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4000 - Advisory Opinions

Whether ATM Promotion Constitutes Payment of Interest on Demand Deposits in Violation of 12 C.F.R. §329


March 13, 1991

Jeffrey M. Kopchik, Counsel

This is in response to your letter of February 7, 1991.

It is my understanding from your letter that *** ("***") is a state-chartered bank which serves numerous rural communities in South Carolina. ***, as well as most other financial institutions located in South Carolina, belongs to the Relay automated teller machine ("ATM") network. In an effort to encourage people to utilize a newly-installed *** ATM which is part of the Relay network, *** would like to mail a brochure to each household in the relevant geographic area. This brochure would contain a coupon worth $5 which would be redeemable at the *** in that community. In order to redeem the coupon, an individual would be required to use the new ATM to withdraw cash or check his/her balance five times within a certain six month period. The individual would then present the coupon along with the five ATM receipts (all from the same account) at the designated *** branch in order to receive the $5. *** would distribute a maximum of $5 per account holder. All holders of Relay ATM cards who receive the brochure would be eligible to cash the coupon, even if they do not maintain an account with ***.

Your letter points out that some financial institutions which belong to the Relay ATM network charge their customers a $1 transaction fee for using a "foreign" ATM. You also point out that *** charges some of its customers (e.g., those that do not maintain a certain minimum balance in their account) a $1 transaction fee for using an *** ATM. In these cases, redemption of the *** coupon would reimburse customers for the transaction fees they will incur in utilizing the ATM.

You have inquired as to whether this promotion would constitute the unlawful paying of interest on demand deposits in violation of Federal Deposit Insurance Corporation ("FDIC") regulations, Part 329. 12 C.F.R. 329.

Section 329.1(c) of the FDIC's regulations defines interest as "any payment to or for the account of any depositor as compensation for the use of funds constituting a deposit. A bank's absorption of expenses incident to providing a normal banking function or its forbearance from charging a fee in connection with such a service is not considered a payment of interest." (Emphasis added) The interpretive rule contained in section 329.103 describes certain payments, referred to as "premiums", which are not deemed to be "interest" as defined in section 329.1(c).

In analyzing the circumstances set forth in your letter, it is necessary to distinguish between the three different categories of individuals who would be eligible to cash the coupon: customers of other banks, *** customers who pay a fee to use the *** ATM and *** customers who do not pay a fee to use the *** ATM. In the first case, it is my opinion that $5 paid by *** to the customer of another financial institution for using an *** ATM does not constitute the payment of interest on a demand deposit in violation of Part 329. Simply put, *** cannot pay interest on an account maintained at another financial institution. Second, with regard to ***'s customers, it is clear from the facts as described in your letter that the $5 payment to them is not "compensation for the use of funds constituting a deposit." Rather, this payment is a permissible promotion designed to encourage customers to use a newly-installed ATM. For example, in the case of two *** customers, each with identical accounts and account balances, whether or not they receive the $5 payment is entirely dependent on whether or not they utilize the new ATM five times during the designated period of time.1

My opinion is based upon the facts recited above. If any of these facts should change, my opinion may also change. I trust that this letter is responsive to your request.

1I should also point out that the $5 payment is well within the restrictions imposed by section 329.103(a)(3) concerning permissible premiums. Also, for *** customers who are charged a $1 transaction fee each time they utilize an ATM, ***'s reimbursement of those fees may constitute the "absorption of expenses incident to providing a normal banking function. . ." as described in section 329.1(c). Go back to Text

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