MPR: Banking on Fees, Part 2

Banking on Fees, Part 2:
Cashing in on Cash Machines
By Bill Catlin
September 11, 1997

This year, state lawmakers are expected to hold hearings on a proposal to ban a controversial fee charged at automated teller machines. Banks that impose the ATM surcharge typically levy a $1.00 fee on the competition's customers. The fee can be highly profitable, and has drawn fire from consumer groups. U.S. Senate Banking Committee Chair Alphonse D'Amato has vowed an effort to ban them.

Audio: Sound of streetscape

Ask a consumer about the ATM surcharge, and you may get a resigned shrug, or smoldering resentment.

Levi: Yes, I've been victimized by it.

Jim Levi of St. Paul says he plans his withdrawals more carefully because of the fee, and says it's part of a trend he doesn't like.

Levi: It seems like every time you want another service from the bank that's making money off of your money, they sock you with another charge. So, it's pay as you go, and it nickel and dimes. For some people, it nickel and dimes them to death if they're always getting charged stuff.

Levi says normally he doesn't like government regulation. But in the case of the surcharge, it may be time for regulators to step in.

Audio: Bank interior

Here at the Prior Lake State Bank, the ATM machine in the foyer bears a large sign proclaiming "NO SURCHARGE ATM." Bank president Bob Barsness is one of many small bank officials who says the fee aggravates his customers and threatens his business. His small handful of ATMs don't assess the fee, but his customers run into it more and more when they use ATMs owned by other institutions. Barsness says he doesn't get the money, but he does get the complaints.

Barsness: We have to handle all the arguments and the discussion from people who say, "How come I'm getting surcharged on my cash transactions?" So they're mad at their bank, because it's their card. It's real confusing, and becomes a real issue to try to explain this to people - why their bank is not the culprit in this case, that we're not doing that. So, it's very frustrating.

Banks that do charge the fee typically give their own customers a free ride and only charge the customers of other banks for using their ATMs. Barsness says a few of his customers have taken their business to banks with large ATM networks, because that makes it easier for them to avoid the charge.

Barsness: The comment was, "We like you, we like your bank, but we just don't want to pay that dollar fee anymore. So we're going to go use that bank, as the bank we do our business at." And I didn't charge the fee! They did! What can we do? We can't do anything!

Barsness says he's not aware of customers leaving in great numbers, but he says even one is too many, because it's probably a sign others will, or are thinking about it.

Audio: Cub Foods interior

It's getting harder to find an ATM that does not surcharge in Minnesota, especially for consumers who do not bank at one of the state's largest banks. The ATM at this Cub Foods in St. Paul is part of TCF's Express Teller network - the first major network to impose the charge in Minnesota, last fall. Since then, the other major ATM networks, Norwest's Instant Cash, and First Bank's Fast Bank have added the fee to most or all of their machines. Their customers can use their bank's own ATM network free of charge, but are likely to pay a fee if they use another bank's network.

First Bank has phased in the fee over several months, and currently charges at more than three-quarters of its machines. Last March, First Bank charged at only about one-quarter of its Fastbank ATM's. At the time, Vice President Rich Martino said the bank was not planning to go much beyond that.

Martino: We have no plans right now to implement on a wide scale. We're watching the market. But by and large, we're still surcharge-free.

Bankers tend not to talk about it, but there's an obvious reason for the rapid spread of the surcharge. It's worth a lot of money - $2 billion nationwide, by some estimates. Don Davis, editor of Bank Network News says the surcharge is almost entirely profit. He says once an ATM is paid for and installed, the cost of switching on the surcharge is small.

Davis: It's just a one-time programming change, and after that, all the money goes to the bottom line.

Legislation introduced by St. Paul DFL Senator Sandy Pappas would prohibit surcharging in Minnesota. The banking commissioners in Connecticut and Iowa have banned surcharging, but lawmakers in several other states have rejected such bans.

The legislation pits banker against banker. The Independent Community Bankers of Minnesota, which represents small banks, argues the surcharge amounts to a tax on the U.S. currency. The group supports a ban, preferably by the Federal Reserve. Large banks oppose a ban. Virginia McGuire with the American Bankers Association says before the advent of the surcharge, ATMs lost money.

McGuire: Since surcharges were put into place, the number of ATMs has increased dramatically. Because it simply makes more economic sense for a provider now to put in an ATM, because they're going to be able to recover income on that ATM.

McGuire says more ATMs means more convenience for consumers. But banks have also applied the surcharge to machines that have been in place for years.

Officials at the major ATM networks in Minnesota point to competitive pressures and increasing rent. And they have a point, according to Don Davis, of Bank Network News. He says an ATM that collects a surcharge is more lucrative. That makes prime locations worth more, and that's driving up the cost of renting space for an ATM installation.

Davis: One consultant was recently telling me, for example, that where a good shopping mall location used to command a rent of about $1000/month, now its $2000 or $3000/month. So if you don't surcharge, you're pretty much going to be locked out of those most attractive locations, and a lot of banks, they want to have their customers know that they can use a Norwest or a TCF ATM at the Mall of America.

Banks are not the only ATM owners. Minnesota retailers are buying the machines by the hundreds and installing them in their stores. For retailers, an ATM that surcharges can bring significant benefits. The fee provides income. The ATM draws customers, and - by some estimates - a third or more of them will buy something with the cash the ATM spits out. Judy Cook of the Minnesota Retail Merchants Association says a ban would be bad policy, and bad for consumers.

Cook: We all need to consider the costs of the technology that's out there now, and there are costs associated with it. And while it may look politically advantageous to say we prevented you from having to pay this fee, somewhere the cost will get passed along. In a retail store, it's gonna get passed along in the price of higher goods [sic] for everyone. And I think it's most fair if the people who use it pay the fees.

But critics point out the surcharge represents double charging by the ATM owner.

Audio: ATM in use

When a customer of one bank makes a withdrawal at another's ATM, the machine becomes part of a high speed messenger service, transmitting the withdrawal request to the customer's home bank. Once the transaction is processed, the home bank sends back an all-clear to hand over the money.

Like any messenger service, the ATM owner receives a fee for the use of its machine, typically $0.40 to $0.50 on a cash withdrawal, paid by the customer's bank.

This behind-the-scenes payment is known as the "interchange fee," and it's entirely separate from the surcharge. Many banks pass on this cost to customers in the form of a foreign ATM fee. As a result, many bank customers who use another bank's ATM are charged two fees: a surcharge and the foreign use fee.

And this double charge can add up. For example, First Bank charges customers $2.00 to use their cash card at someone else's ATM. If the ATM surcharges, that's usually another dollar.

The transaction costs the customer $3.00 and typically, the ATM owner gets paid twice - once through the interchange fee, and again through the surcharge. Don Davis of Bank Network News says Senate Banking Committee Chair Alphonse D'Amato's proposal to ban the surcharge is given little hope of passage, but D'Amato's hearings may throw a spotlight on the issue of double charging, and force changes that way.

Davis: Ironically, though, that may increase surcharging. It might lead to the ATM owners saying, "OK, well, instead of getting $0.50 in interchange, and $1.00 in a surcharge, we could just get $1.50 surcharge." So, you may actually wind up seeing higher surcharges, but basically the elimination of fees for using another bank's ATM.

Davis says it's early in the evolution of the ATM surcharge. He says Minnesota eventually may benefit from competition between three locally based ATM networks. And competition may have delayed the widespread use of the surcharge in Minnesota temporarily. But at this point, the Minnesota networks have fallen into line with expectations.

Davis: Right now, most people following this industry think that banks are gonna take the money and run.

In fact, Banc One of Ohio has even said it will begin surcharging its own customers, not just the customers of other banks.

Davis says while consumers may resent paying the fee, they are not putting much pressure on lawmakers to ban the surcharge.

Davis: I suppose my guess is these fees are just one more thing most of us look at in the welter of bills we pay, and prices going up, and, you know, my cable rates went up a whole lot more than ATM surcharging in the last year, and you know, it's just one more thing to be angry about, but not necessarily do anything about.

For years, that has typified consumers' reaction to bank service charges, even as fees have grown in number, cost and complexity. Banks reliance on fees is growing even in an era of record profits.

Banking on Fees

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