hich party should be responsible for informing customers of a bank's policy of surcharging cardholders who use PINs to authenticate debit transactions: the card-issuing bank or the merchant? And just how responsible should cardholders be for reading and understanding banks' fee disclosures?

This is the crux of an argument simmering beneath the surface in Washington D.C. these days. Whether it gets resolved there or in the marketplace is up for conjecture, and is more than just a bit contingent on this year's Congressional election results. But if bankers are serious about promoting electronic payments and processes as replacements for checks and cash, the existence of this argument should be seen as a clarion call for sensibility.

Creating new fees isn't a sound long-term strategy for replacing the lucrative revenue streams from the traditional checking account relationship. Why would well-informed consumers pony up $1.00 - $1.50 to use a PIN with their debit card, say at a supermarket, when they can write a check, use the signature authentication feature of the debit card, or even use a credit card at no extra charge to them?

Here's how a guy from College Park, Md., put it in a recent letter to the Federal Reserve:

"I had no idea that these fees existed, nor that banks are receiving transaction compensation from the retailers as well." He went on to express his "outrage" over banks "reap[ing] the benefits" of consumer confusion.

Surcharging has been in the spotlight lately as banks seek ways to allay balance sheet implications of the so-called "Wal-Mart" litigation. In settling that litigation, which called into question Visa and MasterCard "honor-all-cards" rules, the bank-owned card Associations agreed to pay in excess of $3 billion to retailers (in effect, refunds on past signature debit interchange charges); to slash interchange on signature debit card payments; and to eliminate the honor-all-cards rules.

Banks have a history of success in surcharging debit card users. In the mid- to late-1990s, when some banks began assessing surcharges to non-customers using their ATMs, consumers at first were outraged. Today, non-surcharge ATMs are an exception rather than the rule. And these "foreign" transaction fees are a crucial component of any business case for ATM placements by banks and non-banks alike.

(Okay, before the lawyers start calling, technically the POS fees are not called "surcharges" but "debit card fees." I use the terms here interchangeably.)

Now a variation on the trend is emerging at the point of sale. NYPIRG, the New York chapter of the Public Interest Research Group founded by Ralph Nader, reports that in 2002 57% of New York banks imposed POS debit card fees. Banks adding surcharges and identified by NYPIRG were largely New York regional banks, but anecdotal evidence suggests the surcharging trend is underway in other regions as well.

The fees NYPIRG identified in 2002 averaged $0.89 a transaction; today many card-issuing banks are charging fees of $1.00 or more when a consumer uses the PIN feature of his or her ATM debit card at a store.

It was the NYPIRG report that piqued the interest of lawmakers, and earlier this year Democrats on the Senate Banking Committee asked the Fed to study the issue and report back to Congress this November.

In response, the Fed, in May, requested public comments on whether existing disclosure rules (contained in the Fed's Regulation E, which covers EFT) are effective in making consumers aware of the fees they pay for using the PIN feature of their debit cards at merchant checkouts. The Fed said it's also looking into the prevalence of these fees and the feasibility of requiring real-time disclosures at the point of sale.

Retailers Are Mixed

Consumers are not alone in their displeasure over POS debit fees. The National Retail Federation (NRF), the Washington D.C.-based trade association, complained in its comment letter to the Fed, last month, that banks are deliberately misleading consumers by making it appear that the fees are imposed by store owners.

Typically, a statement from a bank that imposes these POS debit charges includes a separate line item indicating the fee amount and where it was incurred, say at a Safeway store. That line item appears next after the POS debit amount. Nessa Feddis, a lawyer with the American Bankers Association (ABA), explained that the location name is required under Reg. E.

NRF wants the Fed to amend Reg. E to require that banks provide signs or some other form of disclosure explaining the fee at the merchant's checkout.

"Consumers come to [our members] with their bank statements and express their surprise, to put it mildly, that they have been charged for entering a PIN," said Mallory Duncan, NRF Senior Vice President and General Counsel.

"Once we overcome their disbelief and explain the true source of the charge, the customers' anger is immediately directed at their banks. But this job should not be the retailer's responsibility."

Annual bank account disclosure statements aren't enough, Duncan added. "Only a concrete disclosure at the point of sale will make it clear and allow consumers to effectively comparison shop among banks and encourage efficiency in the marketplace."

Feddis of the ABA counters that the onus should be on consumers. She contends that consumers rarely read bank disclosures or review their monthly statements. "It's a bit disingenuous to say banks aren't providing adequate disclosures," Feddis said.

Target, the retailing giant, isn't convinced that POS disclosures will help. "We believe that the card-issuing banks should improve their disclosures, but we strongly oppose the idea of disclosure at the point of sale," wrote Terrence J. Scully, President of Target's financial services unit.

Scully's letter, like those from Duncan and others, takes issue with the manner in which banks disclose the fees on monthly account statements. "Banks need to clearly state that it is the bank imposing the fee, not the merchant," he said.

Banks and Lessons Learned

Feddis insisted during a telephone interview that banks provide debit card fee disclosures at various times, and that the POS debit fee is disclosed on monthly account statements using the same conventions as ATM fee listings. If retailers want consumers to know about debit card fees at the point of sale, let the retailers explain it, she countered. "There's nothing that prohibits them from telling customers," she said, suggesting that retailers post their own POS signs notifying customers of potential surcharges.

Clearly, banks are within their rights to assess these fees. But they need to be sensible. Is it really worth alienating millions of consumers who might otherwise willingly transition their check payments to debit cards for some short-term gains in fee income?

My friend Richard Crone said it is. Crone, a consultant with Edgar, Dunn & Co., has spent years in the payments space. He said banks are "leaving money on the table" if they don't charge consumers for the "convenience" of using their ATM cards at the point of sale. "As long as the fee is reasonable, the demand is inelastic," he said.

But what's "reasonable"? I might be missing something, but it strikes me that charging $1.00 or $1.50 at this early stage in the trend isn't reasonable. And if the comments sent to the Fed are any indication, I'm not alone.

Clearly, banks are in a bind. It has been estimated that banks collect in excess of $6 billion a year in NSF and similar fees assessed consumers who (for whatever reasons) can't properly manage their checking accounts.

Much of that money will evaporate when real-time authorization of checks and debit card payments becomes the norm. The potential is already here with products like ACH check conversion and Visa's POS Check service, and PIN-based debit, too.

Sure, merchants don't want to turn away sales, but they also don't like write-offs. If these services prove viable, it's a good bet merchants will step up adoption.

But price-conscious consumers don't want to pay for something they perceive as benefiting merchants or the banks, rather than consumers. I discussed the matter with my husband recently. David is a poster child for EFT who prides himself on not having been inside a bank branch in nearly two decades. He was incredulous: "What, now they want to start charging for that? I might as well use a credit card," he said.

Now, that's good news for card-issuing banks, and certainly for acquirers, but the ATM networks will lose precious POS volume, and retailers will end up paying pricey credit card interchange rates if many other consumers adopt an attitude like David's.

For years banks have been giving away checking account services, and not surprisingly, consumers have come to expect that all services tied to their checking accounts should be free.

While banks might have sensible reasons for wanting to recoup diminished revenues that result from shifts in consumer payment preferences, POS PIN debit surcharges of $1.00, or more, is not a sensible response to the problem.

The Fed continues to study the situation, and in its report to Congress this November could recommend new and clearer disclosures by banks of POS debit card fees. One way to avert government dictates is for merchants and banks (as a group) to cooperate on POS information. Another way is for bankers to come to their senses and not let POS surcharges become standard fare, especially this early in the transition.

Let's not forget, it took more than a decade of ATM adoption before ATM surcharges took hold. POS PIN debit is still a relatively new phenomenon; it needs time to grow.

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com .