Senate Banking Committee
Field Hearing on S. 885(The Fair ATM Fees for Consumers Act)
Chicago, Illinois, August 12, 1997

ATM Surcharges

Testimony of David E. Sorkin
Assistant Professor of Law
The John MarshallLaw School
Chicago, Illinois
 

      Good morning, Senator Moseley-Braun.  I want to thank you for your concern with this important issue and for inviting me to participate in thishearing.

      The debate over ATM surcharges is fundamentally about two issues:  money and power.  As participants in a free market economy, banks and other financial institutions have an incentive to earn as much money as possible in order to maximize the return on their investments.  There is nothing wrongwith that; in fact, it is what makes the free market work.  The dark side of ATM surcharges, however, is power.  Banks are imposing ATM surcharges in order to gain market power and avoid having to price their other services competitively.

      ATM surcharges are excessive, regressive, and frequently deceptive -- like many other bank fees.  But ATM surcharges are different from other fees, in that they are not subject to the ordinary checks and balances of a competitive market.  A bank that imposes ATM surcharges stands to gain ratherthan lose customers, since the surcharges are borne by customers of otherbanks.  The consumer ATM market is characterized by a perverse incentive:  banks can increase their market share by raising prices.  This perverseincentive is illustrated by two phenomena:  the recent history of ATMsurcharging, and the relationship between ATM fees and banks' costs.

      ATM surcharges have spread rapidly since the major networks lifted theirsurcharge prohibitions last year.1  Large banks with many ATMs generally have been among the first within eachmarket to impose surcharges.2  When onebank in a local market begins to surcharge, other banks quickly followsuit.3  It is true that the ability to surcharge has brought additional participants into the market -- mainly nonbank ATM operators -- and has resulted in the installation of some ATMs in locations where previously they had not been profitable.  But the mostsignificant change that has occurred in the past 16 months has been theconversion of existing surcharge-free ATMs into surcharging ATMs.  Surchargesare spreading in existing ATMs much more quickly than new ATMs are beinginstalled.4

      Large banks benefit most from ATM surcharges because they have the mostto lose from real competition.  ATMs enable consumers to shop around forreasonable bank fees, and large banks tend to have the highestfees.5  By imposing surcharges, bankscan increase transaction costs to the point where consumers can no longer shopeffectively.  ATM surcharges enable large banks to steal customers away fromtheir smaller competitors without having to provide better service or lowertheir prices.

      The relationship between ATM fees and banks' costs further illustrates this market failure.  ATM transactions are much cheaper to process than those involving a human teller.6  But banks are more likely to impose fees for ATM transactions, and surcharges have magnified the disparity.  A typical ATM withdrawal now involves fees to the consumer totaling $2 or more -- several times the banks' actual cost.7  Furthermore, ATMs located within bank branches are almost as likely to surcharge as off-site ATMs, despite the fact that the costs are much lower.8  Similarly, banks with large ATM networks generally have lower costs due toeconomies of scale, but are more likely to impose surcharges.  Banks promotedATMs and other forms of automation, and consumers embraced them, based uponpromises of great cost savings.  But instead of passing these savings on toconsumers, banks are using ATMs as a cash cow from which to milk windfallprofits.

      Here in Chicago, consumers can still find surcharge-free ATMs, but theirchoices are dwindling rapidly.  Only about one sixth of the financialinstitutions that belong to the Cash Station network impose surcharges, butthose banks own over half of the ATMs.9  In the two major supermarket chains, Dominicks and Jewel, ATMs owned by First Chicago and Bank of America both began imposing surcharges this year.  FirstChicago ATMs in Walgreensdrug stores and St. Paul ATMs in White Hen stores also impose surcharges.  Banc One recently announced plans to install surcharging ATMs in Sears and other stores across the country.10  Banks are using exclusive contracts with chain stores and shopping malls to avoid having to compete with non-surcharging ATMs.

      Illinois residents already pay some of the highest bank fees in the country.11  Thankfully we are somewhat behind the times on ATM surcharges -- in some parts of the country, all or nearly all ATMs impose surcharges.12  Chicago will face a similar situation soon unless Congress takes action to stop the ATM surcharging epidemic.

Notes

      1.  A recent survey by theU.S. General Accounting Office found thatthe number of ATMs with surcharges increased 320% from the end of 1995 toFebruary 1997, at which point about 54% of ATMs imposed surcharges. GAO (1997).  The U.S.Public Interest Research Group conducted a separate survey in March 1997,finding surcharges at 45% of ATMs in 27 states, up from 23% in a smallersample six months earlier.  U.S. PIRG (April 1,1997).

      2.  Both the GAO and U.S. PIRG surveys foundsurcharges more prevalent among large banks than small banks or credit unions,with large banks nearly twice as likely to impose surcharges.  The largest 1%of banks operate about 37% of the total bank-owned ATMs. GAO (1997).

      3.  In the Chicago area, for example, theCash Station network lifted its surcharge ban in mid-1996.  The leading ATMdeployer, First Chicago NBD, waited forsecond-place St. Paul Federal to leadoff the surcharge drive in early 1997.  Schmeltzer (Jan.20, 1997).  First Chicago followed suit four months later. Schmeltzer (May 21, 1997).

      4.  According to data reported by theGAO (1997), the total number of bank-owned ATMsincreased by 30% from the end of 1995 to February 1997; over the same timeperiod, the number of ATMs imposing surcharges increased by 320%.  (The 30%increase is not entirely the result of surcharging; ATM installationsincreased by nearly 16% per year from 1978 to 1996.  Neely(1997).)
      Even if all of the new ATMs had surcharges, surcharging at old ATMsincreased by over 120%.  If the incidence of surcharges at new ATMs was equalto that at existing ATMs, the rate of increase was over 200%.  (The GAOreported surcharges at 64,400 of 119,000 ATMs in February 1997, up from 15,400of 89,000 at the end of 1995.  Much of the increase in surcharges thus isattributable to ATMs that existed in 1995.)

      5.  U.S. PIRG (July 31,1997).

      6.  Neely (1997) cites"typical" cost estimates of 36 cents for an ATM transaction and $1.06 for ateller transaction.
      Banks have argued that the savings are offset by increases in theoverall volume of transactions that result from the relative convenience ofATMs.  But these increases serve only to reduce the marginal cost of ATMtransactions even further.  An ATM owner receives an interchange fee of 35 to75 cents each time its ATM is used by a customer of another bank. Balto (1996).  These interchange fees were designed tocover the ATM owner's costs, and ATM networks currently have the power toraise interchange fees to the extent that they fall short of covering costs. Caron (1997).

      7.  The GAO survey reported an averagesurcharge of $0.62 for all ATMs, and $1.14 among only those ATMs that imposedsurcharges.  GAO (1997).  In addition, most bankscharge their own customers an "off-us" fee of about $1 for using anotherbank's ATM.  U.S. PIRG (July 31, 1997).

      8.  GAO (1997);U.S. PIRG (April 1, 1997).

      9.  Roeder (1997);Talbott (1997).

      10.  Gruber(1997).

      11.  A recent U.S. PIRG survey reportedthat bank fees are highest in New Jersey, followed by Illinois, Louisiana,Florida, and North Carolina.  U.S. PIRG (July 31,1997).  First Chicago's fees are among the highest in the area. Buck (1997).

      12.  U.S. PIRG's 1997 ATM survey foundsurcharging rates over 90% in some states.  U.S. PIRG(April 1, 1997).

References