Texas Department of Banking Testimony Testimony Of Catherine A. Ghiglieri, Banking Commissioner State Of Texas Before The House Interim Financial Institutions Committee Atm Operations Date: October 21, 1998 INTRODUCTION Thank you for the opportunity to address this Committee regarding automated teller machines, or ATMs, operating in Texas. I will discuss the current laws relating to ATMs, the status of the Finance Commission study, the impact of the Year 2000 on ATM operations, related consumer issues, and my recommendations for legislative consideration. BACKGROUND Laws Concerning ATMs In Texas: In Texas, laws related to ATMs are limited, and no statutory or regulatory restrictions exist on the amount of fees charged to users of ATMs. The Texas Constitution (Article XVI, Sec. 16(b)) restricts a state or national bank to establishing and operating ATMs in the county of its domicile, but this provision has long been preempted by federal law. (See Appendix for statutes and rules cited here.) Any person may own and operate an ATM anywhere in the state (Texas Finance Code Sec. 59.201). A depository institution may operate a proprietary ATM or it may permit other depository institutions to share the use its ATM, but if shared it must be shared on a non-discriminatory basis and usage charges imposed must be fair, reasonable, and non- discriminatory among the institutions (Texas Finance Code Sec. 59.201). Owners and operators of ATMs must take steps to evaluate and meet minimum standards for the safety of each ATM they own, and issuers of ATM cards must notify customers of basic safety precautions the customer should follow while utilizing an ATM (Texas Finance Code Secs. 59.301-59.310; 7 TAC Sec. 3.92). Texas law requires notification to the customer before a fee is charged, although no mechanism for enforcement currently exists. The owner of an ATM that is connected to a shared network may impose a fee if it is disclosed at a time and in a manner that allows a user to avoid the transaction without incurring the transaction fee (Texas Finance Code Sec. 59.202). The Texas Racing Commission has adopted a rule requiring ATMs at racetracks to be licensed by the Racing Commission. In addition, a customer at a race track may make withdrawals only from a checking account, in amounts no more than $200 per day. For each transaction at a racetrack ATM, a pre-disclosed statutory fee of $1.00 must be withdrawn from the customer's account, in addition to any other fees authorized and imposed by the network and its financial institution participants, for deposit into the Texas State Treasury (Texas Racing Act,Sec. 11.04(e); 16 TAC Sec. 309.32). Attempts to Regulate ATM Fees: In the past year, almost every state legislature and the federal Congress considered some form of legislation that addressed ATM fees. Only two states actually passed legislation, but neither bill prohibited or limited fees. Maryland passed a fee disclosure provision, similar to our law. Georgia adopted a bill that amended its antitrust law to authorize agreements among institutions not to charge a fee at shared ATMs. Two states specifically limit fees. Mississippi caps fees at $2.00 or four percent of the transaction amount, whichever is greater. Wyoming has a statutory limit of $2.00 but the state banking commissioner has the authority to revise the limit by regulation, and did limit the fee to $1.00 in 1995. Two more states, Iowa and Connecticut, have legal opinions prohibiting ATM fees. Both of these states are currently in litigation over this issue, challenged by national banks and the Office of the Comptroller of the Currency. In practice, ATM fees are rising. The federal General Accounting Office recently reported that the average fee has increased 50% to $1.50. According to the United States Public Interest Research Group, the number of banks that charge fees has increased 45% from 1997-1998. The practice of charging fees differs on average between large national banks and small banks. Eighty-three percent of large banks charge a fee averaging $1.35, while only 63% of small banks charge a fee, averaging $1.16. ATMs at the State Fair of Texas this year charged $3.25 per transaction. FINANCE COMMISSION STUDY In 1995, as part of the rewrite of the banking laws, the Finance Commission was required to perform a study of the availability, quality and pricing of financial services to consumers, agribusiness, and small business in Texas. Texas Finance Code Sec. 11.305. Because of the breadth of this mandate and the attendant costs, the Finance Commission decided to perform one portion of this study at a time. In April, the Finance Commission contracted with Empirical Management Services, Inc. of Houston to conduct a study of the availability, quality and pricing of cash and depository services to consumers in Texas. The study is scheduled to be completed on November 30, 1998 and is based upon the results of random telephone surveys and face-to-face interviews with consumers in eight areas of the State. In addition, focus groups were held with consumers and financial institutions, and mail surveys were sent to financial service providers. The interview questions included items relating to the use of ATMs and the associated fees. IMPACT OF THE YEAR 2000 ON THE USE OF ATMS The Year 2000 (or Y2K) problem is the potential failure of information technology as a result of the year date changing from 1999 to 2000. This potential exists because of past practice of using two digits, not four, to represent the year in computer databases, software applications, and hardware chips. In the year 2000, outdated information technology will be unable to differentiate the year 2000 from the year 1900. According to our review and the review of other bank regulatory agencies, banks are making substantial headway toward resolving their Y2K computer problems. The main impact of any Y2K computer glitches in the use of ATMs would be to prevent access to cash by the consumer through the ATM. However, even if an ATM does not work, the consumer will still be able to go into the bank to withdraw money or cash a check. The Federal Reserve System Board of Governors anticipates that the worry about cash accessibility may cause some consumers to withdraw larger amounts of money from their accounts near the end of the year, and has ordered an approximate 25% increase in available cash to accommodate this possibility. If some ATMs are temporarily dysfunctional, we anticipate that the problems will be relatively short-lived. CONSUMER COMPLAINTS REGARDING ATMs Shortly after the widespread use of ATM fees began, the Department received numerous consumer complaints regarding the amount of the charges. Because of required disclosures on bank-owned ATMs, these complaints have become almost non-existent. Many consumers have altered their ATM use to avoid the surcharges. Other ATM-related complaints include unauthorized withdrawals, erroneous receipts, inexact amount of cash disbursed, and lack of up- to-date balances presented on ATM screens. However, given the number of transactions conducted at ATMs, consumer complaints to our Department are extremely limited. RECOMMENDATIONS FOR LEGISLATIVE CONSIDERATIONI have several recommendations to improve ATM regulation in Texas, other than regulation of the fees charged. Unless an ATM is owned by a depository institution, no regulatory oversight of the operation of the ATM currently exists in Texas law, and regulatory oversight is needed in at least two circumstances. First, no enforcement authority exists over non-bank owned ATMs to compel compliance with state law requiring disclosure of the surcharges prior to completion of the transaction. Many states do not permit ATMs unless they are owned and operated by financial institutions, but because Texas does not so restrict ATM ownership, there is a loophole in regulatory authority. Second, the owner or operator of an ATM is not required to disclose its name, address, or a contact telephone number in case of a problem with the ATM transaction. If such a requirement was imposed by law, with suitable enforcement authority to compel compliance, a consumer would be able to contact the appropriate party if, for example, a non-bank owned ATM at a service station disburses $10 instead of $100 and the receipt states that $100 was disbursed. Without such disclosure, neither the customer nor the service station employee knows whom to contact. CONCLUSION: ATMs provide the consumer with a convenience and a service in Texas. Much has been done by the Texas Legislature to ensure the safety of the consumer at an ATM, and to ensure that a fee cannot be charged without giving the consumer a chance to reject the transaction request. Several areas of concern remain, however, regarding the non-bank owned ATMs, which could be remedied by legislation. I would be happy to answer any questions that you may have. APPENDIX TO THE TESTIMONY OF CATHERINE A. GHIGLIERI, BANKING COMMISSIONER, STATE OF TEXAS, BEFORE THE HOUSE INTERIM FINANCIAL INSTITUTIONS COMMITTEE, ATM OPERATIONS OCTOBER 21, 1998 The Texas Constitution, Article XVI, Sec. 16(b) (b) If it finds that the convenience of the public will be served thereby, the Legislature may authorize State and national banks to establish and operate unmanned teller machines within the county or city of their domicile. Such machines may perform all banking functions. Banks which are domiciled within a city lying in two or more counties may be permitted to establish and operate unmanned teller machines within both the city and the county of their domicile. The Legislature shall provide that a bank shall have the right to share in the use of these teller machines, not situated at a banking house, which are located within the county or the city of the bank's domicile, on a reasonable, nondiscriminatory basis, consistent with anti-trust laws.