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February 22, 2009

ATM fees: competition consequences

The new ATM fee regime may have unintended consequences: even if your ATM network is free to your customers and you don't charge a foreign ATM fee , if they use a foreign ATM they will incur a fee to the owner of that ATM. If you don't have an alternative ATM near your customers will they move to a more convenient fee-free network?

Some banks are imposing a "disloyalty fee" far in excess of the Reserve Bank's estimated processing cost of 10 cents to encourage their customers to use their "native" ATM's.

Reserve Bank Governor Glenn Stevens made his concerns clear in his Opening Statement to House of Representatives Standing Committee on Economics on 20 February 2009:

Under the new arrangements, there
will be no interchange fees. An ATM owner will be able to charge the
customer directly a fee for the use of the machine, but must disclose
the fee prior to the transaction. Banks will probably continue to allow
fee-free withdrawals by their customers at their own machines, because
they expect to cover those costs with the revenue earned across the
entire customer relationship. Use of another bank’s ATMs will
presumably attract a fee by that other bank to cover the costs. But the
only cost to a cardholder’s bank associated with use of a ‘foreign’ ATM
is the cost of processing the transaction electronically – a matter of
no more than 10 cents. Given this, we cannot see any strong case for a
‘foreign’ fee. Independent ATM owners will charge for the use of their
machines, but that will maintain an incentive to grow their network.
Otherwise, it is likely that the independents as a source of
competition would diminish over time, reducing consumer choice. Access
to the system will be governed by a code, which caps the price of
connections, so that new competitors cannot be unduly hampered by the
incumbent players over-charging to connect.

The essence
of the changes is simple. People have always been paying, one way or
another, to use ATMs. ATMs do have a cost of operation and somehow that
cost has to be covered. Even where no explicit charge is levied,
somewhere or other the financial institution is making up that cost.
They do not provide services for free.

Now people will
know exactly what the price of an ATM transaction is, and they will
know it before completing the transaction. There should be no ‘foreign’
fees of any significance. And competition will be maintained, by
allowing the independent ATM owners to remain viable and new
competitors to enter more easily. That is, in our judgment, an
improvement over the arrangements of the past and is the best way of
keeping costs down in the long run.

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Posted 22nd February 2009 by David Jacobson in Credit unions