The price of disloyalty: Why competition has failed to lower ATM fees
One of the most expensive ways for Australians to access their own money is by using an automatic teller machine (ATM) that is not provided by their own bank. In most cases, third-party ATMs charge $2 for every transaction, including checking one's account balance. In other words, $2 is the price consumers pay every time they are 'disloyal' to their bank. In April 2009, the Reserve Bank of Australia (RBA) put in place a package of reforms to the ATM system.
The reforms ensured that customers would be charged directly by ATM owners, rather than being charged indirectly through their financial institution as in the past. The new rules also required that ATMs display the cost before customers confirm the transaction. One of the stated objectives of the reforms was to place 'downward pressure on the cost of ATM withdrawals'.
To date, however, third-party ATM fees typically remain at $2 or higher. In the RBA's words, the $2 fee has become a 'benchmark'.
There is substantial public opposition to ATM fees. Survey results indicate that the great majority of Australians (82%) believe it is unfair for banks to charge $2 to use their ATMs. Survey findings also corroborate the Reserve Bank's claim that consumers have changed their behaviour in order to avoid paying third-party ATM fees now that they are more aware that such fees exist. In the year following the 2009 reforms, the use of third-party ATMs fell 18 per cent, delivering consumers savings of some $120 million. But because ATM fees typically remain at $2, virtually all these savings stem from behaviour change on the part of consumers rather than lower prices, even though behaviour change was never an explicit objective of the RBA's reforms.
Altogether Australians are still paying an estimated $753 million per year on third-party ATM fees.
The increased transparency of ATM fees may have led to another form of behaviour change which is not necessarily in the best interests of consumers. Two in three survey respondents (66%) reported paying for purchases with a credit card to avoid ATM fees, but a substantial minority (18%) do so without then paying off their credit card in full. These people then end up paying high rates of interest on their purchases, effectively negating any savings they might have made on ATM fees and in the process delivering additional revenue to credit card providers. The perception that using credit cards can help reduce ATM fees may therefore serve to exacerbate the problems with personal debt that many Australians experience.
Survey results also show that young people bear a disproportionate burden of ATM fees. One in four survey respondents (26%) reported paying a $2 ATM fee at least once in the past week, but some 40% of those aged between 18 and 24 years paid an ATM fee. People under the age of 25 typically earn less than those who have been in the workforce for longer, meaning that ATM fees would constitute a much higher proportion of income for younger people than for other ATM users. Given that the use of third-party ATMs declines with age it is possible that children with a bank account are also paying a higher than average share of ATM fees. Similarly, people on low incomes are likely to pay more in ATM fees as a proportion of their incomes than people who are financially better off. Although reforms to the ATM system have not led to lower prices across the board, they have resulted in other changes.
The effective abolition of indirect fees (known as 'interchange fees') has meant that owning ATMs is now a much more profitable endeavour than it used to be. The number of ATMs available to consumers has grown strongly since the reforms. In fact, the provision of ATMs is now so profitable that rents for ATM sites have been rising, and investors can now 'buy' one or more ATMs in return for a guaranteed revenue stream. A further change is that the profits associated with fees charged by ATM owners have shifted from banks whose customers used the most third-party ATMs to those organisations which can attract the highest number of 'foreign' customers to their ATMs – that is, those that own the largest ATM fleets.
This is because ATM owners can now charged much more for the same service as in the past. Even though interchange fees of $1 were sufficient to ensure ATMs were widely available prior to 2009, virtually all ATM owners now charge double that amount or more. In addition to promoting competition and lowering prices, the reforms to the ATM system were intended to ensure that ATM owners had sufficient financial incentive to maintain and add to the existing ATM stock, and this has undoubtedly come to pass.
Studies by the RBA and ACCC have shown that the cost of providing ATM services is typically well below $1 per transaction. With such a lucrative revenue stream, ATM providers as a group appear to be reluctant to 'break ranks' by competing on price. With ATM fees more transparent than in the past but by no means fully transparent, there is no 'first-mover advantage' for ATM owners looking to gain more customers by lowering their prices. And with the RBA's statements demonstrating a conviction that the recent reforms have 'worked', consumers are likely to continue paying $2 every time they use an ATM from a bank which is not their own for the foreseeable future.