ATM $urcharges  The problem



What's wrong with ATM surcharges?

There are three things wrong with ATM surcharges. They are deceptive, anticompetitive, and unconscionable.

ATM surcharges are deceptive.

ATM surcharges often are not adequately disclosed to consumers, and consumers frequently don't realize that they have a choice (apart from choosing not to use an ATM at all, which isn't a realistic option for many consumers).

The national ATM networks and most regional networks (along with laws in some states) require that ATM surcharges be disclosed both by a sign on or near the ATM, and by a notice that appears on the ATM screen, giving the consumer an opportunity to cancel the transaction before being obligated to pay the surcharge. But the sign usually contains relatively small print and is buried among other signs on the machine; often the signs are defaced, obscured, or removedentirely. Worse yet, the language of both the sign and the on-screendisclosure is often confusing, and many consumers don't realize that the surcharge isn't the same as the fee they've already agreed to pay their own bank.

Legislation has been proposed to address this problem by requiring the on-screen disclosure to set forth all fees involved in the transaction. However, such a requirement would be difficult to implement, and it doesn't address the more fundamental problems with surcharges.


The arguments that large banks and other surcharge proponents use to defend ATM surcharges are also deceptive. They claim that surcharges are needed to cover the cost of installing and maintaining ATMs, and that without surcharges, consumers wouldn't have access to ATMs at all. That's simply not true. Tens of thousands of ATMs were deployed across the United States before surcharges were permitted, with a steady increase in the number of ATMs installed each year (about 16% per year from 1978 to 1996). The growth rate has increased with the onset of surcharging, but there was certainly no shortage of ATMs even before surcharging was permitted.

The most dramatic effect of surcharging has not been a substantial increase in ATM installations; it has been the rapid conversion of existing surcharge-free ATMs into surcharging ATMs.From December 1995 to February 1997, the total number of bank-owned ATMs grew by 30%, while surcharging on ATMs that were in place at the beginning of that period grew by over 120%. And from February 1997 to February 1998, the total number of bank-owned ATMs increased 13%; over the same period, surcharging on pre-existing ATMs grew by at least 29%, and the overall rate of surcharging increased 33%. Surcharging isn't an incentive; it's a cash cow.


Here's another deceptive argument that banks use to defend surcharging: They admit that ATM transactions cost about one tenth as much as those involving human tellers, but claim that consumers find ATMs so convenient that they engage in more transactions than they used to, eating up all of the savings.

That's a ridiculous argument -- the number of transactions hasn't increased tenfold, and if it did, economies of scalewould lower the costs significantly. Furthermore, the interchange fees that banks collect for each ATM transaction are more than enough to cover the marginal costs of additional ATM transactions. Banks make a profit on each noncustomer ATM withdrawal, and they use those profits (along with the surcharges that they impose) to subsidize the services that they provide to their own account holders.

The truth is that banks are making more money than ever, and a higher proportion of it is coming from fees (including surcharges) than ever before.


Finally, banks claim that ATMs are merely a convenience, andargue that it's therefore OK for them to charge whatever the marketwill bear. But for many consumers, ATMs are a necessity; this isparticularly true for those who are required to receive their paychecks or benefits checks electronically. Furthermore, banksthemselves pressured consumers into relying on ATMs, by closingdown branches (often as a result of mergers between big banks), promising cost savings, and in some instances by imposing fees for transacting business with a live teller.

Even if ATMs truly were merely a convenience, the "free market" argument is flawed. The ATM market isn't particularly competitive;large banks dominate the regional networks, most of which possessa geographic monopoly. Network "nondiscrimination" rules often prevent smaller banks and credit unions from fighting back against large banks that impose surcharges -- that's ironic, because mostsurcharges are themselves discriminatory, in customers of some banks pay more to use an ATM than customers of other banks. Large banks tend to control the most desirable ATM locations with exclusive contracts with chain stores and shopping centers, leaving smaller banks unable to compete. And most importantly, the ATM market has significant external effects on competition in the overall consumer banking market. Even if the ATM market would support high ATM surcharges with true competition, such surcharges still have anticompetitive effects on the consumer banking industry as a whole.

Surcharge-free ATMs are needed to preserve competition among banks.


ATM surcharges are anticompetitive.

Banks impose ATM surcharges because of their market power, not because of their actual costs of doing business. The total cost of withdrawing money from an ATM more than tripled in many places when surcharges were adopted -- not because of any increase in costs, but merely because the surcharge prohibitions were lifted.

ATM surcharges don't represent a market price determined by competition, because most surcharges are borne by nonaccountholders. Since the customers of a surcharging bank generally don't have to pay the bank's ATM surcharges, they have little incentive to move their accounts elsewhere.


It is no coincidence that large banks were generally the first in each geographic market to impose surcharges, and remain far more likely to impose surcharges than smaller banks and credit unions. ATMs make it possible for consumers to choose a bank based on its services and fees, rather than just its location. ATM surcharges make it more expensive for consumers to shop around for reasonable banking fees. Large banks tend to charge the highest fees, and large banks generally have the largest installed ATM networks. They clearly benefit the most from ATM surcharges, at the expense of consumers and smaller institutions.

A national survey conducted in 1997 found that 52% of large banks imposed surcharges, compared to 39% of smaller banks and only 6% of credit unions. Within the Chicago-area Cash Station ATM network, only about one sixth of the member banks impose ATM surcharges (as of mid-1997) ... but those banks control over half of the ATMs.

According to the GAO's 1998 survey, large banks own 49% of all bank-owned ATMs, up from 37% a year earlier.

The consumer banking industry is already highly concentrated, and is becoming more so as a result of mergers and acquisitions. ATM surcharges make the situation worse by reducing consumers' banking options and pressuring them to shift their accounts to large banks.


ATM surcharges are unconscionable.

ATM surcharges bear little relationship to banks' costs, generating windfall monopoly profits for large, already profitablebanks; they also tend to be highly deceptive.

The average American family now pays several hundred dollars per year in ATM fees, including surcharges. Because surcharges areimposed as a flat (per-transaction) fee, they have a highly regressive effect; the poorest consumers end up paying the highest proportion of their income.

Poorer consumers are likely to make more withdrawals of smaller amounts, and recipients of public assistance benefits may even be required by law to receive those benefits electronically. Wealthier consumers, on the other hand, can afford to withdraw more money at a time, and often can negotiate with their own bank for lower fees -- in some cases, even including a rebate of surcharges paid to other banks. The burden of ATM surcharges falls disproportionately on those who can least afford them.

ATM surcharges also may have other undesirable effects. For example, the windfall profits available to those who impose surcharges tends to promote the installation of ATMs in unsafe locations, and at the same time provides consumers with a financial incentive to withdraw more cash at a time; both of these phenomena may produce an increase in ATM-related violent crime.


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