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STATUS OF ATM'S UNDER STATE BRANCHING

LAWS

THURSDAY, SEPTEMBER 20, 1984

U.S. SENATE,
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC. The committee met at 10 a.m., in room SD-538, Dirksen Senate Office Building, Senator Paul S. Trible presiding.

Present: Senators Trible and Gorton.

OPENING STATEMENT OF SENATOR TRIBLE Senator TRIBLE. The hour of 10 having arrived and passed, it's time to begin our second day of hearings on the Banking Convenience Act of 1984. I'd like to welcome all of you here today.

Our aim is to preserve and foster the use of shared automated teller machines for the benefit of American consumers. People are demanding and receiving the convenience of shared ATM networks on a massive and ever increasing scale. Today, many thousands of ATM's in shared networks serve customers in every State and region in the United States. In the 200 regional networks, customers are now using 16,000 ATM's to perform 60 million banking transactions every month. Seven national networks permit consumers to obtain cash anywhere in the United States.

There can be no doubt that consumers want these services and preserving these networks is what the legislation before us is all about.

Earlier this year, as you all know, the U.S. District Court in New York in the case of Independent Bankers Association of New York v. Marine Midland Bank issued a ruling which could jeopardize participation of national banks in shared ATM networks. As we will hear today, this could seriously affect the provision of ATM services.

It is obvious that customers of national banks would be hurt if their banks were unable to participate in shared ATM networks, but it's not just those customers who would be hurt. The customers of the 9,000 banks, thrifts, credit unions, credit card companies, and retailers who participate in these networks today would also be losers. ATM services would be limited and costs would increase.

For example, if the Marine Midland decision is sustained, customers in Virginia's Sovran Bank would be denied the use of hundreds of ATM's across State lines in Washington, Maryland, North Carolina, and South Carolina. ATM services within States could be adversely affected and surely would cost more. Similarly, Virginia

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customers in 58 banks, thrifts,

and credit unions which now belong to the MOST and Network Exchange networks could be denied access to ATM's throughout Washington, Virginia, and Maryland.

These kinds of problems would develop throughout the country. Senator Humphrey and I have proposed this legislation to avoid these problems and the chilling impact of extended litigation, in order to continue the provision of ATM services to millions of customers.

The Banking Convenience Act writes into law the regulations of the Comptroller of the Currency which led to national bank participation in shared ATM's, thereby restores the status quo as it existed before the Marine Midland ruling, and avoids disruption in shared ATM networks.

Yesterday, this committee heard the views of banking groups, Federal and State banking regulators, and the electronic funds transfer industry. Most of the witnesses supported the measure and urged quick adoption of this legislation.

Today, we will broaden our perspective to consider the views of consumer groups, thrifts, credit unions, their regulators, and food retailers. This broader perspective is essential to future bank participation in shared ATM networks and to the survival of the networks themselves. It's not just a national bank issue. It's not just a bank issue. This issue concerns consumers in the broadest sense, investors in shared ATM networks, thrifts, credit unions, and credit card companies that participate or want to participate in shared ATM networks, and retailers interested in serving their customers better.

So I welcome the witnesses today and look forward to a stimulating session in this second day of hearings.

Senator Humphrey regrets he could not be here today due to schedule commitments, but has submitted a statement for the record.

[The prepared statement follows:]

STATEMENT OF SENATOR HUMPHREY Mr. Chairman, millions of consumers currently enjoy the convenience of conducting a wide variety of banking transactions from virtually anywhere in the country through an ATM network. No longer are consumers required to rearrange their busy schedules around the often scarce hours of a bank or wait in seemingly never-ending lines to conduct simple banking transactions. Today, consumers have a choice.

As a result of ATM networks, bank customers are able to pull a plastic card from their wallet or purse, insert it into an ATM and withdraw cash from, or deposit funds into their checking or savings account, make a balance inquiry, pay bills to third parties, or any other number of permissable banking services. All of this is provided with virtually no restriction on the location of this activity or the time of day in which the business is conducted.

The growth in participation by financial institutions in shared ATM networks and the volume of transactions made nationwide demonstrates consumer demand for the convenience, cost savings, and efficiency of such services. According to industry calculations, approximately 40 percent of the 40,000 machines installed in the United States are linked to 1 of approximately 200 regional shared networks. Moreover, each month these shared networks are performing an estimated 60 million transactions.

However, users of these networks are at risk of losing these services as a result of a recent district court decision. In the case of Independent Bankers Association of New York v. Marine Midland Bank, the district court held that a shared ATM that was owned by a supermarket but used by the customers of Marine Midland was a branch of the national bank under the McFadden Act.

This decision would seem to reverse longstanding Comptroller rulings and interpretive letters concerned the application of the McFadden Act's branching restrictions. For example in 1976, the Comptroller issued an interpretive ruling closely paralleling the decision in IBBA v. Smith that an ATM would be considered a branch under the McFadden Act. However, the rule further clarified that any ATM "which is not established (i.e. owned or rented by the bank) is not a branch of a national bank and not subject to the provisions of the McFadden Act. Financial institutions have traditionally relied on this interpretation to provide millions of consumers with the convenience of shared ATM networks.

However, if the district court's decision is upheld, conceivably national banks would be unable to allow their customers to use the ATM's they now use, since this would constitute illegal branch banking. Not only would the decision have a chilling effect on the future developments of these networks, but networks already in existence could also become dismantled.

In an attempt to avoid the potential for disruption of existing shared ATM networks, Senator Trible and I have introduced S. 2898, the Banking Convenience Act of 1984. It is the intent of this legislation to merely codify existing Comptroller rulings and interpretations which have led to national bank participation in shared ATM networks. The bill simply states that a national bank may share, or permit its customers to use, an ATM that is not estab lished by the bank. An ATM used in this manner would not be a branch for purposes of the McFadden Act or State branching restrictions. The bill further clarifies that an ATM is not "established” by a national bank if the machine is neither owned or rented by the bank. Nothing else should be read into the intent of this legislation.

I am pleased Senator Gorton has called us together today to review S. 2898. This legislation is of utmost importance to millions of consumers. I particularly want to commend Senator Trible for his interest and hard work in this regard.

I look forward to reviewing the comments and suggestions of the distinguished panels before us today.

Thank you.

Senator TRIBLE. Our first panel includes Dan Brumbaugh, Deputy Chief Economist, Office of Policy and Economic Research, Federal Home Loan Bank Board, and Wendell Sebastian, General Counsel, National Credit Union Administration.

Gentlemen, I would say to you and the other witnesses today that your full testimony will be made part of the record. You can read your testimony or you can summarize it. I can also tell you and the other witnesses that I have read all the testimony submitted to the committee and it appears that I'm the only one here today, so you might want to summarize your more salient points and we can then move ahead.

STATEMENT OF DAN BRUMBAUGH, DEPUTY CHIEF ECONOMIST,

OFFICE OF POLICY AND ECONOMIC RESEARCH, FEDERAL HOME LOAN BANK BOARD

Mr. BRUMBAUGH. Thank you, Senator. It's a pleasure to be able to testify before the committee on behalf of the Bank Board. I will summarize my testimony for you.

It's also a pleasure to be here with Mr. Sebastian. He and I were closeted together for a good part of last winter on the Vice President's task force on financial regulation. He skillfully, gratuitously, and with good humor abetted the efforts of the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and various other regulators in their attempts to carve away our turf, and it's through no fault of his own that we continue to be an independent Federal regulatory agency. Senator TRIBLE. I'm glad to bring you two together again. Mr. BRUMBAUGH. It's a pleasure.

INTERPRETATION OF THE RECENT DECISION

The Bank Board thinks that the bill which you and Senator Humphrey have designed is a perfectly appropriate response to the decision in the Marine Midland Bank case. It might be helpful, just so that we understand the Bank Board's interpretation of the law, if I briefly review our interpretation of that decision.

The bill would supersede the Marine Midland decision and in our opinion reestablishes the status quo. There was testimony yesterday that it would exceed the status quo as it existed before the decision. We disagree with that interpretation.

We also believe that before Marine Midland ATM's shared by national and State member banks for a fee rather than owned or rented were not considered branches under the appropriate Federal statutes. There was testimony yesterday that if this decision were to stand, automatic teller machines would not necessarily be considered branches under some circumstances. Although we believe that that's a possible interpretation of the decision, we think it's an unlikely one. In fact, we believe almost certainly that if the decision stands, automatic teller machines will be considered branches.

Federally chartered savings and loan associations have none of the constraints applicable to national banks and State member banks with respect to automatic teller machines. Under the relevant law and Federal Bank Board regulations, federally chartered savings and loan associations are permitted to establish what we call remote service units, that are, by any other name, automatic teller machines, without geographic limitations.

I actually asked our Office of General Counsel if in fact there was absolutely no geographic limitation and I'm told that this is correct.

At the present time, approximately half of the savings and loan industry, as we understand it, either is using shared ATM's or intends to use them, and that of the current participants, savings and loan associations comprise over 10 percent of the membership in the country's largest automatic teller networks.

I don't think it's necessary to say any more than that I believe that there's a broad consensus that automatic teller machines provide an enormous benefit to consumers, that most consumers agree that these benefits exist, and that even consumers of services provided by some banks in New York, which impose these services on some depositors, now agree that they provide a tremendous service to consumers. And I don't think there's any reason to say more other than to agree with you that the enormous growth in these automatic teller machines in the last few years is testimony to that.

COSTS OF ATM's One of the more interesting aspects of the issue, however, it seems to me, especially as an economist, is cost. It seems to me there are at least two cost benefits that these shared ATM's used for fees, as opposed to owned or rented, provide. One is that there appears to be an enormous initial cost if one wants to set up even one remote unit let alone a network. For example, I'm told that even the least expensive so-called in-the-wall automatic teller machine costs around $11,000 and that the freestanding models which I think are more frequently found in places like Wegman's Supermarket cost around $25,000.

A network of any size clearly is what the economists would call the absolute cost barrier. This barrier certainly does exist for small depository institutions, and even medium-sized depository institutions, and we think that it's probably a substantial barrier imposed on any depository institution that might want to use such a system in the absence of these "for-fee" systems.

In addition, there appears to be a relatively significant reduction in the cost per transaction when the number of transactions per day per ATM per unit of time is high. This is what generally justifies statements in the literature that I have seen that there are large economies of scale.

The data on the economies of scale, in my opinion, are sparse, and is based primarily on the testimony of people in the industry without many specific examples of why those economies exist. But I think they do, and I think as the data and information becomes more available, we will see that that is indeed the case.

Even now, the combination of costs at the moment prevents many small institutions from joining these shared ATM networks. As an example, I talked to a director of a credit union here in town whose credit union had recently shopped for a network here in Washington, DC and Maryland, which is now a joint network. The figures he cited were a $5,000 initiation fee and $2,500 to make the appropriate computer conversion, so that their initial setup cost would be approximately $7,500. Those costs could be higher if, as in many small institutions, they were still pencil and ledger and first would have to purchase a computer system.

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