AUTOMATED

TELLER MACHINES

Issues Related to

Real-time Fee

Disclosure

United States General Accounting Office

GAO Report to Congressional Committees

July 2000

GAO/GGD/AIMD-00-224

United States General Accounting Office General Government Division

Washington, D.C. 20548

Page 1 GAO/GGD/AIMD-00-224 Automated Teller Machine

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July 11, 2000

The Honorable Phil Gramm

Chairman

The Honorable Paul Sarbanes

Ranking Minority Member

Committee on Banking, Housing and Urban Affairs

United States Senate

The Honorable James A. Leach

Chairman

The Honorable John J. LaFalce

Ranking Minority Member

Committee on Banking and Financial Services

House of Representatives

As required by the Gramm-Leach-Bliley Act of 1999,1

we explored the

feasibility of providing real-time disclosure of all fees that would be

charged to automated teller machine (ATM) cardholders during electronic

fund transfers conducted at ATMs.2 A myriad of fees are associated with

ATM transactions, including fees charged to the card-issuing financial

institution and fees levied on the customer, either on a per-transaction

basis or a monthly or annual basis. Customers are rarely charged a

transaction fee when they use the ATMs of their card-issuing financial

institution.3

However, cardholders may be charged both a surcharge4and a

“foreign” ATM fee5 when they use an ATM that is not owned by the card1

P. L. No. 106-102, § 704 (1999).

2

In this report, “real-time” means the moment at which a cardholder performs an ATM transaction.

“Electronic fund transfer” activities that can be performed at ATMs include making deposits or

withdrawals of funds and transferring funds from one account to another. Credit card advances are not

electronic fund transfers but are, instead, extensions of credit. Therefore, they are not included in the

scope of this study.

3

Any fee assessed by a card-issuing financial institution on its customers when they use their financial

institution’s ATMs is known in the industry as an “own-bank ATM fee” levied in an “on us” transaction.

4

ATM surcharges, which are assessed by the ATM owner when noncustomers use their ATMs, are

already required by law to be disclosed at the ATM. No similar requirement currently exists for foreign

or own-bank ATM fees, which are levied by the card-issuing financial institution. Information on the

surcharge fee amount, charged by the ATM owner and now disclosed to customers at the time of an

ATM transaction, is stored at the ATM machine or the computer that operates it.

5

Any fee assessed by a card-issuing financial institution on its customers when they use an ATM that is

not owned by their bank is known in the industry as a “foreign fee” levied in an “on-them” transaction.
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issuing financial institution. In this report, these financial institutions,

which include banks, thrifts, and credit unions, will be referred to as

“banks” except where distinctions among these institutions are relevant.

As agreed with your offices, we focused our study on the real-time

disclosure of foreign ATM fees levied by the card-issuing bank.

Specifically, we obtained and analyzed information on (1) alterations to

the ATM system that would be needed to support real-time foreign fee

disclosure; (2) estimated costs and time frames associated with

implementing real-time foreign fee disclosure; (3) potential competitive

impact on ATM industry participants, defined to include various sized

banks, ATM networks, ATM owners, and third-party processors; (4)

potential impact on consumers; and (5) alternatives to real-time foreign fee

disclosure.

According to ATM industry representatives, real-time foreign ATM fee

disclosure is technically feasible but would require extensive restructuring

by all major participants in the ATM industry.6 They said that extensive

alterations to the current infrastructure—hardware and software

systems—would be needed to support both the real-time foreign fee

disclosure scenarios we examined in detail and more simplified real-time

disclosure options. Currently, the U.S. ATM system is built on technology

that allows an ATM cash withdrawal or other electronic fund transfer

activity to be performed with a single message transmission for

authorization and settlement of the transaction.7

To provide real-time

foreign ATM fee disclosure, the ATM industry could adopt one of several

possible disclosure scenarios. Each of these scenarios would require cardissuing banks, networks, and ATM owners to revise and upgrade their

hardware and software, in addition to modifying functions such as

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

Most of the industry representatives we contacted indicated that there

were too many unknowns, including dependencies on other industry

participants, for them to estimate with any precision the costs or

timeframes involved with implementing real-time ATM fee disclosure. The

cost estimates, for software and hardware changes alone, that we were

able to obtain from some industry representatives ranged from $5 million

for a large third-party processor to tens of millions of dollars for large

6

Discussions on infrastructure changes and cost estimates, as they relate to real-time ATM foreign fee

disclosure, also apply to the real-time disclosure of own-bank ATM fees.

7

In banking transactions, settlement is the process of recording the debit and credit positions of the

parties involved in a transfer of funds.

Results in Brief
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banks. Time frame estimates ranged from 2 to 3 years to implement realtime ATM fee disclosure.

Banks, networks, and ATM owners of all sizes would likely incur

significant fixed costs to install, test, and certify the hardware and

software that would be needed to implement real-time ATM fee disclosure.

However, some industry representatives suggested that the burden of realtime fee disclosure might fall more heavily on smaller firms and

organizations. They suggested that economies of scale would give larger

banks, networks, and ATM owners an advantage. Representatives of

smaller banks predicted that they would be hurt if some larger banks

chose to minimize the costs of disclosure by restricting access to their

ATMs to their own cardholders. Finally, representatives of independent

service organizations (ISO) suggested that the added costs of real-time

disclosure could induce some ATM operators to shut down operations at

some locations.

The potential consequences of foreign fee disclosure may offset consumer

benefits. If consumers are unaware of foreign fees for ATM transactions or

dissatisfied with the way they are disclosed, then they might benefit from

real-time fee disclosure. However, the banking regulators reported that

they received very few complaints on the disclosure of ATM fees, which

suggests that cardholders were not dissatisfied with the disclosure they

received from their banks. In addition, the consumer groups we

interviewed did not advocate real-time disclosure of foreign fees; instead,

their concerns focused on the fairness of the surcharge, which we did not

address in our review. Further, industry surveys suggested that only a

minority of ATM cardholders pay foreign fees and that the number of

foreign ATM transactions they make is declining.8

At the same time,

industry representatives suggested that requiring real-time foreign fee

disclosure could produce unintended consequences, which we believe

could, at least in part, offset any potential benefits of disclosure.

Some ATM industry representatives suggested other options for enhanced

disclosure of foreign fees that would be less costly and burdensome than

real-time disclosure at the ATM. For example, they suggested augmenting

the existing required written disclosure with more prominent written

reminders in monthly statements or modifying the general statement on

the ATM screen that a consumer’s bank may levy a fee in addition to the

surcharge amount to include an average or range of the foreign fee

amount.

8 Debit Card Directory 2000 Edition, Faulkner and Gray, p. 9.
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Representatives of the ATM industry who reviewed a draft of this report

agreed, overall, with the information presented. We added some

information or clarified some points based on their suggestions. Their

comments and our responses are summarized on pages 35 to 36. We are

not making recommendations in this report.

ATM transactions involve several different participants or entities beyond

the cardholder and the card-issuing bank. In this report, the term “ATM

industry” is used to refer to card-issuing banks, ATM owners, ATM

networks, and third-party processors. Other ATM industry participants or

components that were not the main focus of our study include ATM

manufacturers, software providers, and armored car companies.

ATM cards are issued by banks, thrifts, and credit unions. Card-issuing

banks are not required to own or operate ATMs. For example, some credit

unions issue ATM cards to their customers without installing and

maintaining their own ATMs and, instead, rely on the ATMs owned by

other institutions. Nevertheless, most banks own and operate ATMs. The

card-issuing banks, or their third-party processors, maintain a database of

the cardholder account information (e.g., personal identification numbers

(PIN), usage limits, account status, etc.) that specifies the accounts that

can be accessed via the ATM card.

ATM networks allow the ATM cards of member institutions to be used at

the ATMs of another member institution. ATM networks, which can be

proprietary, regional, or national, consist of a network switch—a device

that determines over what path to send a unit of data—and a set of

prescribed operating rules that are used by all of the member institutions.

ATM networks route transactions between the ATMs and the card-issuing

banks through the network switch and act as a clearinghouse to settle

those transactions. Regional networks connect the card-issuing bank with

ATM owners that are located in a particular region of the United States.

National networks connect the card-issuing bank with ATM owners that

are located throughout the United States and outside of the United States

to route and then initiate settlement of cross-territory ATM transactions.

These networks perform hundreds of millions of transactions monthly.

ATM owners can be banks, merchants, or ISOs—companies that specialize

in offering ATMs. In 1999, there were about 227,000 ATMs in the United

States.9

According to some of the industry representatives, banks currently

own about 60 percent of the ATMs and merchants, and ISOs own the

9 Bank Network News data as of March 31, 1999.

Background
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remaining balance. Banks, thrifts, and credit unions own and operate the

ATMs on their premises and at off-premise locations and sites, such as

supermarkets, gasoline stations, and airports. Merchants, such as

convenience stores and retailers, may own the ATMs on their premises or

contract with banks or ISOs to place ATMs on their premises. ISOs may

own their ATMs as well as provide ATMs under contract to both banks and

merchants (for which the ISOs provide processing, either directly or

indirectly).

Figure 1 depicts the relationship among a card-issuing bank, a regional or

national network, and an ATM owner in ATM transactions.
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Bank A's 

authorization

processor

Card-issuing bank (Bank A's)

batch processors

(fee calculation and

account processing)

Card-issuing Bank - Bank A

Insert

Card Withdrawal

Balance inquiry

Transfers

123

45 6

789

0 Cancel

Terminal driving 

processor

Card-issuing Bank

(Bank A ATM)

1 Illustrates the components

involved in an ATM transaction

when a Bank A cardholder uses a

Bank A ATM for a transaction. The 

transaction flows through Bank A's 

authorization processor for authorization

and processing.

1

Card-issuing bank's

network

A

Figure 1: Relationship Among the ATM Industry Participants
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Terminal driving 

processor

Foreign ATM 

Regional/national

 network

Network provider

Insert

Card Withdrawal

Balance inquiry

Transfers

123

45 6

789

0 Cancel

Illustrates the components

involved in an ATM transaction 

when a Bank A cardholder uses an 

ATM that is not owned by Bank A, 

a foreign ATM. The transaction

must flow through a regional

or national network, noted in the

center of the diagram, to Bank A for

authorization and processing.

2 2

ATM owner's

network

Source: GAO analysis of industry data.
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While many banks perform their own processing, many rely on third-party

processors. Third-party processors, which can be a bank or nonbank

entity, perform various data processing services for ATM participants. The

types of services performed by third-party processors can vary greatly,

depending on the needs of the card-issuing bank, ATM owner, or network.

For example, third-party processors can provide transaction processing

and data processing. Transaction processing involves switching and

routing transaction information to and from relevant parties. Data

processing includes billing, account balancing, clearing, and settlement of

ATM transactions. Third-party processors also can act as the “driver” or

operator of an ATM. That is, they may maintain the software at the

terminal or the communication links. ISOs also can serve as third-party

processors.

As shown in table 1, a cardholder and the card-issuing bank may be

required to pay several fees to perform an ATM transaction. The amount of

the fee a cardholder must pay depends upon the type of banking

relationship that the cardholder has with the card-issuing bank and who

owns the ATM used for the transaction. Fees may also vary according to

the type of ATM transaction performed. A small percentage of financial

institutions, estimated to be from 1 to 7 percent of banks and thrifts,

charged their cardholders a fee for transactions performed at their own

ATMs in 1998.10 A larger percentage of financial institutions, estimated to

be from 61 to 78 percent of banks and thrifts, offered at least one account

type that charged the cardholder a foreign fee when the transaction is

performed at an ATM not owned by the bank in 1998.11 ATM owners may

also charge a surcharge or “convenience” fee for transactions performed at

their ATMs with cards that they did not issue. Thus, cardholders that use

ATMs that are not owned by their card-issuing bank may pay two fees—a

foreign fee and a surcharge.

10Annual Report to the Congress on Retail Fees and Services of Depository Institutions, June 1999,

Federal Reserve System. Data was reported by institution type (bank versus thrift) and by the size of

the institution (small, medium, and large).

11Ibid.

Current Fee Structure of the

ATM Market
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Type of fee Who pays fee? Who receives fee? Who sets fee? Description

Own-bank ATM feeaCardholder Card-issuing bank Card-issuing bank

Fee paid to the card-issuing bank by the

cardholder when using card-issuing bank’s

ATM.

Foreign feeb Cardholder Card-issuing bank Card-issuing bank

Fee paid to the card-issuing bank by the

cardholder when using an ATM not owned by

the card-issuing bank.

SurchargebCardholder ATM owner ATM owner

Fee paid to the ATM owner by the cardholder

using cards not issued by the ATM owner.

Network membershipcCard-issuing bank Network Network

Fee paid to the networks for the costs of

operations, advertising, and other promotional

expenses.

SwitchbCard-issuing bank Network Network

Fee paid to the networks for routing transaction

information over the network.

InterchangebCard-issuing bank ATM owner Network

Fee paid to the ATM owner for the costs of

deploying and maintaining shared ATMs.

a

Own-bank ATM fees may be set on an annual, quarterly, monthly, or per-transaction basis.

b

Fee is paid on a per-transaction basis.

c

Membership fees are usually paid on a monthly or annual basis.

Source: GAO based on Congressional Budget Office and Federal Reserve System data.

The card-issuing bank also incurs several fees to process ATM

transactions. The card-issuing bank may pay a “membership” fee to each of

the networks that routes their transactions. (Nonbank ATM owners pay a

“sponsorship” fee to a financial institution to become member of a

network.) In addition, these networks charge the card-issuing bank a

“switch” fee for each ATM transaction they process. The card-issuing bank

also pays an “interchange” fee to the owner of the ATM that processed the

cardholder’s transaction.

Figure 2 is a simplified illustration of the transaction flow of an electronic

fund transfer activity at an ATM owned by the card-issuing bank. Most

ATM cardholders conduct transactions at ATMs owned by their cardissuing bank (referred to as on-us transactions). When the cardholder

requests the transaction at the ATM, the terminal driving processor

transmits the message through the bank’s network to the authorization

processor. The authorization processor checks the cardholder’s account

and concurrently provides authorization and settlement of the transaction.

The authorization message is then transmitted to the ATM.

Table 1: Types of ATM Fees Levied on the Card-Issuing Bank and Cardholder

Typical ATM Transaction

Flows
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The cardholder requests a transaction

from an ATM owned by the

card-issuing bank. 

Terminal driving processor

The terminal driving processor

routes the transaction information

through the card-issuing bank's

network to the card-issuing bank's

authorization processor.

Authorization

processor

The authorization processor

checks the cardholder's account

and concurrently authorizes

the transaction and provides

settlement of the account. The

authorization message is then

transmitted via the bank's

network to the ATM

using the reverse process.

1

2

Card-issuing bank

batch processors

(fee calculation and

account processing)

Card-issuing Bank

1

2

Insert

Card Withdrawal

Balance inquiry

Transfers

123

45 6

789

0 Cancel

Card-issuing Bank

(Bank A ATM)

Card-issuing bank's

network

A

Source: GAO analysis of industry data.

Figure 2: Transaction Flow Using ATMs Owned by the Card-Issuing Bank
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Figure 3 illustrates a simplified transaction flow for a cardholder

performing an electronic fund transfer activity at an ATM that is not

owned by the card-issuing bank (referred to as a foreign ATM

transaction).12 The cardholder requests the transaction at the ATM. The

terminal driving processor routes the message through the ATM owner’s

network to a regional or national network. The message is then routed

through the internal network of the cardholder’s bank to the authorization

processor. The authorization processor checks the cardholder’s account,

authorizes the transaction, and provides settlement of the account. The

authorization message is then transmitted to the ATM via the bank’s

network, a regional or national network, the ATM owner’s network, and

the ATM’s terminal driving processor to the ATM.

12Foreign ATM transactions are also referred to as “on-them” transactions.
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ATM owner's

network

Terminal driving processor

The terminal driving processor routes

the transaction information through the

ATM owner's network and a regional or

national network, to the card-issuing

bank's authorization processor. 

Insert

Card Withdrawal

Balance inquiry

Transfers

123

45 6

789

0 Cancel

Authorization

processor

Card-issuing bank

batch processors

(fee calculation and

account processing)

Card-issuing Bank

The authorization processor checks the

cardholder's account and concurrently

authorizes the transaction and

provides settlement of the account.

The authorization message is then

transmitted to the ATM using the

reverse process.

2

1 The cardholder requests a transaction

from an ATM owned by another

bank (a foreign ATM transaction). 

1

2

Regional/national

 network

Foreign ATM

A

Source: GAO analysis of industry data.

Figure 3: Transaction Flow at ATMs Not Owned by the Card-Issuing Bank
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The Electronic Fund Transfer Act (EFTA),13 which was amended by

provisions of the Gramm-Leach-Bliley Act of 1999 (GLBA), is the federal

statute that primarily governs the disclosure of ATM fees. The rules and

regulations that implement EFTA’s disclosure requirements are set forth in

the Federal Reserve’s Regulation E.14 As shown in table 2, Regulation E

requires a bank to provide initial and periodic disclosures that reflect the

amount of fees assessed for an electronic fund transfer, such as a

withdrawal at an ATM. Banks must provide disclosures required by

Regulation E, including the amount of any fee associated with electronic

fund transfers at an ATM, at the time a consumer signs up for an ATM card

or before the first electronic fund transfer. Banks are to also provide a

statement that includes the amount of any fees assessed for electronic

funds transfer for each month in which at least one transfer has occurred

and provide a quarterly statement if no transfer has occurred. In addition,

Regulation E requires banks to deliver written notice at least 21 days

before the effective date of any change in fees. The GLBA amendments

cover the disclosure of fees imposed by ATM operators (i.e., surcharges),

including those that are not banks. The act requires operators to post a

sign on the machine and a message on the screen or the receipt that a fee

will be charged and the amount of the fee. This sign must be posted before

the customer is irrevocably committed to completing the transaction.15

However, in the period November 12, 1999, the date of the enactment of

GLBA, through December 31, 2004, this clause is not applied to ATMs that

lack the technical capability to support the necessary on-screen or receiptbased disclosure.

1315 U.S.C. §1693 et seq.

1412 C.F.R. §205.

15The Federal Reserve’s Regulation E currently requires ATM owners to notify cardholders of any

surcharge fees if the fee is included in the amount of transfer either by posting a sign at the ATM or on

the terminal screen. Regulation E requires that cardholders be given the opportunity to cancel the

transaction if the fee is displayed on the terminal screen. Representatives of the ATM networks stated

that it is also a standard ATM network industry requirement that a notice of surcharge be displayed at

the ATM.

Current Fee Disclosure

Requirements
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Statute Foreign fee Surcharge

Regulation E Financial institutions are

required to disclose fees:

•at the time the consumer

contracts for EFT service or

before the first EFT is

made, and

•on a statement for each

month in which at least one

transfer occurs, or

•on a quarterly statement if

no transfers occur in 3

months.

Financial institutions must

provide written notice at

least 21 days before

effective date of any change

in fees.

Financial institutions that

own ATMs are required to:

• notify the consumer of any

surcharges if the fee is

included in the amount of

transfer by providing a

receipt and by posting a

sign at the ATM or on the

terminal screen, and

•give the consumer the

opportunity to cancel the

transaction if the fee is

displayed on the terminal

screen.

Gramm-Leach-Bliley Act of

1999

Not applicable All ATM owners must notify

the consumer of any

surcharges by posting a

notice

•on the ATM, and on the

screen or on a receipt, and

•before the consumer is

irrevocably committed to

completing the transaction

Note: Regarding the surcharge, the regulation generally provides for exceptions to these

requirements for transfers initiated outside of the United States.

Source: GAO analysis of Regulation E (12 C.F.R.§205) and Gramm-Leach-Bliley Act of 1999 (P. L.

No. 106-102, §§702-03 (1999)).

To obtain and analyze information on alterations to the ATM system that

would be needed to support real-time ATM fee disclosure, we obtained

documents from and interviewed representatives of selected card-issuing

banks, ATM owners, ATM networks, third-party processors, and relevant

trade associations. In preparing interview topics and questions, we drew

on the expertise of our specialists in research design, computer systems,

and economics. Our discussions focused on the technical feasibility of the

current ATM systems to support real-time fee disclosure for electronic

fund transfer activities, as defined in the EFTA and on U. S. ATM

operations only.

After gaining an understanding of the current ATM system, our computer

system analysts developed several real-time fee disclosure scenarios.

These scenarios included disclosure of fees on a real-time basis, disclosure

of generic and customized card-issuing bank fee schedules, and disclosure

Table 2: ATM Fee Disclosure

Requirements

Scope and

Methodology
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of a flat-rate foreign fee. We presented these disclosure scenarios to

selected industry representatives and obtained their views regarding the

feasibility and associated technical requirements of these disclosure

scenarios. In reporting our results, we focused on the real-time fee

disclosure scenario that would most closely fulfill the disclosure

contemplated by the legislative mandate and discussed with congressional

contacts. This real-time fee disclosure scenario provides for the disclosure

of the amount of fees that would be charged to a consumer at the point of

the ATM transaction and gives the consumer a chance to accept or reject

the fee before completing the transaction.

Our congressional contacts agreed that the scope and complexity of topics

to be discussed precluded our selection of a statistically valid random

sample of card-issuing banks and ATM owners. Instead we selected these

entities by asset size; type (bank, thrift, credit union, nonbank ATM

owners); number of ATMs; and primary region of operation. We discussed

the technological issues of real-time fee disclosure with 10 banks and two

nonbank ATM owners. The asset size of these banks ranged from $620

million to about $572 billion; and combined, they own approximately

24,000 of the 227,000 ATMs. In addition, we interviewed representatives

from two national ATM networks and four regional networks. We also met

with two of the larger ATM third-party processors in the United States.

We supplemented information obtained from the above selected entities

with industry viewpoints obtained during meetings conducted with five

major trade associations representing segments of the ATM industry.

These meetings included representatives of several banks and networks

mentioned earlier. The five trade associations were

• American Bankers Association, a national trade association

representing financial institutions of all sizes;

• Consumer Bankers Association, a national trade association

representing retail banking interests of financial institutions;

• Electronic Funds Transfer Association, an inter-industry trade

association dedicated to the advancement of electronic payment

systems and commerce;

• Independent Community Bankers Association, a national trade

association representing community banks; and

• Network Executives Council, a group affiliated with the Electronic

Funds Transfer Association, that represents regional ATM networks.

To obtain estimates of the costs and time frames associated with

implementing and operating real-time ATM fee disclosure, we requested
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and obtained information from the industry representatives that we

contacted. Specifically, we asked that the representatives provide us with

estimates of the cost to their firms to provide and support real-time ATM

fee disclosure and the needed implementation time frames under the

above-mentioned disclosure scenarios. As agreed with congressional

contacts, we did not construct our own independent estimates of the costs

and time frames. We also did not verify the accuracy of the data provided

by the industry representatives regarding costs and time frames.

To obtain information on the potential competitive impact on banks and

the other components of the ATM industry, we obtained and analyzed

available studies of economic factors associated with ATM fees and usage.

In addition, we discussed this issue in our meetings with representatives

from banks and other ATM owners, ATM networks, third-party processors,

trade associations, and other independent sources, including the federal

banking regulators, the Congressional Budget Office, and the Antitrust

Division of the U.S. Department of Justice.

To obtain information on the potential consumer impact of implementing

real-time ATM fee disclosure, we reviewed relevant federal laws and

regulations governing electronic fund transfer activity and consumer

protection. We also interviewed officials from (1) the federal banking

regulatory agencies (Federal Reserve System, Office of Comptroller of the

Currency, Federal Deposit Insurance Corporation, Office of Thrift

Supervision, and National Credit Union Association); (2) representatives of

consumer groups that have been active on ATM fee issues (Public Interest

Research Group and Consumers Union); (3) the ATM industry; (4) trade

associations; and (5) other independent sources.

To identify other alternatives to real-time ATM fee disclosure, we

discussed this issue during our meetings with ATM industry participants

and consumer groups. In addition, we interviewed selected experts in

electronic commerce technology to obtain their input regarding potential

alternatives and options regarding real-time ATM fee disclosure. We

conducted our review from December 1999 to May 2000 in Washington,

D.C.; San Francisco, CA; Sacramento, CA; New York, NY; and Portland,

OR, in accordance with generally accepted government auditing standards.

We requested comments on a draft of this report from (1) the senior

executives responsible for ATM services at five financial institutions; (2)

the president of a state league of credit unions; (3) the president of a

regional network (who is also a representative of the Network Executives

Council); (4) the executive vice president and general counsel of a regional
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network; (5) a director and general counsel of two consumer groups; (6)

an academic, who consults in banking issues; and (7) an executive director

and representatives of two trade associations. In mid June 2000, we met

with these senior officials in two groups, except for the consumer group

representatives who had not responded to our request. Their oral

comments are presented and discussed on pages 35 to 36. We also

requested comments from the managing counsel of the Division of

Consumer and Community Affairs of the Federal Reserve Board (FRB) of

Governors. We requested FRB comments because the EFTA requires FRB

to issue relevant regulations. The FRB official provided technical

comments that we incorporated.

ATM industry representatives said that real-time ATM fee disclosure is

technically feasible but would require extensive restructuring by the ATM

industry. Real-time ATM fee disclosure could be provided in several

different ways. However, they said that all of the options likely would

require ATM owners, ATM networks, card-issuing banks, and third-party

processors to substantially change their infrastructure, (i.e., their

hardware and software systems including communications equipment,

message processors, and databases).

Currently, electronic fund transfer activities performed at an ATM rely on

a complex sequence of synchronized tasks to be performed in less than a

minute by the ATM, the data transmission networks, and the banks’

processors. The ATM system is built on technology that allows an ATM

cash withdrawal or other electronic fund transfer activity to be performed

with a single ATM transmission for authorization and settlement of the

transaction. To provide real-time foreign ATM fee disclosure, the current

ATM system would have to be modified to (1) obtain the foreign fee

information from the cardholder’s bank, (2) display the foreign fee

information to the cardholder, (3) allow the cardholder to accept or reject

the fee, and (4) transmit fee acceptance or rejection information to the

bank to consummate the electronic fund transfer activity. Industry

representatives said that ATM owners likely would need to modify or

replace their ATMs and terminal driving processors to support the display

of foreign fee information and provide a means for cardholders to accept

or reject the fee. In addition, the industry representatives stated that realtime ATM fee disclosure would require that changes also be made to the

following functions:

• message processing,

• calculation of ATM fees, and

• stand-in processing.

Real-time ATM Fee

Disclosure Is Feasible

but Would Require

Hardware and

Software Changes
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Because the ATM industry does not handle these functions in a

standardized way, each ATM participant would have to consult with those

it interacts with in conducting ATM transactions to determine the specific

implementation method for these changes. While the current ATM system

could be adapted to support real-time foreign ATM fee disclosure, ATM

participants do not share a common view of how this might be

accomplished.

Each regional and national ATM network requires its members to adopt

specified message formats, message flows, and other processing

requirements.16 Message flows and message formats are defined for all

ATM transactions, including the request and authorization of transactions,

settlement of transactions between ATM participants, and administrative

messages. Because the ATM foreign fee information is not currently

relayed from the card-issuing bank to the ATM owner, industry

representatives said that new message flows and message formats would

need to be defined to support real-time fee disclosure. Once defined, every

participant in an ATM transaction would need to modify their software to

handle the new formats. Although the majority of regional and national

ATM networks based their message formats on an international standard,17

each network dictates its own variation of this message format. Therefore,

there is not an exacting standard that is used by the regional and national

networks. So, for example, if a bank has connections with four different

networks, it likely will need to modify more than one piece of software to

connect to each of the four networks.

The industry representatives indicated that there are different ways to

modify the message flows and message formats to support real-time fee

disclosure. One possible design solution we discussed with industry

participants is shown in figure 4.

16A message format describes the specific contents of a message, including the description, length, and

format of each field. A message flow describes the sequence of messages required to support a

transaction, including the request message and corresponding subsequent response or error messages.

17ISO 8583 is the International Standard designed as an interface specification enabling messages

relating to financial transactions to be exchanged between systems adopting a variety of applications

specifications.

Message Processing

Changes

A “Two-Messages” Solution
B-284431

Page 19 GAO/GGD/AIMD-00-224 Automated Teller Machine

ATM owner's

network

Terminal driving processor

Authorization

processor

Insert

Card Withdrawal

Balance inquiry

Transfers

123

45 6

789

0 Cancel

The cardholder

requests a transaction

from an ATM not owned by card-issuing

bank (a foreign ATM transaction). The 

terminal driving processor routes the

transaction to the card-issuer's 

authorization processor through a 

regional or national network.

1 1

2

3 3 Cardholder approves fee, the 

terminal driving processor routes the 

transaction to the card-issuer's 

authorization processor through a regional 

or national network.

Card-issuing bank

batch processors

(fee calculation and

account processing)

1

3

Card-issuing Bank

2 The authorization processor

retrieves bank fee information

and transmits it to the ATM

through a regional or national

network.

2

4

The authorization processor

checks the cardholder's account and

authorizes transaction. The transaction 

is posted to the cardholder's account.

An authorization message, including

fee information, is transmitted to the

ATM through regional or 

national network

4

4

Regional/national

 network

1

3

2

4

Foreign ATM

Source: GAO analysis of industry data.

Figure 4: A “Two-message” Solution
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In this scenario, following a cardholder’s transaction request at an ATM,

the ATM and terminal driving processor would request the foreign fee

information from the card-issuing bank. The bank would retrieve the

foreign fee information and return it to the ATM. The ATM would display

the foreign fee information to the cardholder for acceptance. Following

acceptance, the ATM and terminal driving processor would route the

transaction back to the card-issuing bank. The bank would send an

authorization message back to the ATM and the transaction would be

completed. This design option would require two transmissions through

the network instead of the one transmission that is normally required in

the current system. In addition, new message formats would need to be

defined for the fee request and the fee response information.

An additional transmission with a message to obtain the foreign fee

information could double the network traffic required to perform most

transactions on both the bank’s system and the network’s. The industry

participants we contacted have said that the current ATM infrastructure is

not capable of handling a doubling of transaction volume. They said to

handle the increased transaction volume, networks would have to

purchase and install additional hardware and software, including new

processors and data communications equipment. They said the extra pass

or message would also lengthen the time it would take to complete an

ATM transaction by 11 to 17 seconds. Currently, according to industry

estimates, a basic cash withdrawal takes between 23 and 33 seconds.

Another design solution discussed with the industry participants would

involve only one network transmission and would require the expansion of

the current transaction response messages to include the foreign fee

information. In this scenario, there would be no separate fee request. The

cardholder’s transaction request would be transmitted as it is currently,

and the response message would be modified to contain the foreign fee

information. However, the ATM would have to generate a reversal

transaction to credit the customer’s account for funds already deducted at

the time of authorization if the customer were to reject the fee and abort

the transaction. Except in the case of fee rejection, only one network pass

would be required in this scenario, as illustrated in figure 5.

A “One-Message” Solution
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The cardholder

requests a transaction

from an ATM not owned by card-issuing

bank (a foreign ATM transaction). The

terminal driving processor routes the 

transaction to the card-issuer's 

authorization processor through a regional

 or national network.

ATM owner's

network

Terminal driving processor

Authorization

processor

Regional/national

 network

Insert

Card Withdrawal

Balance inquiry

Transfers

123

45 6

789

0 Cancel

1 1

2

3 3 If the cardholder rejects 

the transaction, the terminal driving

processor routes the cancellation

message to the card-issuer's

authorization processor through

a regional or national network.

Card-issuing bank

batch processors

(fee calculation and

account processing)

1

3

Card-issuing Bank

2 The authorization processor

checks the cardholder's account

and authorizes the transaction.

The transaction is posted to the

cardholder's account. An authorization

message, including fee information,

is transmitted to the ATM through

a regional or national network.

2

1

3

2

Foreign ATM

A

Source: GAO analysis of industry data.

Figure 5: A “One-message” Solution
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If the fee were rejected by the cardholder, an existing reversal message18

would need to be modified to relay the fee rejection and the cancellation of

the transaction by the cardholder. The message formats for transaction

responses and reversal messages would require modification to relay the

new data. In addition, industry representatives said that a transaction

reversal is usually not performed instantaneously and that customers’

funds may not be immediately restored.

Real-time foreign ATM fee disclosure would involve changes in the basic

infrastructure of a bank’s computer systems because most of the systems

are not currently designed to calculate ATM fees on a real-time basis. The

banks we contacted said they have separate computer systems to handle

on-line processing19 and periodic batch processing,20 whether the

processing is done in-house or outsourced to a third-party processor.

These banks’ on-line processors support ATM, point-of-sale, telephone,

and teller access to current account information. The banks’ batch

processors support posting paper checks and automated clearing house

transactions, preparing monthly statements, and calculating service

charges and are run on a periodic basis—usually daily or monthly,

depending on the process. The authorization processors and terminal

driving processors previously described are on-line processes that support

ATM transactions at a bank. However, the banks said their ATM fees are

calculated with the other account-activity based service charges on the

batch processors. Figure 6 illustrates batch processing in relation to an

ATM transaction.

18 Reversal messages currently exist to support cancellation of transactions due to power failures,

shortage of cash in the ATM cash dispenser, etc.

19On-line processing involves processing on real-time basis.

20Batch processing involves processing a group of transactions at one time. Transactions are collected

and processed against the master files at the end of the day or some other time period.

Calculation of ATM Fees
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Batch

processing

Checking (paper checks)

Savings

Time deposits

Fee processing

Authorizing 

processor

Online

processing

Monthly statements

as an output

Other bank

processors

ATM

Start of day

balances

Point-of-sale

Telephone

Teller access End of day

electronic

transactions

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

Because the fees are calculated based on consumer behavior over a

defined period on a separate platform from the ATM processing, the

authorization processor does not have real-time access to the foreign fee

information. These banks would need to move the calculation of the ATM

fees from the batch processors to the on-line processors, resulting in

software changes in both the batch and on-line processors.

Banks typically offer a variety of account options to their customers to

allow for relationship banking, wherein customers can opt to either pay

fees or maintain a certain account activity level or account balance and be

able to conduct foreign ATM transactions and other account activities

without a fee. While some pricing plans assess a flat fee per transaction on

each customer, others offer variable rate structures, based upon the

number of ATM transactions performed or the balances maintained by the

customer. Variables, such as account activity and average balance, are not

known until the end of the statement cycle.21 The bank representatives said

that to provide real-time fee disclosure in an accurate manner, banks might

need to modify the software that calculates fees in this manner to use

alternative data, such as the average balance or account activity from the

previous month. Another possible industry response would be to eliminate

21Financial institutions commonly prepare statements over the course of a month in account groups

called cycles.

Figure 6: Batch Processing in Relation

to an ATM transaction
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using these variables to assess fees. Any such change in how fees would be

assessed and charged would also result in software changes to their

processing systems.

According to industry representatives, real-time fee disclosure may require

networks to store foreign fee information to allow for stand-in

transactions. Stand-in processing is a service provided by networks to their

members to ensure continuation of cardholder service when a network

cannot communicate with the on-line ATM processor of the card-issuing

bank. In addition, some of the industry representatives said that some

banks do not maintain an on-line ATM processor and stand-in processing is

their normal mode of operation. To provide stand-in processing, networks

typically need a list of the card and account numbers, PINs, and an

account status. In order for networks to continue providing stand-in

processing in an environment wherein real-time fee disclosure would be

required, the networks would need to store foreign fee information from

card-issuing banks. Networks would also need to make software changes

to handle the fee disclosure on behalf of their client card-issuing banks.

Depending on the implementation method, this process could require the

banks to provide more detailed account information to the networks to

perform the complex calculations required.22 In addition, network

representatives said that networks might also have to make substantial

investments in computer hardware to store the additional, necessary data.

We considered the feasibility of other possible options for disclosing the

foreign ATM fees in ways that would circumvent the complex issue of

calculating individual consumer’s fees. We considered the feasibility of

banks providing information on their ATM fee schedules or the particular

pricing plan that a customer had selected. We also considered the

feasibility of disclosure if each bank adopted a flat-rate foreign fee. Based

on our understanding of the ATM system infrastructure and according to

industry representatives, as in the case with real-time fee disclosure, these

options would also require extensive changes to their hardware and

software systems, in addition to modifying the message processing and

stand-in processing functions.

Instead of calculating and displaying the exact foreign ATM fee for each

ATM transaction, banks could disclose the schedule of fees for each

22Due to the potential sharing of account information by ATM participants, bank officials we

interviewed expressed concerns about possible antitrust and privacy issues. We explored antitrust

implications with an official at the Department of Justice. On the basis of the disclosure scenarios we

described, the official said he did not foresee unavoidable antitrust concerns. We asked Federal

Reserve officials about privacy concerns, but they said that they were unable to comment at this time.

Stand-In Processing

More Simplified Disclosure

Options Would Require

Similar Changes
B-284431

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banking plan it offers. A more customized option would be for the bank to

identify a customer by his/her banking plan during the ATM transaction

and disclose only the fee schedule relevant to that customer. Customers

would be shown the fee they might be charged; but to calculate the actual

fee, they would have to know the status of other fee determinants, such as

account balances, the number of transactions already made during the

statement cycle, etc.

Industry representatives said that either alternative would still require

changes to their hardware and software and the various functions as

discussed previously. For example, ATMs would have to be able to display

the banking plans offered by all the banks whose cards could be used at

the ATM. Banks typically offer a variety of account options and pricing

plans, which are typically lengthy and complex, as illustrated in figure 7.
B-284431

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Souce: Courtesy of Chase Manhattan Bank.

These representatives said that transmitting and displaying that volume of

information would not only add to the challenges of altering the current

ATM infrastructure, but it would lengthen the time needed to perform an

ATM transaction and challenge the display capabilities of many ATM

terminals. They said that the infinite variations in account and ATM

transaction pricing, which sometimes depend on relationship banking,

could create complications in displaying customized foreign fee

information.

Figure 7: An example of a bank’s fee

schedule
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Several banks said that if real-time foreign fee disclosure were required,

they might adopt a flat-rate foreign fee to avoid the cost of calculating fees

for each ATM transaction. Adopting flat rate fees would not eliminate the

cost of additional messages for an ATM to obtain the fee from a cardissuing financial institution or overcome the problems of stand-in

processing that we discussed earlier.

We asked card-issuing banks, ATM networks, ATM owners, and third-party

processors to estimate the cost and the time it would take to provide realtime foreign fee disclosure. According to many of the ATM industry

representatives, the effort and costs associated with providing real-time

fee disclosure would be extensive. However, industry representatives said

that the lack of specific details about how real-time ATM fee disclosure

would be implemented and their dependencies on other ATM industry

participants made it difficult to estimate the cost and time frames with any

precision. Several ATM industry representatives enumerated the types of

changes that would be required and a few provided qualified dollar

estimates of costs and time required.

Representatives of card-issuing banks stated that they would incur

extensive costs to make the necessary software and hardware changes

needed to support real-time ATM fee disclosure. For example, the

representatives stated that one of the major costs of disclosing the actual

fee for an ATM transaction would be to move cardholder fee calculations

from a batch-processing mode into a real-time environment. The

representatives of one large bank stated that the bank could not support

real-time fee disclosure with its current infrastructure, which uses a batch

system that runs at night to calculate cardholder fees. Not being able to

calculate fees in batch-processing would require the banks to simplify their

fee structures and would affect their ability to maintain relationship

banking. Because such changes would represent a fundamental shift in

their ATM processing system, the industry representatives were unable to

estimate the total associated costs. Card-issuing banks likely would incur

additional costs to upgrade their ATM hardware and software. For

example, some industry representatives estimated that it would cost tens

of millions of dollars for changes to a large bank’s hardware and software

to provide real-time foreign fee disclosure. Regarding operating costs, one

trade association estimated that the card-issuing banks might have to

absorb an additional $1 billion per year in processing costs—effectively

doubling the fees associated with the current volume of ATM

transactionsif real-time ATM fee disclosure required two, instead of one,

ATM transmissions.

Total Costs and

Implementation Time

Difficult for ATM

Industry Participants

to Estimate
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Representatives of ATM networks also indicated that they would have to

make major upgrades of their hardware and software systems if real-time

ATM fee disclosure were required. For example, one of the representatives

stated that his network system was currently operating at close to full

capacity and that replacement of its hardware and software systems would

be needed to handle the additional traffic that likely would be associated

with real-time ATM fee disclosure. While these network representatives

were not able to provide a precise estimate of these costs, they estimated

that it could be in the billions of dollars for the industry as a whole. In

addition, all of the representatives said that extensive software changes

would be needed to implement any message formatting changes that

would be necessary to support real-time ATM fee disclosure. According to

some of the ATM network representatives, any hardware and software

changes would necessitate extensive testing and recertification of the

systems, which would add significantly to the cost of providing real-time

ATM fee disclosure.

The industry representatives stated that ATM owners likely would incur

major costs to upgrade their ATMs to handle real-time fee disclosure.

According to the representatives, many of the older or less sophisticated

ATMs currently in use may not have the necessary display and processing

capacity needed to handle real-time ATM fee disclosure. As a result, these

ATMs would have to be replaced or upgraded. As of November 1999, the

cost of new ATMs ranged from $15,000 to $50,000 per machine, depending

on functions.23 According to the ATM industry representatives, real-time

ATM fee disclosure also likely would result in increased transaction time.

This could result in the need for ATM owners to deploy more ATMs to

provide the same level of service. Furthermore, some of the ATM industry

representatives stated that real-time ATM fee disclosure may prompt ATM

owners to upgrade their machines using dial-up connections to leased lines

connections because dial-up technology was not intended to support an

extended dialogue or interaction between the ATM and the bank.24

According to representatives of a third-party processor, the annual cost of

leasing a dial-up ATM ranges from $4,000 to $6,000 versus $10,000 to

$12,000 for a leased-line terminal. In addition, they stated that the monthly

communication costs for a dial-up connection is about $30 to $45

compared with $250 to $400 for a leased-line connection. The ATM

23This information was taken from ATM Fact Sheet, American Bankers Association.

24 ATMs link to the networks using either leased lines or dial-up connections. Leased lines provide

communication connectivity between the ATM and the network on a continuous basis. Dial-up

connections are established between the ATM and the network only when there is a transaction to be

conducted and are terminated when the transaction is completed.
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industry representatives stated that all ATMs likely would need to have

software upgrades, such as rewriting the software that controls the screen

displays, in order to support real-time ATM fee disclosure.

According to representatives of the third-party processors, they would

need to upgrade their software systems and some of their hardware

systems to support real-time ATM fee disclosure. However, they stated

that the real cost issue was not primarily related to changes in technology

but in the extensive testing effort that would be required, which would

involve all ATM industry participants. One third-party processor estimated

that it would cost her firm from $5.1 to $7.9 million in one-time

expenditures to provide real-time ATM fee disclosure. Moreover, she

estimated that it would take from 24 to 36 months to make the necessary

changes to the firm’s software and hardware systems. Two ATM industry

representatives compared the effort and costs involved in providing realtime fee disclosure to the Year 2000 readiness effort.25

Some industry representatives suggested that the burden of real-time fee

disclosure might fall more heavily on smaller firms and organizations.

They suggested that economies of scale would give larger banks,

networks, and ATM owners an advantage. Representatives of smaller

banks predicted that they would be hurt if some larger banks chose to

minimize the costs of disclosure by restricting access to their ATMs to

their own cardholders. Finally, representatives of ISOs suggested that the

added costs of real-time disclosure could induce some ATM operators to

shut down operations at some locations.

Banks, networks, and ATM owners of all sizes likely would incur

substantial costs to install, test, and certify hardware and software

required to implement real-time ATM fee disclosure. Industry

representatives said that larger firms, which can exploit economies of

scale, would be in a better position to absorb these costs. They can spread

any fixed costs of providing real-time disclosure over a larger number of

transactions, resulting in a smaller increase in the average cost of

providing service.26

25The Year 2000 readiness effort involved an inherent flaw in computer programs and database files—

the absence of century designators—that unless corrected could have rendered entire computer

systems inoperative. There are various estimates of the total costs associated with the Year 2000

compliance effort. According to the President’s Council on Year 2000 Conversion, the U.S. financial

industry spent an estimated $10 billion to prevent Year 2000 problems.

26 Some small banks and ATM owners contract with third-party processors, whose size may allow them

the same economies of scale as large banks.

Foreign Fee Disclosure

May Disadvantage

Smaller Competitors
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Similarly, network officials said that larger networks might be in a better

position to absorb the costs associated with foreign fee disclosure. They

stated that implementation costs likely would be recovered by charging

higher fees; and the more transactions a network can process, the faster it

can recover these costs.

Industry representatives of smaller banks voiced concerns that the largest

banks, which operate thousands of ATMs, might attempt to minimize the

costs of disclosure by restricting access to their ATMs to their own

cardholders.27 This could hurt small banks that rely heavily on ATMs

owned by larger banks to service their customer base.

Industry representatives also suggested that ISOs that primarily supply

inexpensive ATMs for installation at lower volume locations and their

client base—primarily merchants and smaller banks—would be especially

disadvantaged if real-time ATM fee disclosure were required. These ATMs

typically use low-cost, dial-up connections instead of the more expensive

leased line connection. According to industry representatives, dial-up

technology may be impractical to support the kind of communication

required to offer cardholders an accept or reject option. In addition,

industry representatives estimated that 10 to 15 percent of the low-cost

ATMs typically deployed by these ISOs do not have the display capacity to

support on-screen disclosure. According to industry representatives, these

ISOs and their client base may not be able to afford to purchase and

operate more sophisticated ATMs.

If consumers are unaware of foreign fees for ATM transactions or

dissatisfied with the way they are disclosed, then they might benefit from

real-time fee disclosure. However, the banking regulators reported that

they received very few complaints on the disclosure of ATM fees, which

suggests that cardholders were not dissatisfied with the disclosure they

received from their banks. In addition, the consumer groups we

interviewed did not advocate real-time disclosure of foreign fees; instead,

their concerns focused on the fairness of the surcharge, which we did not

address in our review. Further, industry surveys suggested that only a

minority of ATM cardholders pay foreign fees and that the number of

foreign ATM transactions they make is declining.28 At the same time,

27 If real-time disclosure of ATM fees is required and a bank decides to limit the use of its ATMs to its

customers only to avoid the need to disclose foreign fees, it would still have to address the issue of

real-time disclosure of applicable own-bank ATM fees and foreign fees for its customers.

28 Debit Card Directory 2000 Edition, Faulkner and Gray, p. 9.

Unintended

Consequences of

Foreign Fee Disclosure

Could Partially Offset

Benefits
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industry representatives suggested that requiring real-time foreign fee

disclosure could produce unintended consequences, as discussed below.29

Generally, consumers can make better-informed choices when they are

aware of costs at the time of a purchase. For example, disclosure of the

ATM surcharge at the time of a transaction provides cardholders

information with which to decide whether a transaction is worth the fee

they must pay the ATM owner for using the ATM. Receiving this

information only after completion of the transaction would be too late for

ATM cardholders who would not have made the transaction if they had

known the cost in advance.

However, regulators found little evidence of consumer dissatisfaction

regarding fee disclosure. Regulators maintain databases of consumer

complaints against institutions they regulate. We asked the Federal

Deposit Insurance Corporation, Federal Reserve System, National Credit

Union Association, Office of the Comptroller of the Currency, and the

Office of Thrift Supervision to search their databases for complaints filed

in 1999 about inadequate disclosure of foreign fees. While their complaint

categories did not identify this particular issue, the regulators reported

that they received very few complaints on ATM fees to suggest that

cardholders were dissatisfied with the disclosure they received from their

banks. Regulators reported that approximately 31 complaints involving

electronic fund transfer service charges were filed in 1999.30 The regulators

said that they did not consider consumer complaints on ATM fees a major

concern. Consistent with the low volume of complaints received by

banking regulators, a recent industry-sponsored survey of 700 ATM

cardholders in 7 states found that 86 percent felt that their banks kept

them adequately informed about applicable ATM fees.31

Representatives from consumer groups we interviewed did not advocate

real-time disclosure of foreign fees and recognized that the cost of

implementing fee disclosure could lead to higher fees. They added that

while they were opposed in principle to surcharges imposed on

29 Industry representatives also told us that real-time fee disclosure may create problems for

international transactions. Specifically they said that U.S. ATMs might reject transactions made with

ATM cards not issued by U.S. banks and that U.S. cardholders might be confused by ATMs abroad that

do not display foreign fees. Our work focused on cardholders’ transactions in the United States, since

any change in disclosure requirements would apply only to U.S. institutions.

30 As a point of reference, according to the American Banker Association, there were 11 billion U.S.

ATM transactions in 1999.

31“ATM Surcharging: The Consumer Perspective,” prepared by Dove Consulting Inc., and Analytica Inc.,

April 2000. The survey included a few questions on foreign fees.

Disclosure of Real-time

ATM Fees May Provide

Limited Consumer Benefits
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cardholders by ATM owners, they did not oppose fees charged by cardissuing banks.

It is unclear how many consumers would benefit from real-time fee

disclosure. The Federal Reserve reported that in 1998 about three-quarters

of the banks and thrifts they surveyed offered accounts for which ATM

cardholders would be charged a foreign fee.32 However, a small percentage

of cardholders actually pay foreign fees, since, according to

representatives from banks and consumer groups, many customers choose

account plans for which the fee is waived. According to industry estimates,

at least one half, and perhaps as many as two-thirds of ATM cardholders

have the types of accounts that can exempt them from foreign fees. These

cardholders likely would not benefit from additional disclosure. Some

banks offer account arrangements that provide a specified number of free

ATM transactions per month. Fee disclosure might help these cardholders,

when they do not know whether they have exceeded their allotted free

transactions. Customers who pay a foreign fee on all transactions and are

unaware of the foreign fee their bank charges, could also benefit from

disclosure of this fee on an ATM screen. However, once cardholders are

aware of the fee, they would obtain no additional benefit from disclosures.

Thus, the benefits of real-time fee disclosure likely would be “one-time”

rather than repeated.

In addition, the imposition of surcharges appears to have discouraged

cardholders from using foreign ATMs. In the 3 years prior to 1996, foreign

transactions had been growing at 9 percent per year. In 1997, they declined

by 2 percent.33 Industry representatives said that cardholders are pursuing

alternatives to foreign ATMs, such as surcharge-free point-of-sale terminals

where consumers can request “cash back” when making a purchase. In

addition, they pointed out that cardholders can make greater use of ATMs

at their own banks. The fact that many cardholders are avoiding using

foreign ATMs to avoid surcharges also reduces the potential number of

cardholders who would benefit from foreign fee disclosure, according to

industry representatives.

Under current ATM fee disclosure requirements, it is likely that

cardholders who pay a foreign fee on ATM transactions already have been

informed about the fee. Regulation E requires banks to disclose the fee

32Annual Report to the Congress on Retail Fees and Services of Depository Institutions, Board of

Governors of the Federal Reserve System, June 1999, p. 7.

33 Competition in ATM Markets: Are ATMs Money Machines? (chapter IV), July 1998, Congressional

Budget Office.
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when a customer opens an account and to reflect the fee in monthly

statements in any month in which a fee is charged. Regulators said that

their examinations showed no problems with compliance with these

requirements. The surcharge fee disclosure sign and the ATM message

remind customers that the surcharge fee is “in addition to any fees that

may be assessed by your bank.” To the extent that ATM cardholders

already know the foreign fee they are paying, additional disclosure adds no

benefit.

Industry representatives explained that requiring foreign fee disclosure

could produce unintended consequences. They suggested that the cost of

providing disclosure might result in higher fees for ATM transactions,

longer transaction and waiting periods at the ATM, reduced access to

ATMs, and fewer options in banking arrangements. On the basis of our

analysis and discussions with regulators, economists, and consultants, we

believe that these unintended consequences could, at least in part, offset

the benefits of disclosure.

Industry officials observed that foreign fee disclosure could result in

higher costs for conducting ATM transactions. They explained that cardissuing banks might attempt to recover the costs of implementing and

providing disclosure of foreign fees. To do so, they might increase the fee

for making foreign transactions or raise other account fees. Industry and

consumer group representatives said that ultimately bank customers likely

would bear some or all of the cost of fee disclosure.

Displaying the foreign fee and giving the cardholder the option to accept or

reject the transaction would increase the time it takes to perform an ATM

transaction. Currently, according to an industry estimate, a basic cash

withdrawal takes between 23 and 33 seconds. Industry officials estimate

that if a second transmission is required to disclose foreign fees at the

ATM, it would require 8 to 12 seconds to process the fee inquiry and

another 3 to 5 seconds for the cardholder to accept or reject the

transaction. One official suggested that this increased waiting time would

be especially unpleasant because cardholders would see the same fee in

every transaction. The added time required to perform ATM transactions

also would add to the waiting period at ATMs during times of heavy usage.

Industry representatives said that this might require additional investments

in ATMs to provide the current level of service.

Foreign fee disclosure might also reduce the availability of ATMs. Industry

representatives said that many ATMs—especially those not owned by

banks—are only marginally profitable or are losing money. As previously

Consumer Benefits Could

Be Partially Offset by

Increased Fees,

Inconvenience, and/or

Reduced Account Options
B-284431

Page 34 GAO/GGD/AIMD-00-224 Automated Teller Machine

discussed, some owners of ATMs may conclude their current transaction

volume cannot justify the cost of modifying or replacing existing ATMs.

Consequently, ATM cardholders may find that ATMs at some locations are

no longer available. Further, industry representatives said that large banks,

which operate ATMs in many states, may find it advantageous to limit use

of their ATMs to only their cardholders, rather than make the changes

required to disclose foreign fees to nonaccount cardholders. This would be

harmful for smaller banks that own few ATMs since their cardholders rely

heavily on ATMs owned by larger banks.

Requiring disclosure of foreign fees could also result in more denied

transactions at ATMs if foreign fee information is not available when

networks are “standing in” for card-issuing banks. To provide fee

disclosure, foreign fee information from card-issuing banks would have to

be stored at another location in addition to the cardholder’s bank to

ensure continuation of cardholder service when a network cannot

communicate with the on-line ATM processor of the card-issuing bank. If

this foreign fee information were not available, transactions would have to

be denied. Industry officials said that these denials would occur regularly

because host systems are routinely taken off-line at night for maintenance.

Industry representatives said that foreign fee disclosure might lead banks

to limit account options to customers. For example, several

representatives suggested that banks could eliminate the cost of real-time

fee calculation by moving to a flat rate foreign fee. Other representatives

suggested that banks that currently charge foreign fees might seek to avoid

the disclosure requirement by abolishing these fees and raising charges

elsewhere to cover the costs of ATM transactions. Still other

representatives believed that these actions would harm customers and

reduce competition because it would reduce ATM options a bank could

offer to differentiate its product from those of its competitors.

Some industry representatives suggested that if enhanced disclosure of

foreign fees were required, this could be accomplished with less costly

alternatives. For example, they suggested that fees could be displayed

more prominently on the monthly statements sent to cardholders. We also

noted that additional sheets disclosing fees could be added to the monthly

statements.34 Another alternative that industry representatives suggested

was modifying the existing surcharge message display on the ATM screen

34It is possible that future advances in technology may make it easier and cheaper to provide real-time

disclosure. For example, if ATMs were upgraded to accept “smart” cards containing a computer chip, it

might be possible to store some of the information about fees on the card.

Alternative Options to

Enhance Fee

Disclosure
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Page 35 GAO/GGD/AIMD-00-224 Automated Teller Machine

so that it would be more noticeable. Currently this message includes a

general notice stating that “this fee is in addition to any fees that may be

assessed by your financial institution.”

The ATM industry representatives who reviewed a draft of this report said

either that they found it to be objective and balanced, or that, overall, they

agreed with the information presented. They discussed some issues that

they felt should be added or clarified in the draft. Where appropriate, we

added information in the text to address the issues that they raised. The

industry representatives raised four additional points that we include

below.

First, some of the representatives said that an ATM might not always

distinguish an ATM card from a credit card inserted at an ATM to obtain a

cash advance. Changes to the ATM industry infrastructure in addition to

those referred to in this report would be required, according to the

representatives. We recognize that consumers can use credit cards at

ATMs, but, as required in the mandate for this study and as noted in this

report, our work focused on electronic fund transfer activities, as defined

in EFTA, conducted using an ATM card. We acknowledge the industry

representatives’ point that use of other types of cards at ATMs could

compound necessary modifications to the industry’s infrastructure to

accommodate real-time fee disclosure.

Second, some industry representatives said they thought this report should

place greater emphasis on the potential effect of real-time fee disclosure

on the efficiency of the ATM industry and less on the potential costs. This

report addressed both efficiency and cost, as required by the congressional

mandate.

Third, some industry representatives were concerned that some readers

might get the impression that real-time fee disclosure would be onerous

only for small institutions rather than for all industry participants. Our

report notes that the burden might fall more heavily on small institutions

but states that extensive restructuring would be needed by the entire ATM

industry.

Finally, in commenting on alternative options to enhance fee disclosure,

some industry representatives noted that providing additional paper

disclosure would not be as easy as it might seem. For example, the

industry representatives said that additional paper enclosures could

increase mailing and other costs. Further, the representatives questioned

the need for more fee disclosure given the lack of consumer concern or

Agency Comments and

Our Evaluation
B-284431

Page 36 GAO/GGD/AIMD-00-224 Automated Teller Machine

complaints regarding fee disclosure. Our primary focus in this report was

limited to the feasibility, cost, and time frames of real-time fee disclosure.

Therefore, while we did not examine whether additional fee disclosure

was desirable, additional foreign fee disclosure in or on monthly

statements would be a less costly way of achieving additional disclosure.

We are sending copies of this report to Representatives Marge Roukema,

Chairwoman, and Bruce F. Vento, Ranking Minority Member, House

Subcommittee on Financial Institutions and Consumer Credit; Senator

Charles Schumer, member of the Senate Committee on Banking, Housing,

and Urban Affairs; the Chairman of the Federal Reserve Board; the

Comptroller of the Currency; the Chairman of the Federal Deposit

Insurance Corporation; the Chairman of the National Credit Union

Administration; and the Director of the Office of Thrift Supervision; and

other interested parties. We also will make copies available to others on

request.

If you or your staff have any questions regarding this letter, please contact

Thomas J. McCool or Kay Harris at (202) 512-8678. Key contributors to this

report are acknowledged in appendix I.

Thomas J. McCool

Director, GGD/Financial Institutions

and Markets Issues

Keith Rhodes

Director, AIMD/Office of Computer and Information

Technology Assessment
Page 37 GAO/GGD/AIMD-00-224 Automated Teller Machine
Appendix I

GAO Contacts and Staff Acknowledgments

Page 38 GAO/GGD/AIMD-00-224 Automated Teller Machine

Thomas J. McCool (202) 512-8678

Kay Harris (202) 512-8678

In addition to the persons named above, Davi D’Agostino, Richard Hung,

Harry Medina, Robert Pollard, and Karen Tremba made key contributions

to this report.

GAO Contacts

Acknowledgments
Page 39 GAO/GGD/AIMD-00-224 Automated Teller Machine
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