.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} A national bank is challenging a state law that it says has created a monopoly in the processing of ATM and debit card transactions.

U.S. Bank filed a lawsuit Feb. 16 in U.S. District Court in Des Moines that says the state’s Electronic Transfer of Funds Act restricts interstate commerce and illegally trumps federal law that governs national banks.

U.S. Bank tries again

The lawsuit, filed against Thomas Gronstal in his capacity as the state’s superintendent of banking, marks the second time that U.S. Bank and its Elan Financial Services have challenged the state law, which dates to the 1970s and was an effort to provide some uniformity and data security to bank customers using ATMs and debit cards.

U.S. Bank claims that provisions in the law requiring that many of those transactions must pass through a state-certified central routing unit or data processing center that in turn is connected to a central processing unit restrict its ability to provide the processing services to Iowa banks that might want to use them.

In 2008, Farmers State Bank in Marion made similar allegations after it was told by the Division of Banking that it could not contract with Elan Financial Services because Elan was not certified to provide the services.

That case was dismissed after a federal judge determined that Farmers State Bank did not have standing to file the lawsuit and essentially said that it should have been filed instead by U.S. Bank and its affiliated company, Elan Financial Services.

At the time, Gronstal said there was nothing in state law that prohibited Elan Financial Services from becoming a state-certified central routing unit.

Compliance costly, bank said

When that lawsuit was filed, Farmers State Bank claimed that 25 percent of its operating costs were spent on the electronic transaction services provided by SHAZAM Inc., an Iowa company that was formed in 1975 by community banks and continues to be the only company in Iowa that provides central routing services.

Under state law, central routing units must process ATM transactions that originate on machines that are not owned or operated by the card holder’s bank, called “not-us” transactions. So called “on-us” transactions, or those that use equipment provided by a card holder’s bank, do not pass through a central processing unit.

U.S. Bank says in the lawsuit that it is one of the top 10 ATM processors in the country and operates bank-branded ATM terminals in Iowa. In all, the banks said it operates more than 38,000 ATMs across the country.

The National Bank Act authorizes national banks to provide a full range of electronic fund transfer services. In Iowa, services relating to ATMs and debit cards must pass through the data processing centers or the central routing units. The Office of the Comptroller of the Currency (OCC) issues regulations regarding national bank operations.

State law at odds with federal?

The National Bank Act and OCC allow a national bank to offer services to any financial institutions that it would provide for itself.

State law governing the transactions requires a company that wants to operate a processing center in Iowa to allow state banking officials to appoint four members, all with voting rights, to the company’s policy-making board. The company also must submit to examinations of its operations by state banking officials and it cannot restrict Iowa customers from accessing its services.

The state law violates the supremacy clause of the U.S. Constitution, which essentially states that federal laws preempt corresponding state laws. In addition, the state law restricts interstate trade and therefore violates the Constitution’s dormant commerce clause, according to the lawsuit.

U.S. Bank seeks an injunction prohibiting Gronstal from enforcing the state law as well as monetary damages.

Farmers State Bank would have lower operating costs and increased revenues from point-of-sale transactions if it were allowed to use U.S. Bank’s electronic transfer of funds services, according to the lawsuit.

A clamor for competition?

Des Moines attorney Kim Baer, who represented Farmers State Bank in the 2008 lawsuit, said there is little questions that Iowa banks would benefit from having some choice in the company they use to provide electronic fund transfer services.

“The initial reason for the law was a good one, but those types of protections are no longer needed,” she said.

Baer said she was contacted by three financial institutions encouraging her to continue the case after it was dismissed.

John Sorensen, president and CEO of the Iowa Bankers Association, said he is not aware of a surge of interest among state banks for another provider of the fund transfer services.

The passage of the state law roughly coincided with the creation of what at first was called the Iowa Transfer System Inc. and later renamed SHAZAM by a cooperative of Iowa banks that wanted to provide universal access to ATM services and terminals across the state, said Richard Jenkins, SHAZAM’s general counsel.

Jenkins said the intent was to provide “non-discriminatory” services for users of ATM cards and later debit cards. In other words, a card could be used at any terminal or business, in the case of debit cards, in the state.

The state law governing the exchanges was modeled after the Federal Reserve’s check-clearing system, he said.

“Obviously, the cooperative benefited from the state law,” Gronstal said.

SHAZAM has grown to a multi-faceted card services company serving 1,600 financial institutions in 30 states.

Few companies have attempted to complete the certification process to provide the services.

Gronstal said there is little question that national banks “find us a little annoying.”

Baer offered that all banks and bank customers would benefit if a federal ruling goes in favor of U.S. Bank.

“The effect of this lawsuit will be a good thing for Iowa citizens,” she said.