Automated tellers ; Banks and banking - Service charges

Elizabeth Laderman

English

Research Papers in Economics

FABSF WeEKLY LefleR
September 1, 1989
Why Are AIM Fees Rising?
Over the past two decades, automated teller
machines (ATMs) have revolutionized the way
we perform a variety of banking transactions.
Today, ATMs are used by 45 percent of American
households to withdraw cash, make deposits and
loan payments, and transfer funds. Recently, the
press has reported increases in ATM user fees at
numerous banks. The purpose of this Letter is to
examine various aspects of ATM fees as well as
possible reasons fees may be increasing.
Growing popularity
An ATM is a machine that allows a customer
to perform banking transactions such as cash
withdrawals, deposits, balance inquiries, and
interaccount transfers. In practice, ATMs mainly
are used as cash dispensing machines. Approxi-
mately 75 percent of all transactions at ATMs are
cash withdrawals.
ATMs often are more convenient than human
tellers. They can be used 24 hours a day, and
they have many more locations than do tra-
ditional bank branches. In addition to being
located at bank branches, ATMs are located in
shopping centers, gas stations, convenience
stores, airports, hotels, hospitals, universities,
and touristareas.
The number of ATMs and the number of ATM
transactions per month have grown over time. In
1988 there were over 72,000 ATMs in the United
States, compared to 9,750 in 1978. Likewise,
total transactions per month on ATMs have in-
creased more than nine-fold, from 41 million in
1978 to 375 million ten years later.
Shared networks
Part of the reason ATM use has increased so
dramatically in recent years is that the growth
of "shared" ATM networks has given bank cus-
tomers access to banking services over a much
wider geographic area than their banks' branch
offices cover. A shared ATM network differs from
a "proprietary" network.in which all the AlMs
are owned and controlled by one bank for the
exclusive use ofthat bank's customers. In con-
trast, ina shared network, agroup of banksand
other financial institutions share some or all of
their AlMs with one another's customers. Thus,
customers of a bank that is a member of a shared
ATM network may use any ATM on' that network,
even when the ATM does not belong to their own
bank. According to one estimate, between one-
fourth and one-third ofthe ATM transactions on a
given bank's accounts noware made at other
institutions' ATMs.
One indication ofthe growing importance of
shared networks is the steady increase in the
percentage ofsharedATMs in total ATMs that
has occlJrredin recent years. In 1980, under 20
percent of all machines were linked to shared
networks. By 1988, 90 percent of the ATMs in
the United States were shared with at least one
other institution, and there were over 100 shared
networksoperatirig in this country.
Moreover, a number of banks now belongto
more than one shared network. In1987, 28
percentof the banksthat belongedto shared
networks belonged to two or more suchnet~
works. Nine percent belonged to three shared
networks and three percent belonged to more
than three shared networks.
To use an ATM or not. ..
Whether bank customers decide to use ATMs
or the alternative,human tellers, to handle their
transactiol1sdepends onthe costsof u5ingeach.
The relativecostsofATMs and humantellers, in
turn, dependon a variety of factors,including
the level ofexplicit fees charged and thetime
and effort involved in using each alternative. For
exampl~, a bank maycharge its customers a per-
transactionfee for withdrawing cash from an
ATM, but may not do so forcashing a check
through a teller. On the other hand, ATMs' more
numerous locations and 24~hour access may save
time and effort relative to human tellers. In addi-
tion, customers'attitudes and ta.stes regarding, for
example, computers versus human interaction
playa role in the decision.FRBSF
With respect to the explicit costs of using ATMs,
available evidence indicates that relatively few
bank customers pay fees for using their own
banks' ATMs. A 1988 survey of 475 users of ATM
cards found that 77 percent of them paid no
"home" ATM fees at all. When fees were
charged, such fees tended to be highest for de-
posits. Another survey found thatonly 16 percent
ofbanks charged their own customers for cash
withdrawals from ATMs.
Although relatively few customers pay for
transactions on ATMs operated by their own
bank, many pay their bank for transactions car-
ried out on ATMs operated by other banks on
shared networks. Such transactions are referred
to as "foreign" transactions. In 1988, foreign, or
"us-on-others:' fees were employed, or were
abouttobe employed, by 75 percent of large
banks and thrifts in shared networks. A 1987 re-
port stated thatabout 40percent of all banks
charge foreign fees. Incontrast to homeATM
fees, foreign fees tend to be highest forwith-
drawals.
Besides being more common than home ATM
fees, foreign fees also tend to be higher than
home fees. For banks.that charge such fees, the
averageforeign fee for withdrawals is 75 cents,
although figures up to $2.00 have been reported.
The av~rage fee forwithdrawals at an ATM
owned by the customer's bank, on the other
hand, is 20t025 cents.
The higher foreign fees may be a reflection of the
higher cost offoreign ATM transactions.. .one of
the costs that a bank faces when its customer
uses a foreign ATM is the "interchangefee" that
mustbe paidto .the ATM-owning bank.lnter-
change fe.es and other network member fees vary
from network to network, and thismay explain
whysome banks vary theirforeignfees according
to the network their customers use.
Studies suggest that ATM use is fairly insensitive
to small changes in the level of ATM fees, at least
in the vicinityof currently observed fee levels.
Although studies of actualATM use are not avail-
able, a recent survey found that 35 percent of
customers who payATMfees said that they cut
backon ATM use when the fees were imposed,
while 43 percent said thatthey did notcut back.
(Another 19 percent said they had always paid
fees and three percent were unsure whether they
paid fees.) Another survey concluded that ATM
use would be unaffected by the imposition of a
charge of about 30 cents per transaction. Finally,
a third survey indicated that fees could rise to 50
cents per transaction without significantly lower-
ing ATM use.
Convenience
It is not surprising that ATM use is relatively
insensitive to small changes in transactions fees
since other factors also are important in deter-
mining ATM use. As noted above, whether a par-
ticular customer will choose an ATM or ateller
partially will depend on such factors as the value
of the time and the effort that the customer needs
to contribute in order to get to and use an ATM
or a teller. These factors determine how "conven-
ient" ATMs are.
The number of ATMs available to customers
appears to be one useful measure of the con-
venience of ATMs. Preliminary work at this Bank
indicates that an increase in the number of ATMs
noticeably increases the number of ATM trans-
actions, holding other factors, including the
number of ATM cards, constant. An additional
ATM at a new location is assumed to increase
convenience and may thereby encourage a
bank's customers to use the machines instead of
visiting a teller at a bank branch. And even if
the new ATM is installed near existing terminals,
convenience may increase as a result of shorter
lines or reduced risk of all terminals being down
at once.
Given the tendency for ATM transactions to in-
crease as the number of machines increases, it is
reasonable to speculate that ATM use is qualita-
tively at least as affected by convenience as by
changes in .the level of fees, if not more so.
Rising ATM fees
Many observers claim that in recent years,
home ATM fees have become more widespread
and that banks have been increasing customers'
costs of ATM use in other ways, such as impos-
ing a minimum balance in order to avoid or
reduce ATM fees. Instances of increases in
foreign fees also have been reported.
There are several explanations for this apparent
rise in ATM fees. One argument is that because
both fees and the non-pecuniary aspects of th~
cost of using ATMs are important in determiningATM use, banks deliberately may have set rela-
tively low promotional fees initially as a way of
encouraging people to try ATMs and become fa-
miliar with the convenience they offer. Now that
bank customers are familiar with the advantages
of ATMs, banks can raise their fees without much
risk of discouraging ATM use, according to this
hypothesis.
This is only part of a complete explanation for
the rise in fees. Such a strategy assumes that
banks are able to make up for any losses result-
ing from low initial fees by earning excess profits
lateron.However, for this to happen, there must
be some sort of breakdown in the competitive
process in banking. Without such a breakdown,
competitionwould induce banks to keep ATM
fees at the lowest possible level at all times; .that
is, the point at which they only "break even."
Any bank that charged higher fees presumably
would lose its depositors to banks with lower
fees.
Economist Mark Flannery has pointed out that
since bank customers incur setup costs when
they establish a deposit relationship with a par-
ticularbank, these setup costs can bea source of
imperfect competition in the bank deposit mar-
ket, S~tup<,osts include the cost~ of gathering
information on.types of accounts, fees, charges,
interest rates, bank procedures, and hours of
operation, as well as the time spent meeting with
bank personnel and filling out forms.
Flannery's work can be extended to ATM fees.
The idea is that as long as the savings from
transferringto a bank with lower ATM fees are
less than the costs of establishing a new account,
banks can raise ATM fees above competitive
levels without losing customers. Thus, the recent
increase in fees, in this view, is the outcome of a
strategic pricing policy.
An alternative, but not mutually exclusive,
explanation for the apparent increase in ATM
fees is that it is part of a general trend towards
"unbundling" bank services. In recent years,
technological improvements have enabled banks
to determine the cost of and assess fees for
providing individual banking services. As a re-
sult, many banks are attempting to price each of
their services on a stand-alone basis, rather than
as part of a package of services. Thus, some
banks are now pricing transactions services,
including ATM access, that formerly were not
priced explicitly.
Looking ahead
There are two recent developments that may have
implications for the level and structure of ATM
fees. First, the outcome of a pending anti-trust
lawsuit has the potential to change both the
pricing of foreign transactions and the availability
of ATMs at heavily-trafficked, off-bank-premise
locations such as airports and hotels. At present,
virtually all shared networks prohibit ATM own-
ers from charging fees directly to customers of
other banks, referred to as "surcharges!' This
prohibition keeps fees down by preventing the
ATM-owning bank from charging fees commen-
surate with the value ofthe services rendered at
high-demand locations. However, it also dis-
courages banks from installing shared ATMs at
these locations. Ifthe court were to disallow such
prohibitions, surcharges probably would become
more widespread, thereby raising the explicit
cost of using ATMs. At the same time, however,
eliminating these prohibitions also might en-
courage banks to install more ATMs at heavily-
trafficked locations, thereby increasing
convenience for bank customers.
The second development that may affect ATM
costs has to do with changes in the level of the
interchange fee. The interchange fee is set by the
shared network owners and has been declining
for some networks. For example, last year, inter-
change fees for the ten largest regional shared
networks were around 15 to 20 cents per transac-
tion, but are now running around 5 to 10 cents.
If this decrease in interchange fees is indicative
offuture and more widespread trends, then we
may see a decrease in foreign ATM fees. How-
ever, if ATM owners continue to be prohibited
from charging foreign ATM users directly, this
decrease in interchange fees can also be ex-
pected to decrease the number of new ATMs
deployed.
Elizabeth Laderman
Economist
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Why are ATM fees rising?

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Why are ATM fees rising?

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