originally published in Twin Cities Star Tribune, November 4, 1999
Inone of the most significant decisions of Tuesday’s election, San Francisco voters approved a ballot measure prohibiting automated teller machine (ATM) surcharges within the city. The vote marks a major victory in the growing effort to outlaw the fees. San Francisco will join the city of Santa Monica, Calif., and two states, Iowa and Connecticut, in prohibiting ATM surcharges. A number of cities and states, including Minnesota, are expected to consider bills banning surcharges in the coming months.
Surcharges are the fees consumers pay each time they use ATMs operated by a bank other than their own. Surcharges are withdrawn directly from a consumer’s account at the time of the transaction. They are levied at nearly every ATM in the state. A typical surcharge of $1.50 will add a 7.5 percent charge to a $20 withdrawal.
Opponents of banning surcharges contend that banks have every right to impose fees in order to cover their costs and provide a profit. Why should government tell them what they can and cannot charge for their services?
Tobegin with, banks are already compensated for the cost of operating ATMs through a bank-to-bank fee known as an interchange. In order to join an ATM network, a bank agrees to pay an interchange fee when its customers use an ATM owned by another bank in the system. Interchange fees are set by the network at a rate designed to cover the ATM owner’s costs and, often, a profit.
Surcharges are a second fee for the same transaction charged directly to the customer. They are one of a myriad of new bank fees facing consumers; understandably, many feel ripped off. Last year Americans paid $2.1 billion in surcharges.
Consumerwelfare notwithstanding, surcharges have drawn special scrutiny because of their impact on competition and, in particular, the threat they pose to small banks and credit unions.
Three banks own a dominant share of the ATMs in Minnesota. Surcharges enable these banks to determine how much customers of smaller financial institutions will have to pay in order to access their account at most ATMs. It’s a win-win situation for large banks; either they generate income from the fees or, better yet, they gain new deposits as customers of small banks and credit unions move their accounts in order to avoid the surcharge.
Thehigher the surcharge, the more incentive for customers to choose to bank with one of the big three. And indeed surcharges have risen steadily, despite the fact that the cost of ATMs, like most technologies, continues to decline.
It’s an inverted form of price competition. What other business can gain new customers by raising its prices?
Surchargesenable big banks to attract customers, not because they offer the most attractive rates and best service, but simply because they are large. This dynamic can be seen on dozens of billboards throughout the metro that advertise the number of ATMs owned by a bank. The message is clear: Drop your neighborhood credit union, sign on with us, and we’ll stop surcharging you.
The anticompetitive effect of this tactic is evident in annual reports released by the Federal Reserve. For several years running, the Federal Reserve has concluded that small financial institutions offer consumers a better deal. Average monthly fees on checking accounts, for instance, are 14 percent higher at multistate bank than at smaller, single-state banks.
Yetsmall financial institutions continue to lose ground to their larger rivals. Already, more than half of the state’s deposits are held by just four banks. Concentration not only harms consumers, but undermines communities and the state’s economy. Small banks and credit unions are a critical source of loans for farmers and small businesses. They ensure that important financial decisions, rather than occurring in distant offices, are made locally by community members.
Fairand equitable access to ATMs has become nearly as important for the viability of financial institutions as fair access to telephone wires is to the telephone industry. But while federal law treats telephone wires as common carriers and prohibits those who own the wires from unfairly disadvantaging their competitors, no such rule governs ATMs.
Minnesotalegislators will soon have the opportunity to restore a level playing field. Rep. Matt Entenza, DFL-St. Paul, has promised to introduce a bill banning ATM surcharges during the next session. Policymakers of all political persuasions, whether conservatives concerned with the free market or liberals concerned with consumer welfare, have good cause to support his bill. For the sake of the state’s small financial institutions, let’s hope they do.
Stacy Mitchell is a researcher with the Minneapolis-and Washington, D.C.-based Institute for Local Self-Reliance