking services would
likely have the greatest impact on current banking operations. The
on-base financial institutions that currently provide ATM service
would incur additional costs to provide the service or would lose
access to the most potentially profitable locationsthose likely to
be bid on by off-base ATM vendors. Both outcomes would decrease
revenues for institutions currently on basespotentially causing
them to leave the base.

In its report to Congress on competitive banking procedures, DOD
stated that the loss of an on-base bank has historically been
detrimental to

20 The Armed Forces Financial Network is a provider of networking
capability jointly sponsored by the Association of Military Banks
of America and the Defense Credit Union Council.

21 The Department of the Treasury establishes Treasury general
account relationships with financial institutions so that federal
program agencies will have access to efficient and effective
systems for the management of public funds.

B-281135 Page 17 GAO/NSIAD-99-72 Military Banking

productivity because assigned personnel must travel off base to
obtain financial services. In addition, on-base entities such as
DOD disbursing officers, commissaries, and nonappropriated fund
instrumentalities would incur additional costs to meet their
banking needs. DOD officials expressed further concern that
revenue generated by separate vendor- offered ATM services might
not be sufficient to offset the additional costs to DOD due to the
loss of on-base banks.

Conclusions When needs for banking services have arisen, the
services have publicly solicited proposals from banks and credit
unions. We found that

solicitations often indicate factors important to the bases in
selecting from among proposals, and selecting officials cited
varying factors influencing their selections; however, we could
not determine the importance and weight of each criterion in the
selection process for each solicitation. Better identification of
the selection criteria and the relative importance of each
criterion could be useful in enhancing proposals received and
fostering greater assurance of fairness in the selection process.

Banking service fees on military bases appear to be within the
range of charges found at banks nationally, although some fees
appear to be higher than national averages.

DOD could ensure it continues to receive fair market value for use
of its facilities by financial institutions by periodically
reassessing the fair market value associated with long-term
leases. However, lease fees could decrease if property values
decrease. DOD could also negotiate some type of fee-sharing
arrangement for ATM services. The extent to which higher costs
would be absorbed by financial institutions, be passed onto
customers, or affect the financial institutions' willingness to
provide services on military bases is uncertain and likely to vary
based on the characteristics of individual bases. However, an
adverse impact on customers or services could result if financial
institutions raise their fees to cover operating costs or leave
the base.

Recommendations We recommend that the Secretary of Defense direct
that forthcoming regulations governing banking on military bases
require base commanders

to ensure that solicitations for banking services include
information on factors and weights to be used in choosing among
competing proposals and

B-281135 Page 18 GAO/NSIAD-99-72 Military Banking

that the evaluation of proposals and the selection of on-base
financial institutions be based on those factors and weights.

We also recommend that the secretaries of the military departments
consider including in new long-term lease arrangements provisions
for periodically renegotiating fees based on updated fair market
value to better ensure that the government is obtaining payments
commensurate with the current value of the property.

Agency Comments In written comments on a draft of this report, DOD
concurred with both of our recommendations. DOD said that its goal
is to ensure that bank and

credit union services are available at reasonable cost to DOD
personnel on bases. DOD said that it would include provisions on
evaluation factors and weights in revised regulations on
solicitations currently under review. DOD also said it would
request that the military departments review their policies and
procedures to consider including in long-term leases periodic
renegotiation of fees. In commenting on the draft of this report,
DOD stated that it does not support any initiative that would levy
additional fees or charges for financial services on DOD personnel
to generate or increase revenue for an installation or other
organization. DOD's comments are reprinted in appendix II.
Appendix III sets forth the objectives, scope, and methodology of
our review.

We conducted our review between August 1998 and March 1999 in
accordance with generally accepted government auditing standards.

We are sending copies of this report to Senator John Warner,
Chairman, and Senator Carl Levin, Ranking Minority Member, Senate
Committee on Armed Services. We are also sending copies of this
report to the Honorable William S. Cohen, Secretary of Defense;
the Honorable William J. Lynn, Under Secretary of Defense
(Comptroller); the Honorable F. Whitten Peters, Acting Secretary
of the Air Force; the Honorable Louis Caldera, Secretary of the
Army; the Honorable Richard Danzig, Secretary of the Navy; the
Honorable Gary W. Amlin, Director, Defense Finance and Accounting
Service; and the Honorable Jacob J. Lew, Director, Office of
Management and Budget. Copies will also be made available to
others upon request.

B-281135 Page 19 GAO/NSIAD-99-72 Military Banking

Please contact me at (202) 512-8412 if you or members of your
staff have any questions concerning this report. Major
contributors to this report are listed in appendix IV.

David R. Warren, Director Defense Management Issues

Page 20 GAO/NSIAD-99-72 Military Banking

Contents Letter 1

Appendix I DOD's Overseas Banking Program

22

Appendix II Comments From the Department of Defense

23

Appendix III Objectives, Scope, and Methodology

25

Appendix IV Major Contributors to This Report

28

Tables Table 1: Solicitations for Financial Institutions (1996-98)
6 Table 2: Charges for ATM Use by Nonaccount Holders or

Nonmembers on Military Bases 11 Table 3: Charges by Banks and
Credit Unions for Their Account

Holders' or Members' Use of an ATM Owned by Another ATM Provider
12

Abbreviations

ATM automated teller machine DOD Department of Defense

Contents Page 21 GAO/NSIAD-99-72 Military Banking

Page 22 GAO/NSIAD-99-72 Military Banking

Appendix I

DOD's Overseas Banking Program

Appendi x I

The process for selecting commercial banks to operate on military
bases varies between U.S. domestic and overseas bases. Unlike
commercial banks that operate on domestic military bases under
lease arrangements and operating agreements with individual bases,
the Department of Defense (DOD) uses a formal contract with a
single U.S. bank to provide services to multiple locations
overseas. Such contracts are awarded on a cost-plus-fixed-fee
basis to provide DOD personnel banking services similar to those
they could obtain in the United States. 1 DOD may establish
overseas banks where allowed by bilateral agreements and host
country laws.

Currently, DOD supports banking facilities at 114 locations in
Germany, the Netherlands, the United Kingdom, Iceland, Japan,
Okinawa, South Korea, Diego Garcia, and Panama. Facilities and
logistical support for overseas banking services are provided by
the host component commands. DOD specifies fees charged for
banking services.

DOD awarded the current contract for overseas banking to
NationsBank of Texas. The contract's term is 5 years, from October
1995 through September 30, 2000, and the bank is to provide a
range of services at fees and locations DOD specifies. The total
cost of the contract, including costs and fees, is estimated at
$500 million. Fees charged to customers offset the major portion
of the costs, but the services also obligate appropriated funds
that, according to DOD officials, cover the fixed contract fee,
bad debts, and operating losses. In fiscal year 1998, the services
provided $11 million in appropriated funds.

1 Credit unions on domestic bases have in some instances
established branches on overseas bases, but these are not under
contract with DOD.

Page 23 GAO/NSIAD-99-72 Military Banking

Appendix II

Comments From the Department of Defense Appe ndi x I I

Appendix II Comments From the Department of Defense

Page 24 GAO/NSIAD-99-72 Military Banking

Now on pp. 17- 18. Now on p. 18.

Page 25 GAO/NSIAD-99-72 Military Banking

Appendix III

Objectives, Scope, and Methodology Appendi x I I I

In the House Armed Services Committee (formerly National Security)
report on the National Defense Authorization Act for Fiscal Year
1999, we were directed to review certain aspects of DOD's military
banking program. 1 Accordingly, we determined whether (1) domestic
military bases have followed DOD procedures to provide for open
solicitations in obtaining banking services; (2) on-base financial
institutions face competition for banking services from other
financial institutions and charge fees competitive with other
banks; and (3) opportunities exist for DOD and military bases to
generate additional revenue banking services on military bases and
how this might affect banking services and customers.

To review DOD's selection procedures for banking services for
domestic bases, we examined DOD regulations and the military
departments' implementing instructions governing solicitation of
financial institutions. We also met with officials of DOD's Office
of the Under Secretary of Defense (Comptroller) who have policy
oversight of DOD banking issues to discuss the history of banking
on military bases and DOD's ongoing review of the banking
regulations. We also met with officials from the Defense Finance
and Accounting Service who have operational oversight of both
overseas and domestic banking programs to obtain information about
the differences between the two programs. In addition, we met with
banking liaison personnel from the Air Force, the Army, the Navy,
and the Marine Corps to discuss the status of banking on military
bases and the services' solicitation processes. We reviewed the
case files of recent solicitations that were available to verify
whether the military departments openly solicited proposals for
banking services and selected from among the proposals. The
solicitation files did not contain proposals from banks that were
not selected. Therefore, we did not review the services'
evaluations of all proposals they received. Solicitation files for
two Air Force bases that had recent proposals were incomplete.

To identify the extent of competition for on-base financial
institutions we (1) matched a list of banks and credit unions on
military installations provided by DOD with information on base
size from DOD's Base Structure Report for fiscal year 1996 2 and
(2) met with DOD officials and representatives of on-base banks
and credit unions at four military bases Fort Myer, Virginia;
Bolling Air Force Base, Washington, D.C.; Fort Belvoir,

1 House Report 105-532 at page 281(1998).

2 Where installations with financial institutions were not in the
base structure report, we obtained infor- mation on base size from
service officials.

Appendix III Objectives, Scope, and Methodology

Page 26 GAO/NSIAD-99-72 Military Banking

Virginia; and Marine Corps Base Quantico, Virginiato discuss
whether financial institutions on military bases face competition
and the sources of that competition. We also discussed these
issues with representatives of the Association of Military Banks
of America and the Defense Credit Union Council. We reviewed The
DOD 1997 Financial Services Survey and the Armed Forces Financial
Network's 1998 Survey of Armed Forces Consumers Financial Services
Needs and Behaviors to obtain information about where military
consumers obtain their banking services and their satisfaction
with these services.

To determine whether banking service fees charged by financial
institutions on bases are competitive, we analyzed data from
several sources. First, we analyzed data DOD had collected from 46
banks and 86 credit unions to respond to congressional questions
on fees for selected services charged by financial institutions on
military bases. Not all DOD bases were represented in the
information DOD provided, but DOD officials said it represented a
fair sample of charges. We compared average fees from this sample
of banks with those for similar services charged by all banks, as
reported to the Federal Reserve Board. Although DOD information
was reported about 1 year after the Federal Reserve Board reported
information, the Federal Reserve Board provides a conservative
comparison point for charges on military bases.

We also reviewed financial institutions' charges for on-base ATM
service, including service to persons not having an account or
membership with the institutions. To obtain this information, we
asked the services to provide, for each base, the charges for ATM
service for (1) account holders using the financial institutions'
own ATMs, (2) account holders using ATMs owned by another
financial institution, and (3) nonaccount holders using the ATMs
on bases. We analyzed this data and compared the on-base ATM fees
with those from a sample of all banks we reported on in February
1998. We also collected fee information from bases we visited to
confirm the accuracy of data DOD provided.

To assess the potential for generating additional revenue from
financial institutions and possible impacts on the military
community if additional revenues were generated, we interviewed
DOD officials and military banking representatives to discuss
options for generating additional revenue from financial
institutions on military bases and consequences that might occur
if these options were exercised. We met with officials from the
bases we visited and discussed leasing practices with the Army
Corps of Engineers and the Naval Facilities Engineering Command.
We discussed

Appendix III Objectives, Scope, and Methodology

Page 27 GAO/NSIAD-99-72 Military Banking

revenue that DOD is currently receiving and obtained documentation
regarding lease fees and other payments that DOD collects from
financial institutions. We discussed the impacts of potential
revenue-raising options with banking representatives at the bases
we visited and with industry representatives. We also discussed
in-store banking facilities with representatives of banks and
credit unions on bases and the Defense Commissary Agency and the
Army & Air Force Exchange Service. We also discussed electronic
banking issues with representatives of banks not on military bases
to obtain information about how remote ATMs are placed at
commercial sites.

Page 28 GAO/NSIAD-99-72 Military Banking

Appendix IV

Major Contributors to This Report

Appendi x I V

National Security and International Affairs Division, Washington,
D.C.

Barry W. Holman Donald C. Snyder Margaret G. Morgan Jennifer M.
Thomas Richard R. Irving

Office of the General Counsel, Washington, D.C.

William T. Woods Raymond J. Wyrsch

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