oversight

Military Banking: Solicitations, Fees, and Revenue Potential

Published by the Government Accountability Office on 1999-04-15.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Requesters




April 1999
                  MILITARY BANKING

                  Solicitations, Fees,
                  and Revenue Potential




GAO/NSIAD-99-72
GAO
                   United States
                   General Accounting Office
                   Washington, D.C. 20548                                                                                    Leter




                   National Security and
                   International Affairs Division                                                                            Leter




                   B-281135                                                                                          Letter



                   April 15, 1999

                   The Honorable Floyd Spence
                   Chairman
                   The Honorable Ike Skelton
                   Ranking Minority Member
                   Committee on Armed Services
                   House of Representatives

                   In your Committee’s report on the National Defense Authorization Act for
                   Fiscal Year 1999, you expressed concern about the Department of
                   Defense’s (DOD) domestic banking program on military bases and required
                   that we review certain aspects of the program. In response to that
                   mandate, we determined whether (1) domestic military bases have
                   followed DOD procedures to provide for open solicitations in obtaining
                   banking services, 1 (2) on-base financial institutions face competition for
                   banking services from other financial institutions and charge fees
                   competitive with other banks, and (3) opportunities exist for DOD and
                   military bases to generate additional revenues from banking services on
                   military bases and how this might affect banking services and customers.



Results in Brief   In the 15 instances where domestic military bases sought banking services
                   since 1996, the military services openly solicited proposals from financial
                   institutions and selected from among the proposals to authorize a bank or
                   credit union to operate on the base, as required by DOD regulations.
                   Eleven of the solicitations resulted in two or fewer responses. In a few
                   instances where no proposals were received, DOD had to take special
                   action to obtain banking services. We learned of no unsolicited proposals
                   from financial institutions to provide banking services on other bases.
                   When a base received more than one proposal, commanders cited a range
                   of factors on which they based their selection decisions, such as fees,
                   operating hours, or services. The applicable regulations and instructions
                   do not contain specific guidance for this selection process. Further,
                   solicitations did not specify selection criteria or the weights associated
                   with various factors considered. The lack of clear selection criteria makes
                   it difficult to know the basis for selection and ensure fairness in the
                   selection process.


                   1
                     The general procurement laws do not apply because the bases are not procuring services for the direct
                   benefit of the government and are not using appropriated funds.




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             Financial institutions on military bases face significant competition both on
             and off the base. Less than half of DOD’s personnel use an on-base
             financial institution as their primary banking provider, according to a 1997
             DOD survey. On many bases, a bank and a credit union compete for
             business with each other and with off-base financial institutions. Fees
             charged by base financial institutions were close to the national average
             and within the range charged by all banks, on or off base.

             A few options exist for potentially generating additional revenues for DOD
             from financial institutions operating on its bases; how successful such
             options would be is unclear, and customers and banking services could be
             adversely affected. First, given that many banks’ lease agreements on
             military bases extend to 25 years, DOD could raise an unknown amount of
             additional revenue by incorporating in new leases and operating
             agreements the requirement to periodically renegotiate lease payments
             based on changes in fair market value, although there is some risk that
             lease payments might decline. Second, DOD could negotiate automated
             teller machine (ATM) fee-sharing arrangements, as is sometimes done in
             the private sector. Third, DOD could competitively solicit ATM placements
             apart from other banking services. The amount of additional revenues that
             could be obtained would vary by market conditions, including customers’
             reactions to likely increases in ATM charges.



Background   DOD has arranged for banks and credit unions to operate on military bases
             for decades, providing convenient banking services for military and civilian
             personnel assigned there. They also serve official purposes such as
             disbursing funds or serving as a depository for funds generated by other
             activities on military bases. According to DOD data, 116 domestic bases
             have banks and 223 have credit unions, which together field over 1,000
             ATMs.2

             DOD transferred management responsibility for its domestic and overseas
             banking programs to the Defense Finance and Accounting Service in 1998.
             The Office of the Under Secretary of Defense (Comptroller), which



             2
               Based on DOD data as of September 1998. We did not validate the data, but we noted that the list
             included bases targeted to be closed under the base realignment and closure process, and in a few
             instances omitted base information. Nevertheless, the data appears to provide a general indication of
             the overall size of DOD’s banking program.




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previously managed the programs, now provides policy guidance. Banks
on bases are subject to both state and federal regulations.

Procedures that apply to bank operations on military bases in the United
States3 are different from those that apply to such services on bases
overseas. In the United States, banks and credit unions typically operate
on military bases based on written operating agreements issued under DOD
and service policy guidance. In contrast, DOD contracts for overseas
banking services under the Federal Acquisition Regulation. 4 (See app. I
for information on DOD’s overseas banking program.) Military affiliated
credit unions chartered in the United States are often permitted to establish
branch offices on U.S. military bases in other countries, but they are not
under contract with DOD.

No specific statute governs the solicitation and selection of financial
institutions to provide a full spectrum of banking or credit union services
on domestic military bases. 5 DOD has issued regulations that call for
military bases to initially solicit proposals from nearby financial
institutions. 6 The military services also solicit nationally, if necessary.
DOD regulations delegate authority to the services to prescribe regulations
for soliciting financial institutions and selecting the institution making the
best offer. According to DOD officials, financial institutions may also
submit unsolicited proposals to provide banking services on military bases.
As of February 1999, DOD was reviewing and revising its regulations and
intended to publish the proposed regulations for comment in the near
future.

DOD’s regulations currently direct the military services to prescribe
procedures for soliciting financial institutions and require that the services
review proposals to establish banking offices and select the banking



3
    Includes the Commonwealth of Puerto Rico.

4
    See 48 C.F.R chapter 1 (1998).

5
  The Competition in Contracting Act does not apply in this instance because this law applies to the
military services’ procurement of property and services directly benefiting the government and for
which payment is to be made from appropriated funds (10 U.S.C. 2302 et. seq.).

6
  DOD Instruction 1000.12, “Procedures Governing Banking Offices on DOD Installations,” as codified at
32 C.F.R. Part 230; DOD Directive 1000.11, “Financial Institutions on DOD Installations,” as codified at
32 C.F.R. Part 231; and DOD Instruction 1000.10, “Procedures Governing Credit Unions on DOD
Installations,” as codified at 32 C.F.R. Part 231a.




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institution making the best offer. 7 These regulations provide general
guidance on how financial institutions are to be solicited. The military
services’ regulations more fully describe how proposals from financial
institutions are to be solicited, for example, by contacting nearby
institutions and placing advertisements in local newspapers. 8 However,
none of the regulations provide guidance on evaluating submitted
proposals.

Under DOD regulations, solicitations for banking services originate with
individual base commanders’ identification of a need for banking services
and a request that their service headquarters authorize a solicitation for
proposals for a financial institution to operate on the base. Once selected,
these financial institutions are required to sign a lease for space and/or an
operating agreement specifying their services and fees. Banks are to pay
not less than fair market value for space they occupy, 9 while credit unions
may occupy facilities without charge under certain conditions. 10 The term
of a lease for government-owned facilities generally does not exceed
5 years. Because banks and credit unions may construct buildings on
military bases, land lease agreements may be long term, up to 25 years.
Banks and credit unions having their own facilities on base reimburse the
bases for government-furnished services, including utilities. DOD
regulations require that all leases contain a clause that allows DOD to
withdraw authorization for cause or because of DOD decisions about base
operations such as base closure, deactivation, or substantial realignment.

Within the last 4 years, the Defense Commissary Agency and the Army &
Air Force Exchange Service have begun signing agreements with banks and
credit unions to operate inside their facilities. In some cases, the financial
institutions receive space at no cost in return for helping with cash


7
    32 C.F.R. 230.4(d)(1) and (2).

8
  The services have issued their own separate regulations: Army Regulation 210-135, “Banks and Credit
Unions on Army Installations;” Air Force Instruction 65-701, “Banking Services on Air Force Bases” and
Air Force Instruction 65-702, “Credit Unions on Air Force Installations;” and Secretary of Navy
Instruction 5381.5A, “Financial Institutions on Navy and Marine Corps Installations.”

9
  10 U.S.C. 2667 specifies that all money received under leases entered into by the secretary of a military
department shall be deposited in a special account established in the Treasury for the department
except amounts paid for utilities and services. Fifty percent of the money deposited in the account is
available for facility maintenance and repair or environmental restoration at the base where the leased
property is located and 50 percent is for facility maintenance and repair and for environmental
restoration by the military department concerned.

10
     Congress specifically authorized this benefit in 12 U.S.C. 1770.




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                         management activities for retail operations. Leasing issues regarding base
                         involvement in decisions by commissaries and exchanges, including
                         leasing fees, are still under DOD review.

                         The Conference Report accompanying the 1999 Defense Appropriation Act
                         requires that any bank offering financial services to a base must provide a
                         full range of banking services, including ATMs. 11 This direction is
                         consistent with DOD policy that generally only financial institutions
                         authorized to operate on the base may place ATMs there. Where a base
                         does not have enough personnel to sustain operation of a full service bank,
                         the base commander has the authority to solicit proposals for a sustainable
                         level of financial services, such as ATMs. The domestic banking program
                         does not procure a service for the military and is not financed with
                         appropriated funds, so the general procurement laws do not apply. 12
                         Consequently, there is no statutory requirement that the selection of
                         domestic banking services be performed on a competitive basis. Likewise,
                         there are no statutory or administrative requirements that, once a financial
                         institution is selected at a particular base, the provision of banking services
                         be recompeted in the future.



DOD Openly Solicits      The military services have conducted 15 solicitations for banking services
                         in the past 3 years. Our review of case files showed that bases followed
Financial Institutions   DOD’s procedures requiring open solicitations. However, solicitations
for Banking Services     during this time drew few responses and in some cases none.

                         Most of the solicitations since 1996 were for financial institutions that
                         would provide a full range of banking services. In three cases, small bases
                         without banking services requested only ATM service. Our review of case
                         files of recent solicitations for banking services indicates that the military
                         departments solicited proposals from local and national financial
                         institutions where a need for financial services existed because of new
                         requirements or because a bank ceased operations on the base. Table 1
                         summarizes military departments’ solicitations since 1996 and the
                         justification for the solicitation and notes special circumstances about the
                         solicitations.



                         11
                              House Report 105-746, page 86 (1998).

                         12
                              See 10 U.S.C. 2303(a).




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Table 1: Solicitations for Financial Institutions (1996-98)
                                 Banking                             Number of
                                 service          Reason for         proposals
Service/base                     solicited        solicitation       received    Comments
Army
 Fort Irwin, Cal.                Bank             New service        0           Base worked with Association of Military Banks of
                                                                                 America to identify prospective bank and solicit a
                                                                                 proposal.
 Arlington Hall National         Credit union     New service        2           Two credit unions were eligible to compete based on
 Guard Bureau, Va.                                                               membership requirements.
 U.S. Southern Command,          ATM              New service        5           The base selected the offerer with the lowest
 Miami, Fla.                                                                     surcharge for nonaccount holders: $.75.
 Camp Frank D. Merrill, Ga.      ATM              New service        0           One bank expressed interest after the original
                                                                                 solicitation closed. The base undertook a new
                                                                                 solicitation and received one proposal that it accepted.
Navy/ Marine Corps
 Naval Air Station, Corpus       Bank             Bank left          1           The base agreed to provide support to the bank at no
 Christi, Tex.                                                                   cost until it could become profitable.
 Naval Training Center,          Bank             Bank left          3           The bank not selected filed a protest with GAO, which
 Great Lakes, Ill.                                                               GAO dismissed because of lack of jurisdiction.
 Marine Corps Air Ground         Bank             Bank left          3           A base selected a local bank, but the bank declined.
 Combat Center,                                                                  The base then accepted the proposal rated next
 Twentynine Palms, Cal.                                                          highest.
 Marine Corps Recruit            Bank             Bank left          5           Bank selected agreed to offer special services to the
 Depot, Parris Island, S.C.                                                      base by providing recruits point of sale cards for
                                                                                 purchase of necessities on base during training.
Air Force
 Beale AFB,a Cal.                Bank             New service        1           Base solicited banks to operate in the commissary.
 Bolling  AFB,a                  Bank             Bank left          2           Solicitation was for a bank to operate in the
 Washington, D.C.                                                                commissary, but Air Force files were incomplete.
 Charleston AFB,a                Bank             Bank left          4           Base bank closed operations after a merger. Base
 Charleston, SC                                                                  solicited banks to operate in the commissary.
 Dover AFB,a Del.                Bank             Bank left          2           No local banks submitted proposals.
 Edwards AFB,a Cal.              Bank             Bank left          2           Air Force files were incomplete.
 Travis   AFB,a Cal.             Bank             Bank left          2           Local banks expressed interest but did not submit
                                                                                 proposals. Proposals were from national banks.
 Will Rogers World Air           ATM              New service        0           No banks or credit unions submitted proposals. The
 National Guard Base                                                             base then signed an agreement with an ATM vendor to
                                                                                 provide service in exchange for surcharge revenue.
                                             a
                                                 AFB = Air Force Base.
                                             Source: Our analysis of DOD data.




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                         As shown in table 1, the services did not receive many proposals in
                         response to a number of the solicitations. In three cases—Fort Irwin and
                         Travis Air Force Base in California and Dover Air Force Base in
                         Delaware—solicitations to local financial institutions did not elicit
                         responses, but banks from out of the area responded. At Fort Irwin, initial
                         solicitations to nine local financial institutions did not produce any
                         proposals, so the Army advertised through the Association of Military
                         Banks of America, a trade association of on-base banks, and received one
                         proposal.

                         The small number of proposals received through broad, nationwide
                         solicitations indicates that banks do not see on-base operations as very
                         profitable, especially where bases are small or in remote locations. Most of
                         DOD’s recent solicitations were to fill voids created when banks left bases,
                         according to DOD officials. In some cases, base banks were taken over in
                         mergers, and the new management decided to stop on-base operations.
                         This was the situation Fort Myer, Virginia, faced in 1994 when the new
                         owner of the on-base bank ceased its operation, turning over its building to
                         the base. Because DOD’s solicitation did not result in any proposals, DOD
                         worked with the Association of Military Banks of America to find a bank
                         willing to operate on the base. As an incentive, the base agreed to provide
                         facilities and logistical support at no cost for several years, although the
                         bank hopes to attain profitability and begin paying leasing and operations
                         fees within 2 years.


Selection Criteria Not   While DOD and military service regulations provide guidance as to
Clearly Stated           solicitation procedures, they do not specify factors that base commanders
                         should use to select a financial institution or state the weight that should be
                         given to each factor. DOD regulations simply state that the bank making
                         the “best offer” is to be selected. Our file review indicated that base
                         commanders selected from among proposals based on distinguishing
                         factors such as fees, hours, and range of services. We also noted that there
                         is no criteria to guide banks in preparing proposals. While solicitation
                         letters indicated in general the types of services the financial institutions
                         would be expected to provide, they did not clearly state the relative
                         importance of each requirement. The Army has developed a standardized
                         procedure for evaluating proposals that includes developing weighted
                         factors that define the importance of each criterion for a particular
                         solicitation. Additional clarity in stating the selection criteria would help
                         financial institutions tailor their proposals to meet the installations’
                         priorities and ensure fairness in the selection process.



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Base Financial                Our analysis shows that financial institutions on bases face competition
                              from several sources, both on and off the base. Moreover, a 1997 DOD
Institutions and Fees         survey indicates that DOD personnel were satisfied with banking services
Are Competitive With          both on and off base. Our comparison of data on fees charged by banks
                              and credit unions indicates that fees charged on bases were within the
Off-Base Banks                range of fees charged by all commercial banks.


Financial Institutions Face   DOD generally limits financial institutions on each base to one bank and
Competition on and off        one credit union. According to DOD and service officials, this arrangement
                              provides competition between the two types of financial institutions.
Bases                         DOD’s data indicates that over 100 bases have both a bank and a credit
                              union, and over 100 more have only a credit union. On the bases we visited,
                              bank and credit unions offered similar services and provided a choice to
                              base personnel.

                              Bases with both banks and credit unions vary in size from about
                              1,800 personnel to over 50,000. Most large bases have both a credit union
                              and a bank: 29 of 33 bases (88 percent) with more than 15,000 military and
                              civilian personnel had two financial institutions. Smaller bases less
                              frequently had two institutions on base: 61 percent of bases with 5,000 to
                              15,000 personnel and 31 percent of bases with 1,000 to 5,000 personnel had
                              both a bank and a credit union. None of the 14 bases with fewer than
                              1,000 personnel had two institutions on base. The largest bases have
                              populations that might support more than two full service financial
                              institutions. However, DOD officials told us that they did not believe that
                              most bases could support more than two financial institutions.

                              Military personnel and DOD civilians also have many off-base alternatives
                              to the base financial institutions. In most cases, there are banks in
                              communities near bases where many DOD military and civilian employees
                              live. According to DOD officials, most servicemembers who live on bases
                              have transportation options that make it possible for them to bank with
                              financial institutions in the local area if they choose. The growth in
                              electronic and telephone banking has provided additional competition for
                              on-base banks because remote banking services are conveniently
                              accessible.

                              Available data suggests that DOD personnel were satisfied with the banking
                              facility they used most often whether they banked on or off the base. In
                              DOD’s 1997 survey of military and DOD civilian employees, a large majority



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                           (89 percent) of the 8,403 U.S.-based survey respondents reported that they
                           were satisfied or very satisfied with the financial institution they used most
                           often.13 Of the U.S.-based respondents who used an on-base financial
                           institution on their current base most often, 88 percent said they were
                           satisfied or very satisfied. Only 37 percent of the respondents said that the
                           financial institution they used most often was a bank or credit union on the
                           base to which they were assigned. About 8 percent of the respondents
                           named the on-base bank as the financial institution they used most often,
                           while 29 percent named the on-base credit union. The largest percentage
                           of respondents (about 35 percent) reported that they most often used a
                           bank not on a military base.


Fees Charged Are Similar   Fees charged by on-base financial institutions were within the range of
Both on and off Bases      those charged by all banks. According to DOD procedures, on-base banks’
                           fees may not exceed customary fees charged for off-base operations. We
                           reviewed data collected by the Federal Reserve Board in June 1997 14 and
                           compared the data with data DOD collected (in August 1998) on financial
                           institutions on bases. We found that the average ATM fees for military
                           banks for which data were available were close to the average of all banks.
                           The average ATM fees for credit unions were less than the average of all
                           banks. However, banks and, with one exception, credit unions on bases
                           charged higher fees for customers that had insufficient funds in their
                           accounts than the national average, although the range of charges on bases
                           was within the range of all banks.

ATM Fees                   Banks and credit unions on bases, like those off bases, generally do not
                           charge their own account holders or members to use ATMs they own. The
                           Federal Reserve Board reported in its June 1998 report that less than
                           8 percent of all banks charge their account holders for the use of ATMs the
                           banks own. According to a 1998 financial survey by the Armed Forces
                           Financial Network, 11 percent of military households reported paying a fee
                           to use their financial institutions’ ATMs. However, according to the data on
                           ATM charges at 118 banks and 175 credit unions on military bases we
                           collected during this review, only two banks (1 percent) and no credit



                           13
                             The 1997 DOD Financial Services Survey: A Study for the Office of the Under Secretary of Defense
                           (Comptroller ), Defense Manpower Data Center, DMDC Report No. 98-008, September 1998.

                           14
                            Annual Report to the Congress on Retail Fees and Services of Depository Institutions , Board of
                           Governors of the Federal Reserve System, June 1998.




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unions charged their account holders or members any fees to use their
ATMs.15

Most banks on bases impose surcharges or fees for nonaccount holders’ or
nonmembers’ use of the ATMs they own, as do most commercial banks. We
reported that 64 percent of banks that operated ATMs as of February 1,
1998, assessed surcharges on at least some of their ATMs. 16 We also
reported that in February 1998 the average surcharge for all banks with
surcharges was $1.27. In comparison, 91 percent of banks on bases we
reviewed assessed ATM surcharges on nonaccount holders and the average
surcharge was $1.19. Credit unions on bases less frequently charge
nonmembers that use their ATMs, but for the 29 percent that did, the
average charge was $1.03. Table 2 shows the average and range of ATM
fees and the percent of financial institutions on military bases charging
nonaccount holders.




15
     Our sample included banks located on military bases from each service.

16
  Automated Teller Machines: Survey Results Indicate Banks’ Surcharge Fees Have Increased
(GAO/GGD-98-101, Apr. 24, 1998).




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Table 2: Charges for ATM Use by Nonaccount Holders or Nonmembers on Military Bases
Service                     Characteristic                                       Bank                                         Credit union
Army                                 Mean                                        $1.17                                                 $1.07
                                    Range                                      $0-2.00                                               $0-2.00
                     Percent charging a fee                                          93                                                   46
Navy                                 Mean                                        $1.17                                                 $0.78
                                    Range                                $0.45 to 2.00                                               $0-1.00
                     Percent charging a fee                                        100                                                      3
Marine Corps                         Mean                                        $1.14                                                 $1.10
                                    Range                                      $0-1.50                                               $0-1.50
                     Percent charging a fee                                          78                                                   31
Air Force                            Mean                                        $1.23                                                 $0.97
                                    Range                                      $0-2.00                                               $0-1.50
                     Percent charging a fee                                          88                                                   48
All services                         Mean                                        $1.19                                                 $1.03
                                    Range                                      $0-2.00                                               $0-2.00
                     Percent charging a fee                                          91                                                   29
                                          Note: The means presented refer to banks that assess surcharges but not to banks that do not assess
                                          surcharges; the range and percent refer to the whole sample.
                                          Source: Our analysis of data provided by the services.


                                          Most banks assess their account holders a charge to use an ATM owned by
                                          another bank, as do most financial institutions on bases. Fees charged by
                                          banks nationally ranged from $0.25 to $2.00 and averaged $1.14 in 1997,
                                          according to the Federal Reserve Board study. Fees charged by banks on
                                          bases ranged from $0.45 to $2.00 and averaged $1.20. Just over half of
                                          credit unions charged a fee that averaged $0.94. Table 3 shows the average,
                                          range, and percent of fees charged to account holders of banks and credit
                                          unions on military bases that use other financial institutions’ ATMs.




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Table 3: Charges by Banks and Credit Unions for Their Account Holders’ or Members’ Use of an ATM Owned by Another ATM
Provider
Service                           Characteristic                                      Bank                                    Credit union
Army                                       Mean                                       $1.21                                            $1.04
                                          Range                                     $0-2.00                                           0-2.00
                           Percent charging a fee                                        93                                               57
Navy                                       Mean                                       $1.06                                            $0.77
                                          Range                                     $0-1.50                                          $0-1.00
                           Percent charging a fee                                        94                                               32
Marine Corps                               Mean                                       $1.36                                            $0.86
                                          Range                                     $0-1.50                                          $0-1.00
                           Percent charging a fee                                        78                                               94
Air Force                                  Mean                                       $1.24                                            $0.99
                                          Range                                     $0-2.00                                          $0-1.00
                           Percent charging a fee                                        92                                               61
All services                               Mean                                       $1.20                                             $.94
                                          Range                                     $0-2.00                                          $0-2.00
                           Percent charging a fee                                        93                                               51
                                          Note: The means presented refer to banks that assess surcharges but not to banks that do not assess
                                          surcharges; the range and percent refer to the entire sample.
                                          Source: Our analysis of data provided by the services.




Other Fees                                On-base banks’ average fee for a check returned for insufficient funds was
                                          higher ($19.93) than the average of all banks ($16.55) according to Federal
                                          Reserve data. The insufficient funds charges by banks on bases ranged
                                          from $8 to $29 compared to all banks’ range of $5 to $30. The average
                                          charge by credit unions on bases was $17.41 and ranged from $10.00 to
                                          $35.00. Returned check charges by all banks and, with one exception,
                                          credit unions on military bases fell within the range of charges the Federal
                                          Reserve Board found.

                                          Although the Federal Reserve Board study provided no average fees for
                                          money orders, we found that banks and credit unions on bases most
                                          typically charged $1.00 for this service. Charges by banks on bases
                                          averaged $2.16 and ranged between $0.50 and $5.00. In comparison,
                                          charges at base credit unions averaged $1.17 and ranged from $0.00 to
                                          $6.00.



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Potential for Raising       To respond to the mandate to examine options for generating revenues
                            from financial institutions, we identified three options DOD could examine
Revenue From Base           to potentially raise additional revenue from financial institutions operating
Financial Institutions      on military bases: (1) increase lease charges; (2) seek to share revenues
                            banks receive through service fees, such as ATM fees; or (3) competitively
Is Uncertain                solicit bases for ATM placements apart from other banking services. 17
                            These options may require changes in the rules that now govern banking on
                            military bases. The precise impact of these actions on the quality of life on
                            military bases is uncertain. Some financial institutions operating on the
                            bases might be able to afford higher payments than they currently make,
                            while others might not. The recent history of banks leaving bases due to
                            low profits suggests that additional fees might further reduce the
                            attractiveness of on-base operations.


Adjusting Current Lease     Since 1991, 10 U.S.C. 2667 has required that banks pay in cash or in kind
Fees Based on Fair-Market   not less than fair market value for the use of government-owned land or
                            facilities on military bases. 18 To increase its revenues, DOD could change
Value
                            future lease and operating agreements to provide for periodically reviewing
                            and adjusting lease fees based on changes in fair market value.

                            Under current procedures, lease charges for financial institutions remain
                            constant through the life of lease agreements—up to 25 years. According
                            to service officials, banks that signed leases before 1992 pay a nominal fee
                            through the term of their leases, in accordance with regulations in effect
                            before 1992. Banks that signed leases after 1992 pay the current fair
                            market value for the term of their leases. DOD could change its procedures
                            to include a recurring assessment of fair market value on long-term leases
                            to ensure that banks’ leases reflect current conditions. Neither the Army
                            Corps of Engineers, which determines fair market value for Army and Air
                            Force bases, nor the Navy’s Engineering Division, which determines fair



                            17
                              10 U.S.C. 2667(d) requires military departments to deposit any money received from rentals into a
                            special account in the Treasury to be used for certain purposes, such as facility maintenance and repair.
                            Any other moneys received must be deposited into the Treasury as miscellaneous receipts
                            (31 U.S.C. 3302(b)) unless otherwise authorized by law.

                            18
                              In some cases, DOD may provide facilities and operating support, such as utilities, at no cost to banks
                            based on their profitability. At the time of our review, three banks received facilities and operating
                            support at no cost. These banks were located on Fort Myer, Virginia; the Naval Air Station, Meridian,
                            Mississippi; and the Naval Air Station, Corpus Christi, Texas.




                            Page 13                                                           GAO/NSIAD-99-72 Military Banking
                             B-281135




                             market value for Navy and Marine Corps bases, currently have regulations
                             that require periodic reviews of fair market value.


Fee Sharing of ATM-Related   DOD does not currently assess any fees that are dependent on financial
Surcharges                   institutions’ revenues from banking operations on military bases, and it is
                             unlikely that financial institutions would readily share such information
                             with DOD. To raise revenues, DOD could implement a fee-sharing
                             arrangement related to ATM surcharges.

                             The profitability of ATMs depends on the number of transactions they
                             make—particularly transactions for nonaccount holders that pay a
                             surcharge. Banking officials said that banks in the private sector
                             sometimes pay set amounts and/or enter into fee-sharing arrangements to
                             place ATMs in high-traffic locations such as grocery stores and airports.
                             According to these officials, this practice varies according to the
                             desirability of the location, based on access to customers and potential
                             customers’ alternatives for obtaining cash.

                             Officials of banks and credit unions now authorized to operate on bases
                             said that their current placement of ATMs is not necessarily driven by
                             direct profits from individual ATMs. They said they serve the base
                             community by providing ATMs that are convenient for the military
                             community, for example, in barracks and at remote training sites, but are
                             not very profitable. Often, base officials ask banks or credit unions to place
                             ATMs in locations to benefit the base community. For example, officials at
                             the Marine Corps Base at Quantico, Virginia, asked the base credit union to
                             support an ATM at its bachelor officers’ quarters. The credit union
                             complied, although a credit union representative reported that the ATM
                             does not produce large profits.


Competition for ATM          A related option to raise revenue for DOD might be to competitively solicit
Placements                   placement of ATM operations on military bases apart from full service
                             banking operations. This option might generate revenue by requiring that
                             ATM sponsors pay a flat fee or a percentage of revenues from transactions
                             to DOD. Some ATM vending companies might be willing to pay to locate
                             ATMs in prime locations on military bases. Some banking representatives
                             stated that increased competition through representation of additional
                             financial institutions would raise money for bases. Of the 15 recent
                             solicitations DOD conducted, three involved solicitations for ATM service
                             only. In one case, the base was small and remote, and the base initially



                             Page 14                                         GAO/NSIAD-99-72 Military Banking
                              B-281135




                              received no proposals. In another, the base was a headquarters office
                              building located in an urban area and received five proposals. In the third
                              case, a base that received no proposals entered into an agreement with an
                              ATM vendor to provide ATM service in return for 30 percent of the
                              surcharge revenue. DOD’s preference is to obtain full-service banking on
                              its bases where feasible so that DOD personnel will have convenient access
                              to a range of banking services and financial counseling.

                              The amount of revenue that could be raised by soliciting bids to provide
                              ATMs would depend on how financial institutions valued selected sites on
                              individual bases. While ATM vendors might be willing to pay to locate
                              ATMs in high foot-traffic areas, according to DOD banking officials, it is
                              unlikely that vendors would support ATMs at less popular locations
                              without a high surcharge. DOD officials expressed concern about the
                              potential negative impact of separating the provision of ATM services from
                              its full service banking program. In a report to the House Committee on
                              Appropriations on competitive banking procedures, DOD said that the only
                              way stand-alone ATMs would create significant revenues for DOD would be
                              by levying substantial new ATM surcharges on DOD military personnel and
                              their families. 19 According to this report, such a charge would most
                              negatively affect junior-grade enlisted personnel because they are least able
                              to afford surcharges imposed on the use of ATMs. Further, the report
                              stated that the adverse financial consequences on individual
                              servicemembers would outweigh any benefits to DOD.

                              While this option might raise some revenue for DOD, it conflicts with
                              DOD’s current policy of granting exclusive rights for ATMs to its on-base
                              financial institutions. It might make on-base operations less attractive and
                              further erode the full-service banking capability DOD seeks. In addition,
                              this option would be inconsistent with the direction in the Conference
                              Report accompanying the 1999 Defense Appropriation Act that any bank
                              offering financial services on an installation must provide a full range of
                              banking services.


Impact of Efforts to          It is difficult to forecast in advance precisely what effects would result
Increase Fees Could Vary by   from efforts to increase revenues generated for DOD from banks and credit
                              unions operating on military bases. Much would likely depend on the
Base
                              profitability of existing operations. In some situations financial institutions


                              19
                                   Department of Defense, Report on Competitive Banking Procedures , September 17, 1998.




                              Page 15                                                         GAO/NSIAD-99-72 Military Banking
B-281135




might be expected to increase fees to try to make up the difference in their
profits, with their customers bearing the additional costs. In some
situations, banks might decide to cease operations on bases, as some have
done in the past based on concerns over profitability.

Faced with higher fees, some current on-base bank customers might take
their accounts to other financial institutions with lower fees, either on or
off base. In its 1997 financial survey, DOD found that low prices were a
major factor in choosing a financial institution for most respondents. In a
1998 survey conducted for the Armed Forces Financial Network, a sizeable
majority (78 percent) of DOD respondents reported that they would change
their current behavior to avoid ATM fees and would not use an ATM where
they were charged $2 or more. 20

DOD officials and representatives of financial institutions on military bases
told us that because the number of people with access to on-base bank and
credit union facilities is limited, the profitability and stability of current
on-base financial institutions could be at risk if their net revenues were
decreased by increases in operating costs. In some cases, according to
DOD and banking officials, banks and credit unions would probably leave
their on-base locations if operating costs increased. If banks that hold
bases’ Treasury general accounts 21 left, the bases’ costs to obtain these
services would increase.

Of the three options, the one that would provide competitive placement of
ATMs on bases apart from other banking services would likely have the
greatest impact on current banking operations. The on-base financial
institutions that currently provide ATM service would incur additional
costs to provide the service or would lose access to the most potentially
profitable locations—those likely to be bid on by off-base ATM vendors.
Both outcomes would decrease revenues for institutions currently on
bases—potentially causing them to leave the base.

In its report to Congress on competitive banking procedures, DOD stated
that the loss of an on-base bank has historically been detrimental to


20
 The Armed Forces Financial Network is a provider of networking capability jointly sponsored by the
Association of Military Banks of America and the Defense Credit Union Council.

21
  The Department of the Treasury establishes Treasury general account relationships with financial
institutions so that federal program agencies will have access to efficient and effective systems for the
management of public funds.




Page 16                                                           GAO/NSIAD-99-72 Military Banking
                  B-281135




                  productivity because assigned personnel must travel off base to obtain
                  financial services. In addition, on-base entities such as DOD disbursing
                  officers, commissaries, and nonappropriated fund instrumentalities would
                  incur additional costs to meet their banking needs. DOD officials
                  expressed further concern that revenue generated by separate vendor-
                  offered ATM services might not be sufficient to offset the additional costs
                  to DOD due to the loss of on-base banks.



Conclusions       When needs for banking services have arisen, the services have publicly
                  solicited proposals from banks and credit unions. We found that
                  solicitations often indicate factors important to the bases in selecting from
                  among proposals, and selecting officials cited varying factors influencing
                  their selections; however, we could not determine the importance and
                  weight of each criterion in the selection process for each solicitation.
                  Better identification of the selection criteria and the relative importance of
                  each criterion could be useful in enhancing proposals received and
                  fostering greater assurance of fairness in the selection process.

                  Banking service fees on military bases appear to be within the range of
                  charges found at banks nationally, although some fees appear to be higher
                  than national averages.

                  DOD could ensure it continues to receive fair market value for use of its
                  facilities by financial institutions by periodically reassessing the fair market
                  value associated with long-term leases. However, lease fees could decrease
                  if property values decrease. DOD could also negotiate some type of
                  fee-sharing arrangement for ATM services. The extent to which higher
                  costs would be absorbed by financial institutions, be passed onto
                  customers, or affect the financial institutions’ willingness to provide
                  services on military bases is uncertain and likely to vary based on the
                  characteristics of individual bases. However, an adverse impact on
                  customers or services could result if financial institutions raise their fees to
                  cover operating costs or leave the base.



Recommendations   We recommend that the Secretary of Defense direct that forthcoming
                  regulations governing banking on military bases require base commanders
                  to ensure that solicitations for banking services include information on
                  factors and weights to be used in choosing among competing proposals and




                  Page 17                                          GAO/NSIAD-99-72 Military Banking
                  B-281135




                  that the evaluation of proposals and the selection of on-base financial
                  institutions be based on those factors and weights.

                  We also recommend that the secretaries of the military departments
                  consider including in new long-term lease arrangements provisions for
                  periodically renegotiating fees based on updated fair market value to better
                  ensure that the government is obtaining payments commensurate with the
                  current value of the property.



Agency Comments   In written comments on a draft of this report, DOD concurred with both of
                  our recommendations. DOD said that its goal is to ensure that bank and
                  credit union services are available at reasonable cost to DOD personnel on
                  bases. DOD said that it would include provisions on evaluation factors and
                  weights in revised regulations on solicitations currently under review.
                  DOD also said it would request that the military departments review their
                  policies and procedures to consider including in long-term leases periodic
                  renegotiation of fees. In commenting on the draft of this report, DOD
                  stated that it does not support any initiative that would levy additional fees
                  or charges for financial services on DOD personnel to generate or increase
                  revenue for an installation or other organization. DOD’s comments are
                  reprinted in appendix II. Appendix III sets forth the objectives, scope, and
                  methodology of our review.

                  We conducted our review between August 1998 and March 1999 in
                  accordance with generally accepted government auditing standards.


                  We are sending copies of this report to Senator John Warner, Chairman, and
                  Senator Carl Levin, Ranking Minority Member, Senate Committee on
                  Armed Services. We are also sending copies of this report to the Honorable
                  William S. Cohen, Secretary of Defense; the Honorable William J. Lynn,
                  Under Secretary of Defense (Comptroller); the Honorable F. Whitten
                  Peters, Acting Secretary of the Air Force; the Honorable Louis Caldera,
                  Secretary of the Army; the Honorable Richard Danzig, Secretary of the
                  Navy; the Honorable Gary W. Amlin, Director, Defense Finance and
                  Accounting Service; and the Honorable Jacob J. Lew, Director, Office of
                  Management and Budget. Copies will also be made available to others
                  upon request.




                  Page 18                                         GAO/NSIAD-99-72 Military Banking
B-281135




Please contact me at (202) 512-8412 if you or members of your staff have
any questions concerning this report. Major contributors to this report are
listed in appendix IV.




David R. Warren, Director
Defense Management Issues




Page 19                                       GAO/NSIAD-99-72 Military Banking
Contents



Letter                                                                                             1


Appendix I                                                                                       22
DOD’s Overseas
Banking Program

Appendix II                                                                                      23
Comments From the
Department of Defense

Appendix III                                                                                     25
Objectives, Scope, and
Methodology

Appendix IV                                                                                      28
Major Contributors to
This Report

Tables                   Table 1: Solicitations for Financial Institutions (1996-98)               6
                         Table 2: Charges for ATM Use by Nonaccount Holders or
                           Nonmembers on Military Bases                                           11
                         Table 3: Charges by Banks and Credit Unions for Their Account
                           Holders’ or Members’ Use of an ATM Owned by Another ATM
                           Provider                                                              12




                         Abbreviations

                         ATM       automated teller machine
                         DOD       Department of Defense




                         Page 20                                    GAO/NSIAD-99-72 Military Banking
Contents




Page 21    GAO/NSIAD-99-72 Military Banking
Appendix I

DOD’s Overseas Banking Program
                                                                                                                    AppenIdxi




             The process for selecting commercial banks to operate on military bases
             varies between U.S. domestic and overseas bases. Unlike commercial
             banks that operate on domestic military bases under lease arrangements
             and operating agreements with individual bases, the Department of
             Defense (DOD) uses a formal contract with a single U.S. bank to provide
             services to multiple locations overseas. Such contracts are awarded on a
             cost-plus-fixed-fee basis to provide DOD personnel banking services
             similar to those they could obtain in the United States. 1 DOD may establish
             overseas banks where allowed by bilateral agreements and host country
             laws.

             Currently, DOD supports banking facilities at 114 locations in Germany, the
             Netherlands, the United Kingdom, Iceland, Japan, Okinawa, South Korea,
             Diego Garcia, and Panama. Facilities and logistical support for overseas
             banking services are provided by the host component commands. DOD
             specifies fees charged for banking services.

             DOD awarded the current contract for overseas banking to NationsBank of
             Texas. The contract’s term is 5 years, from October 1995 through
             September 30, 2000, and the bank is to provide a range of services at fees
             and locations DOD specifies. The total cost of the contract, including costs
             and fees, is estimated at $500 million. Fees charged to customers offset the
             major portion of the costs, but the services also obligate appropriated
             funds that, according to DOD officials, cover the fixed contract fee, bad
             debts, and operating losses. In fiscal year 1998, the services provided
             $11 million in appropriated funds.




             1
               Credit unions on domestic bases have in some instances established branches on overseas bases, but
             these are not under contract with DOD.




             Page 22                                                        GAO/NSIAD-99-72 Military Banking
Appendix II

Comments From the Department of Defense                         ApenIdxi




              Page 23        GAO/NSIAD-99-72 Military Banking
                    Appendix II
                    Comments From the Department of Defense




Now on pp. 17-18.




Now on p. 18.




                    Page 24                                   GAO/NSIAD-99-72 Military Banking
Appendix III

Objectives, Scope, and Methodology                                                                                          AppIenIdxi




               In the House Armed Services Committee (formerly National Security)
               report on the National Defense Authorization Act for Fiscal Year 1999, we
               were directed to review certain aspects of DOD’s military banking
               program.1 Accordingly, we determined whether (1) domestic military
               bases have followed DOD procedures to provide for open solicitations in
               obtaining banking services; (2) on-base financial institutions face
               competition for banking services from other financial institutions and
               charge fees competitive with other banks; and (3) opportunities exist for
               DOD and military bases to generate additional revenue banking services on
               military bases and how this might affect banking services and customers.

               To review DOD’s selection procedures for banking services for domestic
               bases, we examined DOD regulations and the military departments’
               implementing instructions governing solicitation of financial institutions.
               We also met with officials of DOD’s Office of the Under Secretary of
               Defense (Comptroller) who have policy oversight of DOD banking issues to
               discuss the history of banking on military bases and DOD’s ongoing review
               of the banking regulations. We also met with officials from the Defense
               Finance and Accounting Service who have operational oversight of both
               overseas and domestic banking programs to obtain information about the
               differences between the two programs. In addition, we met with banking
               liaison personnel from the Air Force, the Army, the Navy, and the Marine
               Corps to discuss the status of banking on military bases and the services’
               solicitation processes. We reviewed the case files of recent solicitations
               that were available to verify whether the military departments openly
               solicited proposals for banking services and selected from among the
               proposals. The solicitation files did not contain proposals from banks that
               were not selected. Therefore, we did not review the services’ evaluations
               of all proposals they received. Solicitation files for two Air Force bases
               that had recent proposals were incomplete.

               To identify the extent of competition for on-base financial institutions we
               (1) matched a list of banks and credit unions on military installations
               provided by DOD with information on base size from DOD’s Base Structure
               Report for fiscal year 1996 2 and (2) met with DOD officials and
               representatives of on-base banks and credit unions at four military bases—
               Fort Myer, Virginia; Bolling Air Force Base, Washington, D.C.; Fort Belvoir,


               1
                   House Report 105-532 at page 281(1998).

               2
                Where installations with financial institutions were not in the base structure report, we obtained infor-
               mation on base size from service officials.




               Page 25                                                           GAO/NSIAD-99-72 Military Banking
Appendix III
Objectives, Scope, and Methodology




Virginia; and Marine Corps Base Quantico, Virginia—to discuss whether
financial institutions on military bases face competition and the sources of
that competition. We also discussed these issues with representatives of
the Association of Military Banks of America and the Defense Credit Union
Council. We reviewed “The DOD 1997 Financial Services Survey” and the
Armed Forces Financial Network’s “1998 Survey of Armed Forces
Consumers Financial Services Needs and Behaviors” to obtain information
about where military consumers obtain their banking services and their
satisfaction with these services.

To determine whether banking service fees charged by financial
institutions on bases are competitive, we analyzed data from several
sources. First, we analyzed data DOD had collected from 46 banks and 86
credit unions to respond to congressional questions on fees for selected
services charged by financial institutions on military bases. Not all DOD
bases were represented in the information DOD provided, but DOD
officials said it represented a fair sample of charges. We compared average
fees from this sample of banks with those for similar services charged by
all banks, as reported to the Federal Reserve Board. Although DOD
information was reported about 1 year after the Federal Reserve Board
reported information, the Federal Reserve Board provides a conservative
comparison point for charges on military bases.

We also reviewed financial institutions’ charges for on-base ATM service,
including service to persons not having an account or membership with the
institutions. To obtain this information, we asked the services to provide,
for each base, the charges for ATM service for (1) account holders using
the financial institutions’ own ATMs, (2) account holders using ATMs
owned by another financial institution, and (3) nonaccount holders using
the ATMs on bases. We analyzed this data and compared the on-base ATM
fees with those from a sample of all banks we reported on in February
1998. We also collected fee information from bases we visited to confirm
the accuracy of data DOD provided.

To assess the potential for generating additional revenue from financial
institutions and possible impacts on the military community if additional
revenues were generated, we interviewed DOD officials and military
banking representatives to discuss options for generating additional
revenue from financial institutions on military bases and consequences that
might occur if these options were exercised. We met with officials from the
bases we visited and discussed leasing practices with the Army Corps of
Engineers and the Naval Facilities Engineering Command. We discussed



Page 26                                        GAO/NSIAD-99-72 Military Banking
Appendix III
Objectives, Scope, and Methodology




revenue that DOD is currently receiving and obtained documentation
regarding lease fees and other payments that DOD collects from financial
institutions. We discussed the impacts of potential revenue-raising options
with banking representatives at the bases we visited and with industry
representatives. We also discussed in-store banking facilities with
representatives of banks and credit unions on bases and the Defense
Commissary Agency and the Army & Air Force Exchange Service. We also
discussed electronic banking issues with representatives of banks not on
military bases to obtain information about how remote ATMs are placed at
commercial sites.




Page 27                                       GAO/NSIAD-99-72 Military Banking
Appendix IV

Major Contributors to This Report
                                                                                ApeVnxIdi




National Security and   Barry W. Holman
                        Donald C. Snyder
International Affairs   Margaret G. Morgan
Division, Washington,   Jennifer M. Thomas
                        Richard R. Irving
D.C.

Office of the General   William T. Woods
                        Raymond J. Wyrsch
Counsel, Washington,
D.C.




(709372)      Lert      Page 28              GAO/NSIAD-99-72 Military Banking
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