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 Letr

Page 1 GAO/NSIAD-99-72 Military Banking

GAO

National Security and

International Affairs Division Letr

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 Committees report on the National Defense Authorization Act for

Fiscal Year 1999, you expressed concern about the Department of

Defenses (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.

1The 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 DODs 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

2Based 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 DODs 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

States3 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 DODs 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.

DODs 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

3Includes the Commonwealth of Puerto Rico.

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

5The 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.).

6DOD 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

732 C.F.R. 230.4(d)(1) and (2).

8The 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.

910 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.

10Congress 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

DODs 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.

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

12See 10 U.S.C. 2303(a).
B-281135

Page 6 GAO/NSIAD-99-72 Military Banking

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

aAFB = 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

DODs 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 DODs 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.

DODs 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

DODs 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

13The 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.

14Annual 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.

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

16Automated 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 Navys Engineering Division, which determines fair

1710 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.

18In 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. DODs 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

DODs 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

19Department 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

20The 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.

21The 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 vendoroffered 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. DODs 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

DODs 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

DODs Overseas Banking Program

ApendIxi

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 contracts 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.

1Credit 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 ApenIdxIi
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 ApeIndIxi

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 DODs 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 DODs 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 DODs 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 DODs 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 DODs Base Structure

Report for fiscal year 19962 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,

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

2Where installations with financial institutions were not in the base structure report, we obtained information 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 Networks 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

ApenVdxIi

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

(709372) Letr
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order made

out to the Superintendent of Documents, when necessary, VISA and

MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any list

from the past 30 days, please call (202) 512-6000 using a touchtone

phone. A recorded menu will provide information on how to obtain

these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with info in the body to:

info@www.gao.gov

or visit GAOs World Wide Web Home Page at:

http://www.gao.gov
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00