Interchange fees and ATM usage

Interchange fees and ATM usage
Tags: Debit / Credit, Multifunction ATMs, North America, Prepaid / Stored Value / Gift Card, Regulatory Issues, Retail / Off-Premises, Transaction Processing, Trends / Statistics
March 19, 2008

There's no doubt about it: Credit card interchange fees — the fees credit card companies charge merchants in exchange for the benefits those merchants receive for accepting electronic credit transactions at the point of sale — are going up. And that may be driving down ATM usage, according to some.

According to a fact sheet disseminated by the Washington D.C.-based Merchants Payment Coalition, credit card companies received more than $36 billion in interchange fees in 2008, an increase of 17 percent from 2005. The increases even have drawn the attention of Congress, which is currently debating the Credit Card Fair Fee Act of 2008 — proposed legislation that would limit the power of credit card companies to set interchange fees.

Industry experts say merchants have found a way to avoid — or at least reduce — the frequency of the charges: Getting customers to swipe their plastic as a debit, rather than a credit transaction. But as the debit cash-back option becomes increasingly popular among consumers, some analysts are concerned that ATM usage may suffer. After all, they say, if consumers can run their debit card and get cash back immediately at the point of sale, why use the store's ATM machine?

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ATM deployers, such as Harry Popiel of Rocky Mountain ATM Sales and Service, say merchants often believe it's in their best interest to push debit transactions instead.

"We have talked to merchants about the cash-back option and tried to discourage it, and basically the feedback that we have gotten is â€˜Well, if that's what my customer wants, that's what I'm going to provide for my customer, even though I do have an ATM here,'" he said.

A threat or not?

At this point in time, analysts say there is no hard evidence that an increase in credit card interchange fees at the merchant level is having any effect on ATM usage, but one thing is for sure: ATM usage is on the decline.

Research conducted by Boston-based Aite Group LLC found the number of ATMs in the United States fell by 9 percent in 2007. Carpinteria, Calif.-based The Nilson Report also reported that cash accounted for 35 percent of the 137 billion payment transactions in the United States in 2006 — that's down 44 percent from 117 billion transactions in 2001. At the same time, The Nilson Report said credit, debit and prepaid card payment methods rose 13 percent.

Chris Allen, director of Dove Consulting, was quick to downplay the relationship.

"I don't necessarily see a direct correlation — certainly not a significant correlation — between migrating people towards debit and less use of the ATM," Allen said. "I think that cash back at the point of sale has been growing because people have been becoming more aware of it and because ATM owners are charging upwards of $3.00 for that transaction."

The challenge

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Still, some in the ATM industry see a direct link and they say the challenge for ATM deployers is to convince merchants that — even in the wake of rising credit card interchange fees — it's more advantageous for them if their customers make credit transactions, rather than debit transactions that offer cash back.

Sam Jonas, president of 5604 LLC and the former owner of ATM ISO Cash Resources, says the key to doing this lies in reminding the merchant of the income they receive from the ATM — and that if the consumer uses the debit transaction as a chance to get cash back, the merchant will lose that possible ATM income.

"In the credit and debit world, interchange flows to the card issuer. In the ATM world, interchange flows to the terminal owner," Jonas said. "So the fact is that all of these retailers would love to see as much volume flow to the ATM because if they own the ATM, then they maximize their revenue."

Even if the merchant doesn't own the ATM located in their store, Jonas says they still receive income from the deployer in the form of commission for the space rental, sometimes via a flat fee and sometimes via a transaction-based fee.

One reason for merchants to disallow the debit cash-back option altogether, according to ATM industry leaders, is cash flow: Some merchants discourage keeping large amounts of cash in the cash drawer.

"It's a big issue," said Marilyn Kilcrease, president of Creative Card Solutions. "If you go into a 7-Eleven at midnight, how much money is in that cash drawer? How much money is the merchant willing to have in the cash drawer in order to give cash back?"

The merchant perspective

Jeff Lenard sees the competition between ATMs and debit/credit transactions from a different vantage point. As the vice president of communications for the National Association of Convenience Stores, an organization that represents 146,000 U.S. stores, he says he fully understands the advantages that an ATM brings to a merchant, because money obtained through that ATM often gets spent at the cash register. At the same time, however, he says consumers — particularly young people — are rapidly embracing debit transactions.

"Pretty much anybody younger than me is using a debit card instead of cash," he said.

He says having an ATM in convenience stores is one way to help combat this trend.

"It gives consumers access to the form of payment that you most want them to use, which is cash," he said. "You'd much prefer to have consumers use cash over debit, credit or a check."

But regardless, he said that when consumers do pull out the plastic, store owners will push debit over credit card transactions — although he adds that most convenience stores don't offer cash back. He says many retailers feel abused by increasingly high interchange fees.

"Anything the ATM industry could do to just talk to and understand the needs of merchants — whatever channel — would be a breath of fresh air compared to how the credit card industry treats us," he said.

An unlikely option

Not everyone is pointing fingers at the credit card companies. Allen believes that the drop in ATM usage is the fault of deployers who charge hefty surcharge fees — a practice he says rivals the interchange fees charged by credit card companies.

"Drop your surcharge fees," he advised deployers. "If consumers can get cash at the checkout lane for nothing, versus at the ATM for $2.00, it's a no-brainer."

Despite this advice, ATM deployers like Popiel say they're not likely to be slashing their ATM surcharge rates anytime soon.

"I think that, for our business plan, that would be disastrous because we are primarily a turnkey ATM placement company," Popiel said, adding that surcharge rates are his company's "bread and butter" income in a tightly saturated ATM market.

He also disputed the effectiveness of such a tactic, arguing that "people are not particularly surcharge conscious — they're more convenience conscious."

The onus, in his view, is not on retailers, but on the ATM industry to find new functionalities in order to stay relevant in an increasingly cashless society.

"Cash-back debit is something that we're faced with and it is going to affect ATM transactions dramatically," he said. "The ATM industry is a very challenged industry right now and they have to look to other ways to use the real estate that they have, so to speak, in those stores and look to ways to service, perhaps, the unbanked with check cashing and bill payment enhancing on the ATM."