Although it hasn't attracted as much attention as the heated debate over national versus regional interstate banking, a recent ruling by the 2nd U.S. Circuit Court of Appeals stands out as a significant development in the evolution of the banking industry.
For the Washington region, at least, the court's ruling effectively removes what loomed as a potential threat to the continued advancement of electronic banking across state lines.
In a little-noticed decision, the court ruled that an automatic teller machine (ATM) that is owned by a supermarket is not a branch of a national bank whose customers use the machine. The court, in effect, upheld an earlier interpretation and ruling by the U.S. Comptroller of the Currency.
In reversing a lower court decision, the appeals court found that if shared-ATM usage is considered the establishment of a branch under federal law, then "national banks will be prohibited from the interstate activities facilitated by such laws." And that, said the court, will "limit the ability of national banks to compete in the use of major technological developments in the banking industry, contrary to congressional purpose."
The ruling stemmed from a case in which the Independent Bankers Association of New York State and an upstate New York bank had charged Marine Midland Bank with operating a branch in a supermarket. A ruling by the appeals court upholding the claim of the plaintiffs might have forced banks and other financial institutions to restructure at considerable cost -- if not abolish -- ATM networks that operate across state lines.
"We were obviously concerned and watching the ruling because, indeed, if it had come down the other way, it would have rattled our tree," said David A. O'Connor, president and chief executive officer of Internet, the big ATM network with which most Washington-area banks and savings institutions are affiliated.
Internet, which is one of the nation's biggest regional electronic banking systems, was formed last year in a merger of the Most and Network Exchange ATM networks. Most and Network Exchange have not yet been joined operationally, but cardholder customers of affiliated financial institutions can still make deposits, balance inquiries or cash withdrawals from ATMs across state lines in the Washington area.
The use of automatic teller machines for limited banking services is really an initial phase of electronic banking. Internet, for example, is expected to begin a number of pilot point-of-sale (POS) projects that will electronically link retailers with financial institutions. The direct-debit communications link will enable consumers to transfer funds electronically from their bank accounts to a merchant's account when making purchases.
Internet, in all probability, will conduct its first pilot POS program with the Mid-Atlantic Food Dealers Association. But that project would have been "put on hold if the Marine Midland ruling had come down differently," O'Connor said.
The case also had strong implications for another local electronic banking venture that was launched last year by Suburban Bancorp and Giant Food Inc. The new venture, GFS Financial Services, operates Giant Money Mover ATMs in Giant's supermarkets.
The GFS Financial Services venture differs from the arrangement between Marine Midland and the supermarket chain in New York. The ruling is important to GFS' continued operation, however, because Giant operates stores across state lines in the Washington area.
In Marine Midland's case, the bank did not own the ATMs that were installed by the supermarket chain in New York. What's more, the food chain made the electronic banking services available to other banks as part of a shared network.
Thus, the appeals court concluded that Marine Midland's use of the shared ATM "which Marine neither owns nor rents, does not constitute establishment and operation of a branch under the McFadden Act," which prohibits interstate branching.
Unquestionably, a ruling against Marine Midland "would have had considerable impact" on electronic banking networks nationwide, as O'Connor observed.
The Consumer Bankers Association, a trade group with headquarters in Arlington, noted that an adverse ruling "could have compelled a mass exodus by national banks" from the more than 200 shared-ATM networks presently operating on an interstate basis. The result, said the CBA, would have led to a "crippling" of the development of electronic banking services nationwide.
A lawyer for the plaintiffs in the case suggested several months ago that I might find his legal arguments "persuasive." The plaintiffs' arguments obviously weren't persuasive enough to convince the appeals court to throw the banking system into further upheaval.